The maritime industry is in doldrums.
The death-knell has been sounded by the COVID-19 pandemic.
Will the industry stay afloat?
These are oft-repeated statements and questions from anybody and everybody with even the remotest connection to the maritime industry. So, what is this maritime industry? It includes not only ship-owners and charterers but also ports, freight forwarders, container freight stations, other allied infrastructure operators, and so on. Not to forget the cargo owners who provide the bread and butter to this industry, there are also others such as insurers (Cargo, Hull, P and I, Marine Liabilities), maritime lawyers, environmentalists, oil-producers, Regulators and Governments who can impact/and even be impacted by the fortunes of this industry. While there is no doubt that COVID-19 and the associated restrictions have hurt the maritime industry immensely, COVID-19 has only been an ‘accelerator’ or ‘aggravator’ of the problems for the industry, and certainly not the initiator.
The woes of the maritime industry began much before COVID-19 became the most searched word in dictionaries. A Survey carried out by the Global Maritime Forum in 2020, published as a report – Global Maritime Issues Monitor-2020, highlighted 5 key indicators expected to have a major impact on the maritime industry in the next 10 years:
- Global economic crisis
- De-carbonisation of shipping
- New environmental regulations
- Geo-political tension
The global economy was slipping even before the COVID-19 pandemic and lockdowns set in and going by the looks of it, will take much longer to come back to pre-covid levels and then move forward towards growth.Asian Development Bank(ADB) estimates the global economy to suffer losses in the range of US $ 5.8-8.8 trillion which will constitute between 6.4% and 9.7% of the Global GDP. Shrinking volumes in manufacturing, falling demand, low capital investments, bankruptcies, job losses, and so on have aggravated rapidly in the face of COVID-19 induced lockdowns. No wonder, shrinking trade volumes top the list of issues impacting the maritime industry.
Black carbon emissions from ships burning Heavy Fuel Oil has been identified as a major cause of global warming and melting of ice-caps apart from being a major air-pollutant. Use of alternate fuels are among the many ways identified by experts to reduce Black carbon emissions from ships. The International Maritime Authority (IMO) seeks to introduce a ban on Black Carbon emissions and enforce it strictly from 2023. What will be the cost for ship-owners can only be imagined? Even as this new environmental regulation is to kick-in, ship-owners are already reeling under IMO 2020 which came into effect from 1stJanuary 2020 ; seeks to reduce Sulphur content in ships’ fuel from 3.5% to 0.50%. This can be achieved by one of the below methods, but each one has its own repercussions:
- *Marine diesel or LNG can be used as substitutes, but Marine Diesel is the most expensive fuel while use of LNG would necessitate modifications to the ship’s engines and storing LNG cylinders on board – added costs
- *VLSFO can be used but refineries find it difficult to cope up with rising demand
- *Ships fitted with scrubbers is another option but again there is a huge cost impact plus a long waiting time at shipyards for fitments
Pandemics have been identified as another top issue which will impact the maritime industry. We have already witnessed the indirect impact of the COVID-19 pandemic in creating newer issues (which we discuss in later paragraphs) and aggravating the existing ones discussed earlier. The word used is ‘pandemics’ and hence one can safely construe that COVID-19 is not going to be the end of the problem, possibly mutants, variants or totally new viruses. The world is worried.
Geo-political tensions are already widespread and with the prevailing situation in the Middle East, South Asia, and Baltic region it can only get worse and impact global trade and along with it the maritime industry.
In addition, ship-owners and charterers have been facing multiple operational issues such as -
- Container fires on board (due to mis-declaration of cargo, ship-design or inexperienced crew),
- Piracy in the Malacca Strait, off the coast of Somalia (though reduced now) ; in the Gulf of Guinea,
- Increasing premium rates on Hull ; Machinery insurance and rising legal expenses across the globe in fighting cases of General Average, (which show a rising trend) and cases from litigant cargo owners or insurers,
- Rising war insurance premiums and the increased tariffs for usage of the Suez ; Panama canals which are important waterways connecting the world.
