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In a tumultuous year of supply chain shortages and pandemic-related upheaval, the marine industry needs to prepare for the challenges that lie ahead.

By

Senior Risk Account Consultant, Marine Risk Management, AXA XL

It has been a tough couple of years for the marine industry. There have been headline-making disasters that point to the risks that shippers contend with every day.

Consider the massive explosion at a Beirut port in 2020 which caused an estimated 218 deaths, 7,000 injuries, the loss of some 13 vessels and $15 billion (USD) in property damage. Approximately 300,000 people in the area were left homeless, and the blast was felt in Turkey, Syria, Palestine, Israel and in some European countries. The cause: a large cache of ammonium nitrate, stored for six years without proper safety protocols in place.

And more recently, in October 2021, a container ship caught fire off the coast of Vancouver Island, British Columbia. While no injuries were reported, some 105 containers have been lost off the coast during rough seas prior to the fire. According to the Canadian Coast Guard, while containers held Christmas decorations, sofas, appliances, clothing, car parts, toys and other everyday items, there were also two bins that contained hazardous materials: chemicals used in mining.

With pandemic-related shipping disruption likely to linger, laid-up vessels having to be reactivated after months of inactivity, and the massive backlog of orders to deliver, the marine industry will likely enter 2022 with plenty of challenges to maneuver.

While we cannot predict the future, there are market challenges the industry faces right now that could well become loss exposures later on.

Issue #1: Building container vessels in a rush.
Because of the backlog of business, marine companies are working to build enough container vessels to meet the unparalleled demand coming from the global market. According to an analysis of the new construction orders by industry trade group BIMCO, 381 containerships have been ordered in 2021 representing a nominal capacity of 3.44 million TEU, a level of container capacity that has never been ordered in such a short period of time.

Catching up with demand is of paramount importance, but that is not the only reason for the rush to build more vessels. Many of today’s container ships are aging to the point where they might be taken out of commission either partially or completely. With increased demand, having enough vessels on hand at current levels is critical. Yet many companies are planning to put more vessels into use.

The larger reason, however, is the ability to generate significant profit. As an example, Maersk, the world’s largest container shipping company, recently reported its best quarter in its 117-year history. The company reported a 68% rise in revenue during the third quarter of 2021 and a record-high profit of USD 16.6 billion, compared to its USD 5.5 billion from the same period last year.

With the current demand and backlog, freight prices have skyrocketed up to 10 times their pre-pandemic prices. Many shipping operations are willing to take the risk of having too many vessels if they can generate enough profit.

Even so, the shipping industry may not have a choice. Because of the backlog, many bulk carrier vessels are being utilized to carry containers. These vessels are not designed to transport and handle containers unless substantial modification is done. Although there are regulations and standards allowing ship owners to adopt bulk carriers for container carriage, but the purpose is to use as one-off solution rather than permanent mode of transportation. However, as long as demand remains high, some shippers will continue to take unnecessary risks.

With the current demand and backlog, freight prices have skyrocketed up to 10 times their pre-pandemic prices. Many shipping operations are willing to take the risk of having too many vessels if they can generate enough profit.

Issue #2: An over-supply of vessels.
Demand often wanes. The vessels so desperately needed today to meet extraordinary market demand could well be needed for only a limited time. What will happen in two years when new vessels that have come into the market to meet the heavy demand are no longer needed?

During the pandemic, we saw such situations happen. One of the byproducts of COVID-19 was that quite a few vessels were put in layup. Preservation of machinery for long idle time is complicated and costly. Once the demand returns, the vessel needs to be reactivated. Doing so after a number of months could mean that the vessel’s propulsion and electronic components are no longer functioning.

That same dilemma has been faced by shipping companies when gas and oil demand is high. When the crude oil market hits a slump and the supply diminishes, those vessels are no longer used. That means that many of the vessels were either put in layup or scrapped. That can be an issue considering the typical 25-year lifespan of most vessels.

Because of the price that steel is currently fetching, we have seen vessels from the passenger industry that could have had a few more years of use suddenly scrapped because they were in layup and the cost of getting them reactivated again was too high. The Alang Ship Breaking Yard in India has seen a total of 14 passenger ships that were beached there in the past 12 months with more expected. The scrapping operation has seen more ships this year than collectively during the last 10 years. It becomes more cost-effective to let go of a ship than reactivate it.

Issue #3: Building bigger vessels.
The natural next step for the marine industry is to consider building larger vessels to capture the economy of scale and find a way to limit or decrease the cost of shipping. The more containers on a vessel, the unit cost of fuel is lesser and the fewer vessels you need in the water.

However, bigger vessels create even larger issues. The current infrastructure does not support larger vessels. Ports would be inundated, and unable to handle the additional container traffic. The aggregation of cargo in one point would soon render ports inadequate in size and number of ports available. The same with aggregation of the hull and machinery assets. The increase in size and number cannot be supported easily by today’s available services.

Safety while at sea would also be compromised – larger ships could potentially induce large incident and long-term consequences. The risk of collision, particularly in places like the Suez and Panama Canals as well as busy ports increases. The current salvage equipment available may not be adequate to handle such operations should there be an accident.

Facing 2022
While it is difficult to say how the marine industry will ultimately respond to the increased market demand, taking into account the pros and cons of meeting that demand is critical. As shipping operations consider their options, they must understand whether the infrastructure is there to support their choices, and whether the profit gained is worth the additional risks.

AXA XL’s Marine Insurance experts will continue to track these issues and others, and we will bring you the latest information that becomes available. Our approach to managing risks starts with making sure our clients have the information needed to make informed decisions.

 

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