Impact of global trade and supply chains
The cyclical nature of the shipping industry is well known, but whether it is about to enjoy a new “super cycle”, as major markets reopen and demand recovers in the wake of the Covid-19 pandemic, is less certain. What is clear is that broad forecasts for a hugely diverse industry are likely to obscure the differing fortunes of various subsectors.
For instance, at the start of the pandemic, as global energy demand fell, tanker operators saw asset values suffer and then found a silver lining in rising demand for offshore storage. This year, tanker values and charter rates have fared poorly compared to those for container ships, operators of which have reaped incredible gains as soaring demand has combined with supply-chain bottlenecks to send container rates into the stratosphere.1
A combination of unleashed pent-up demand for consumer goods and a series of supply constraints, including the closure of major ports in China2 and backlogs in land transport,3 has seen unprecedented gains for container operators. By the second week of September, for instance, spot rates for containers as measured by the Shanghai Containerized Freight Index (SCFI) had risen 60% since the start of 20214 and had set records for seventeen weeks in a row.5
Even so, uncertainty remains about the success of the global vaccine rollout and whether economies will continue to recover. And longer-term macroeconomic trends are also likely to play a role in moderating demand. These include a pushback against globalisation that is increasing calls for reshoring, diversifying and de-risking supply chains.
Against such broader currents, the recent bubble in container shipping is likely to be unsustainable – even though analysts agree that its profitability curve has likely shifted upwards permanently. Similar megatrends, notably rising demand for renewable energy and a reshaping of the refining landscape, are likely to affect long-term demand for tankers – even if aviation recovers to pre-Covid levels – while the prospects for dry bulk cargo remain tied to longer-term movements in commodities demand.
Against this complex backdrop, decarbonisation remains perhaps both the biggest long-term challenge and opportunity facing shipowners and operators.
Increasing efforts to go green
While the need for shipping to decarbonise is well understood – given the sector accounts for around 3% of global greenhouse gas emissions and runs predominantly on fossil fuels – the industry hasn’t yet grappled with the costs and means to do so. Further inaction clearly isn’t an option: according to the IMO, global shipping emissions could increase by as much as 50 per cent in 2050 compared with 2018 levels if nothing is done.6
As a result, regulators have started to take more steps to drive change. As Chih Chwen Heng, Director of Shipping Finance at Standard Chartered, notes, “The landscape for ship owners has changed drastically over the past 20 years. Shipping regulations used to be implemented at a much slower pace and at a much smaller scale. However, in recent years: we have witnessed large scale regulatory changes which have been implemented at breakneck speed. This includes IMO 2020, Ballast Water Management Convention, IHM [Inventories of Hazardous Materials], and looking ahead, EEXI [Energy Efficiency Existing Ship Index] regulations, as well as IMO 2030 and 2050 emissions targets.”
Shipping operators face an array of choices when making decisions about which technology will be most cost-effective in helping them meet decarbonisation goals. This includes retrofitting existing vessels for lower-carbon fuels, optimising superstructure, and propeller design in new ships, as well as investing in data-gathering technology to ensure accurate ship energy modelling. Monitoring sustainability metrics will also be increasingly crucial to accessing a range of green financing innovations aimed at helping the industry decarbonise.
Shipping companies must also act as calls from end-users for greener transport grow louder. Major shipping users like ecommerce giants are increasingly going to demand sustainable factory-to-customer supply chains. Unless shipping companies adapt to their clients’ demands, they will lose out.
Fuel change could favour first-movers
This means, too, that first-movers will be able to command a premium for delivering energy-efficient, clean, and sustainable service. While recent economic conditions have made some steps towards decarbonisation (such as scrapping older vessels and slow steaming) unlikely, some shipowners are taking immediate action on fuels. This comes despite high adoption costs and uncertainty about which fuel source – from lower-carbon LNG, to carbon-neutral biofuels, to zero-emissions hydrogen, ammonia, or electricity – will ultimately become the industry standard.
Maersk, the world’s largest container shipping company by fleet capacity,7 is one such prime mover. In August 2021 it announced an order of eight dual-fuel containerships that would run on carbon-neutral methanol, allowing it to be the first to offer customers carbon-neutral shipping on mainline ocean trading routes when the ships are delivered in 2024.8 It had previously also suggested that a tax of US$150 per tonne of CO2 emissions should be phased in to encourage the adoption of greener fuels,9 while the company’s CEO later suggested that fossil-fuelled ships should be phased out altogether.10
Green finance and the need for collective action
The problem of this approach is that inevitably, smaller and medium-sized operators, which play an important role in all shipping subsectors, may struggle to make similar investments in fuel-efficient new ships, or to retrofit old ones, which in turn will make them riskier for investors. This could lead to sectoral consolidation, although given no major player has yet successfully adopted cutting-edge sustainability technology, the opportunity remains for some SMEs to thrive through taking such an approach.
Ultimately, it will require all stakeholders, from government and multilateral agencies to major and minor shipping companies, to align to promote decarbonisation. The financial sector has a crucial role to play here, for instance through loan agreements that tie shipowners to progress on sustainability goals (recent examples of which have been pioneered by Standard Chartered.)11
By aligning the cost of borrowing to sustainability performance, banks can incentivise the shipping industry to make progress on their long-term decarbonisation agenda. Alternative and innovative financing that embeds sustainability targets into funding deals can help companies escape a vicious circle whereby they lack the funding to invest in the technology to decarbonise, but their lack of progress on doing so means they are overlooked by investors.
Some imaginative funding tools have already been proposed, including carbon taxes, carbon trading schemes and offsets. Initiatives like the Poseidon Principles12 and the Sea Cargo Charter13 are helping define the future of financing. But much remains to be done, particularly on closer collaboration, to help shipping companies adapt to the biggest challenge – and seize the biggest opportunity – they currently face.
This article is based on themes discussed during a panel at the 2021 Marine Money Week Asia conference.