So how has COVID-19 or the associated lockdowns impacted the maritime industry or aggravated the existing issues?
COVID-19 pandemic on its own does not affect the maritime industry directly. Yes, the virus does not cause physical loss or damage to cargo or hull or machinery or ports. However, the efforts taken to combat the spread of the virus is what causes huge economic losses or increased expenditure. Supply chains across the globe have been severely impacted and the hidden losses, most of which are uninsurable or remained uninsured could run into trillions of dollars. Lloyds estimates insured losses due to COVID-19 and its aftermath to be US $ 107 billion, mainly coming in from liabilities, credit insurance, event cancellation and of course Health insurance. Marine insurance may not have been directly impacted in a big way but the shrinking trade volumes and heightened expectations from customers posts a challenge to insurers. Investment returns have reduced, and many investments have been reduced to ‘junk’ status, posing an added problem to insurers, who need to bring in capital to maintain their solvency levels as per regulations. Premiums are rising and will rise further. Let us brace ourselves for a hard market.
As COVID-19 vaccination programs gather steam across the globe and economies show green-shoots, there is no place for complacence. The virus may yet come out with Plan-D - a Delta variant. Furthermore, the after-effects of the extended lockdowns and the interruptions caused still linger as far as the shipping industry is concerned. Some of the prominent after-effects are as follows:
- Shortage of Containers: 85% of the global trade happens through containers. It is estimated that around 17 million containers are in use. The problem is COVID-19 had ensured a skew on container availability and the industry is grappling with this problem. When a stuffed container is shipped from one country to another, it comes back after de-stuffing with new cargo from that region. Bringing back an empty container is never a viable proposition. If one looks at the trade pattern, China was the major exporter to North America and Europe before the advent of COVID-19. As all these containers were moved, panic set in. Many stuffed containers were lying at Chinese and intermediate ports, on vessels which were not allowed to berth and finally lying at container freight stations in destination countries either with cargo or after unloading. Countries such as China, Vietnam ; India have recovered faster than the west and there are commodities ready to be exported but alas! There is a shortage of containers. It is estimated that 60% of the box-containers which went to North America and Europe have not come back – A new problem for the shipping industry and exporters.
- Dependence on China: Building new containers could be an option but here again, 85% of the world’s containers were built in China. Now with China looked at suspiciously by many and the next wave of the pandemic, which is said to have broken out in the region, this does not seem an immediate option. In addition, some Chinese ports such as Ningbo-Zhoushan (world’s 3rdlargest container port) and Yantian went into lockdown amidst fears of a new variant of the virus spreading. This has created tremors again in the shipping industry.
- Crew shortage: Crew-change operations have been badly hit as regards banning of shipping crew members from India or those who have travelled to India or Bangladesh recently. Neither a ban on entry of ships with such crew, nor a prolonged period of quarantine has helped in speeding up the supply chains. It may be noted that China, India, and the Philippines contribute majorly to the seafarer’s count. This is followed by Singapore and some Chinese ports as of now and if this gets extended, the problem can quickly snowball into a major one.
- Recent Unexpected Shocks: Though not directly or indirectly connected with COVID-19, two events during the lockdown periods created a huge impact on supply chains and brought home the fact that such incidents could recur – One was when MV ‘Ever Given’ blocked a portion of the Suez Canal – The delays, the economic losses, efforts involved in salvaging operations, the legal issues involved and above all the political ramifications set a precedent for future events. Compensation issue seems to have been settled though the details are not made known yet. Suffice to say that a severe dent would have been made to the finances of insurers/ P ; I Clubs. Second incident was the fire on board MT ‘New Diamond’ and her consequential sinking. General average was declared but the vessel could not be saved. Another body blow to insurers and a field day for maritime lawyers.
Even as the maritime industry struggles to meet these existing challenges compounded by COVID-19, newer challenges such as Cyber threats and automated or remote-controlled vessels are seen on the horizon. The industry has to keep pace with the operational, regulatory, personnel and technological changes and be nimble enough to navigate them. Support from different stakeholders including governments and global maritime bodies is the need of the hour.