Reference:seatrade-maritime | Updated: 30 Dec. 2021
What a year! By any measure, 2021 has been chaotic; characterised by near-term events risks disrupting the familiarity and predictability of the cyclical market – a continuing global pandemic, stimulus programmes, growing economic recovery, pent-up demand, freight rates rocketing to levels never seen before, a surge in newbuilding and a supply chain in distress – all against the framework of the acceleration of decarbonisation.
Except to say that the fortunes of the maritime industry in 2022 will be driven by context, 2021 shows that it is somewhat difficult to forecast what may happen; however, there are some trends which the sector should consider and plan for.
The surge in freight rates in 2021 was largely due to the relentless demand of consumers, particularly in the US and Europe, and the limited capacity of the market to match that demand. Based on the data currently available from current backlogs, carrier order books and ongoing demand, and considering the increased discipline of and technological advancements made by carriers since the inception of the pandemic, it is widely anticipated that the freight market will remain strong throughout Q1 and Q2 and potentially throughout the remainder of the year.
Following the decline in newbuildings in 2020, 2021 saw a surge in orders as a direct consequence of the pent-up demand and distressed supply chain. This is predicted to continue throughout 2022 and into 2023. In 2021 H1, new orders for 1.7m teu of container fleet capacity were placed: this is the largest order book since 2.6m teu of container fleet capacity were ordered throughout the whole of 2015 and equates to an increase of approximately 15% of capacity by 2024. Of course, the impact of newbuildings will not be felt until significant new vessels are delivered in two or three years.
The systemic changes required by decarbonisation will underpin the direction and success of the sector for decades to come. Those who do not adapt, and do not do so in an astute commercial manner, will fall by the wayside. The need for and extent of the changes required became clearer during Q3 2021.
The International Maritime Organization (IMO) endorsed ‘New technologies for greener shipping’ as the World Maritime theme for 2022, focusing on the importance of a sustainable maritime sector and the need to build back better and greener in a post-pandemic world. According to the IMO’s estimates, shipping is responsible for 2-3% of all global greenhouse gas emissions annually.
As such, the sector was a key focus during COP26. The challenge extended (although yet to be adopted) to the sector is to reach zero emissions by 2050, a challenge which several major players in the sector think can be reached successfully (in time) so that the sector will not need to employ carbon offsetting.
To meet the challenge of decarbonisation by 2050, requires an immediate and stark change. Two areas where the sector is making advancements is in the establishment of green corridors and the search for a viable alternative to fossil fuels. Nineteen countries signed the Clydebank Declaration which aims to establish at least six green corridors by 2025, and many more by the close of the decade. Not only this but it aims to create partnerships to accelerate decarbonisation of the sector.
The search for and the implementation of viable alternatives to fossil fuels is a gargantuan task. Maersk is leading the way in looking to scale the production and distribution of methanol and ammonia, by investing in startups. This includes WasteFuel, focused on turning waste into sustainable aviation fuel, sustainable bio-methanol and renewable natural gas; Vertoro, focused on developing liquid lignin technology; and Prometheus, focused on developing a direct air capture technology to enable cost-efficient, carbon neutral electro fuels, and in the order of eight new vessels intended to run on clean electricity. Success will depend upon international cooperation between all those in the industry and policy makers.
Several other trends of note include:
carriers, especially beneficial cargo owners, attempting to negotiate longer terms to build more stability into their operations;
importers taking greater control over their inventory – shipping earlier and cutting items which are either very expensive or unprofitable;
centralising of freight and supply chain solutions; and
automation and digitisation.
The pandemic has underscored the need to build resilience into the entire system and we have seen supply chains accelerating the development of advancements in this area, which is already shown to be delivering greater efficiency and cost savings. This will continue apace. It is likely that hybrid operating models, including just-in-time and just-in-case supply chain models, will be more widespread, which in turn could lead to a demand for more flexible shipping services.
So far, across the sector, companies have been prudent in managing risk and avoiding or resolving disputes. However, COVID-19-related issues are crystallising, and we are seeing more disputes come through the courts and arbitral tribunals. In times such as these, it is more important than ever to actively manage risk and resolve disputes; however, on occasion it is necessary to take formal action.
The pessimists’ prophecy that the UK’s withdrawal from the European Union would result in businesses choosing to have their contracts governed by the laws of countries other than England & Wales and an exodus of business from the courts and arbitral tribunals of London has not come to pass. Whilst uncertainty remains as to the enforcement of court judgments in the EU given the UK’s absence from the Brussels (Recast) Regulation and the Lugano Convention, the law of England & Wales remains the jurisdiction of choice for international business.
There has been, however, a shift to a greater number of contracts specifying arbitration as the final forum for dispute resolution, rather than litigation. This is driven by two factors: international businesses continuing to wish that their contracts are subject to the law of England & Wales; and the certainty that the New York Convention provides in the enforcement of arbitration awards.
Negotiating 2022 will require the capacity to adapt, to be nimble and to manage near-term disruption while accelerating decarbonisation, challenging traditional ownership models which are ill-equipped to adapt.