Forget air miles – approximately 90 per cent of the world’s bulk traded goods are transported by sea, making shipping the lifeblood of the global economy. The United Nations Conference on Trade and Development (UNCTAD) estimates that in 2008 the shipping industry transported more than 7.7 thousand million tons of cargo.
Advances in technology have made shipping the most fuel-efficient and carbon-friendly form of commercial transport available. And all current trends and trading patterns indicate that an even greater proportion of the world’s trade will be carried out by sea in the future. Without shipping, the transport of crude oil, coal, iron ore and raw materials, including feedstocks and metals, would simply not be possible. Intercontinental trade in affordable food and manufactured goods would cease to exist in all but the most niche and exclusive areas. International supply networks would break down.
But with approximately 50,000 merchant ships traversing international trading routes, the freight market can be summed up in two words: volatile and complex. Ship owners, operators and charterers have to navigate an intricate, multi-faceted and inter-dependent freight market and are at the mercy of hundreds of events that can impact the cost of transport – and hence profit margins – every day.
The prevalence of piracy off the Somali coast and in the Gulf of Aden is perhaps the most obvious and has caused shippers either to pay exorbitant war risk insurance premiums, or to re-route and add delays and extra fuel costs to the journey. UNCTAD’s 2009 Review of Maritime Transport found that, based on 2007 data, re-routing 33 per cent of cargo from the Suez Canal to the Cape of Good Hope because of piracy concerns would cost ship owners an additional $7.5 billion per annum. These costs will ultimately be passed on to consumers.
It’s not just piracy that causes problems. Even if traffic through the Suez Canal were to be re-routed, other key shipping ‘choke’ points remain. Congestion in the world’s strategic shipping lanes, such as the Panama Canal, the Bosporus, the Straits of Hormuz and Malacca, as well as the Suez, can cause significant delays and add costs to journeys.
But even with a safe route planned out, other challenges inherent to the shipping industry remain to confound its participants and their profit margins. Seasonal differences, whether it is iced up ports, swollen river levels, or the size of harvest, have to be taken into account, for example. But even these fluctuations in weather and climate provide a more predictable framework of operations compared to demand for commodities, which can change rapidly in response to the ebb and flow of the global economy and industrial production in specific countries.
Equally hard to predict is price volatility for bunker fuel – which accounts for at least 25 per cent of the cost of running a vessel. What participants in the shipping industry do know is that climate change restrictions are coming into force. The cost of ships’ fuel is expected to increase by a further 50 per cent as result of the increased use of low-sulfur distillate fuel that will follow the implementation of the new IMO rules (MARPOL Annex VI). These will reduce the allowable sulfur content to just 0.1 per cent in 2015, down from the 1.5 per cent permitted today in prescribed Emission Control Areas (ECAs) – currently the Baltic Sea, North Sea, and certain shipping lanes around the US and Canada. Outside these ECAs, shippers are obliged to reduce the sulfur content of fuel from 4.5 per cent to 0.5 per cent. The IMO rules therefore add to the complexity involved in planning routes effectively, ensuring the right ships make the right journeys and optimising fuel consumption.
Then there is the size of the available fleet that has to be borne in mind: too few or too many vessels directly affects prices, which in turn affects freight rates. And finally, trading finance and credit conditions can positively or negatively affect both investment spending and consumer activity.
Managing all these elements – and many more – is critical for successful shipping operations, particularly as prices of fuel, commodities, cargo, credit and vessel hire continue to fluctuate once a ship has embarked on its journey.
Shipping lanes remain the great conduits of commerce. Like the great empires of old, today’s modern trading enterprises are built on naval strength and maritime capabilities, and 90 per cent of the world’s traded goods are transported by sea.
But although the majority of raw materials and finished goods reach their destination by sailing the seven seas, the reality of commercial shipping is much more constricted than the old cliché implies. It may well face fewer logistic challenges than transporting goods across huge land-masses, but getting cargo from one point to another is far from straightforward, and there are still plenty of constraints on where and how goods can be transported.
Oil products and minerals are the most transported commodities, and the location of these resources determines many of the shipping lanes for bulks. The importance of large manufacturing regions and consumption markets also give structure to the most common maritime routes. Then there are the physical constraints: coasts, winds, marine currents, depth, reefs, and ice all play their part in determining where ships can and can’t be sent – as of course do political boundaries. There is a reason that today’s supertankers plough the same waves as the great tea clippers of the 19th century.
However, many of the maritime routes that traverse the rest of the globe are only a few kilometers wide, and a limited number of strategic ports to serve these congested shipping lanes. Even ships on the popular trans-Atlantic and trans-Pacific routes, which have a far greater choice of routes and ports, still tend to congregate around tried and tested ‘Great Circle’ paths and the ports that serve them.
So a ship cannot simply turn up in a strategic port and expect to discharge one cargo, pick up another and sail off into the sunset. One of the most critical elements in managing the profitability of any voyage, therefore, is assessing port availability, and to include that information when calculating voyage distances, bunker fuel requirements, and the type of cargo to be carried. A ship sitting idle while waiting for a berth in one of the world’s shipping choke points will be missing its laycans, possibly destroying its cargo and definitely losing business. It is effectively throwing money overboard.
Port availability is also a critical factor in determining the level of risk of any given voyage. This is not simply the financial exposure to freight rate volatility and counterparty credit risk – although again an idle ship will have deleterious effects on both – but also the personal risk of piracy. Pirates off the Somali coast and in the Gulf of Aden have already caused shippers either to pay exorbitant war risk insurance premiums, or to re-route and add delays and extra fuel costs to the journey. UNCTAD’s 2009 Review of Maritime Transport found that, based on 2007 data, re-routing 33 per cent of cargo from the Suez Canal to the Cape of Good Hope because of piracy concerns would cost ship owners an additional $7.5 billion per annum.
So charterers, ship owners and operators need accurate, up-to-date and comprehensive information on all the ports on their routes. And not just whether there is room for them. Shipping firms need quick identification of port positions – individually, by country and by zone. They need pilot information and the restrictions on draft, length overall (LOA) and beam to make sure the port can take a given vessel. They need latitude and longitude values and the UNLOC code as well as distance and routes to other ports. Even information about GMT offset and Daylight Savings Time is essential if journeys are to be optimized and delays minimized.