Ocean freight rates and their volatility will increasingly be influenced by environmental regulations, the United Nations Conference on Trade and Development (UNCTAD) said in its ‘Review of Maritime Transport 2022’ released on 24 November.
UNCTAD’s prediction comes in the wake of the recent steep downturn in container shipping rates that brought huge relief to exporters and importers hit by record high-rate levels after the pandemic roiled global trade.
In 2021, a shortage of shipping capacity and continued disruptions caused by COVID-19, combined with a rebound in trade volumes boosted container freight rates to record levels. By mid-2021, rates had peaked at four times their pre-pandemic levels. Container carriers also faced extra expenses but were able to post record profits.
At the start of 2022, container freight rates remained high and volatile. But, by early 2022, freight rates started to decline on some routes, and from mid-year there was a drastic downturn. Over four weeks between August and September, there was a double-digit fall. By the third week of September, the Shanghai Container Freight Index – the most widely used index for sea freight rates for importing China worldwide – had dropped by nearly 60 per cent.
Nevertheless, the current rates are more than double the pre-pandemic averages.
“Ports and shipping companies have now adjusted to the challenges brought by the COVID-19 pandemic,” UNCTAD’s Global Trade Update, published on 13 December, said. “Freight and cargo rates are still higher than the pre-pandemic averages, but their trend is downwards”.
“Container freight rates can be expected to decline further as merchandise trade normalizes and newly built vessels enter the market. But freight rates and their volatility will increasingly be shaped by environmental regulations,” UNCTAD’s ‘Review of Maritime Transport 2022’ said.
Even though rates have fallen from historical highs, they are still expected to be higher than pre-pandemic levels due to high ancillary charges such as high fuel prices, port taxes, canal charges, and the cost of new vessels compared to 2019, said Coen van der Maarel, MD, Kuehne+Nagel India.
“Demand is expected to be relatively stable over the next few years. Capacity is likely to remain stable, as 25 percent of the current global fleet would be in order, providing enough supply to meet shipping demand. However, much of it will be determined by consumer demand and orders placed in the coming months,” Coen van der Maarel said.
For 2022, UNCTAD projects maritime trade growth to moderate to 1.4 per cent, and for the period 2023–2027 to expand at an annual average of 2.1 per cent, a slower rate than the previous three-decade average of 3.3 per cent.
Global trade should hit a record US$32 trillion for 2022, but a slowdown that began in the second half of the year is expected to worsen in 2023 as geopolitical tensions and tight financial conditions persist, according to the latest Global Trade Update of UNCTAD.
Containerized trade, the fastest growing segment for many years, is projected to grow at a tepid 1.2 per cent in 2022, before marginally picking up to 1.9 per cent in 2023. The projected deceleration is a consequence not just of pandemic-induced lockdowns, but also of strong macroeconomic headwinds combined with a weakening in China’s economy. In addition, faced with rising inflation and living costs, consumers are spending less, while to some extent switching expenditure from goods to services, UNCTAD noted in the ‘Review of Maritime Transport 2022’.
In 2021, the container ship orderbook grew by 121 per cent. More vessels entering the market may push down freight rates, but effective supply can be reduced by operational and logistical problems.
In dry bulk shipping, by September 2022, rates had softened as congestion eased and China’s economy slowed. Future demand will be affected by a persistent pandemic and its impact on supply chains, a global economic slowdown and volatile commodity prices, while the supply will depend on fleet growth, for which in 2022 deliveries only grew by 3.6 per cent. Dry bulk freight rates are further being disrupted by the war in Ukraine as well as by higher operational costs arising from the energy transition and new environmental regulations.
For oil tankers, freight rates can be expected to increase with a potential rise in oil demand and trade and a reshuffling of global oil flows resulting from the war in Ukraine.
Tightening environment regulations, globally, could hold the key to the volatility in shipping rates.
On 1 January 2023, three new International Maritime Organisation (IMO) regulations will come into force, aiming to reduce maritime carbon emissions and the environmental impact of shipping.
The Energy Efficiency Existing Ship Index (EEXI) – a framework for determining the energy efficiency of vessels over 400 gross tonnage (GT) – requires ship operators to assess their ships’ energy consumption and CO2 emissions against specific energy efficiency requirements. To ensure compliance, shipowners may need to reduce their vessels’ emissions.
The annual operational Carbon Intensity Indicator (CII) – which applies to ships of 5,000 GT and above – indicates a vessel’s performance and efficiency based on annual fuel consumption, using a rating from A to E. The CII will be assessed annually from 2023 and becoming increasingly stringent towards 2030. For ships that achieve a D rating for three consecutive years, or an E rating in a single year, shipowners need to develop a corrective action plan.
The enhanced Ship Energy Efficiency Management Plan (SEEMP) is a mechanism for improving the CII ratings. It envisages targets and planning, and new technologies and practices for optimizing ship performance, along with procedures for self-evaluation, verification, and company audits.
The CII will provide an internationally verified and recognized ship rating. A bad carbon intensity rating may, in some cases, affect insurance coverage and charterer’s liability. Poorly performing companies could become less attractive to cargo owners in charter markets.
To reduce the carbon intensity and emissions of existing ships they will need to consider alternative, low-or zero-carbon fuels, and ways of optimizing operations, including reducing sailing speeds, which in turn will likely reduce shipping capacity. They may also need to invest in retrofitting vessels with energy-efficient technology and alternative propulsion techniques and will require some vessels to be recycled.
Around 65 per cent of the fleet capacity of tankers and bulk carriers is already compliant with the EEXI although some need to undergo engine power limitation. Other vessels would be required to slow down or fit new technologies.
To analyse the potential impact of the CII regulation, UNCTAD has compared actual and required CII for container ships and dry bulk carriers in 2021. Most container ships were CII-compliant while 31 per cent would be rated D or E. For dry bulk carriers, the share of rated D or E vessels was estimated at 36 per cent. This result is consistent with the conclusion from Clarkson’s Research that 42 per cent of the existing tanker, bulk carrier and container fleets would be rated D or E in 2026 if they had not modified their speeds or specifications.
Shipping is also affected by other national and regional environmental policies. The European Union (EU), for example, in 2021 presented a ‘Fit-for-55’ package, which charts the path towards 2050 to decarbonize across various sectors, including shipping, and includes changes to the EU Emissions Trading Scheme (ETS). In shipping, the package covers bunkering infrastructure in ports, with related tax incentives, and aims to promote alternative fuels, establishing fuel standards and lifecycle GreenHouse Gas (GHG) footprint requirements.
The EU Commission foresees a cap-and-trade system that limits GHG emissions for each ship with a mechanism for trading in a secondary market. Revenues generated from the auctioning of maritime allowances would go into a fund to support investments in energy transition.
Companies would have to buy carbon credits for all voyages starting or ending in the EU, and when at berth in EU ports, whichever flag they fly, or wherever the owner of that ship is. The regulation would apply to all ships above 5,000 GT, though there are discussions for lowering the threshold. Ships that do not comply could be detained or denied entry to ports. This is likely to increase the cost of voyages involving EU ports.
At the beginning of 2018, emissions allowances were being traded on the EU ETS at €8 per ton of CO2 equivalent, but by March 2022 the price had risen to €80 to €90 per ton and is expected to rise further and become increasingly volatile.
Looking ahead, UNCTAD said, prospects are uncertain, depending on changes in demand, congestion at ports and other supply-chain disruptions, as well as the fallout from the war in Ukraine with economic and other restrictive measures on Russia-related cargoes, and the need to reposition ships and containers.
“All these uncertainties either singly or in combination, would evidently influence freight rates development in one way or another,” the U N agency said.
