Arctic shipping: A new way to capitalize on climate change?
What will it take for Maersk to navigate the next great frozen frontier?
Each year, ~70% of the world’s trade is moved by ship1. Despite incredible advances in technology, the primary means of moving goods is little changed since the days of Christopher Columbus. However, there may be a breakthrough on the horizon fueled by an unlikely candidate – climate change. Rising temperatures have wreaked havoc on Arctic sea ice, which has some people dreaming of shorter journeys between trading hubs.
What is the opportunity?
A recent study by the University of Reading found that over the next decade, Arctic sea ice volume is likely to shrink to ~50% of 1985-2000 averages. The result – open channels near polar landmasses and thinner ice across the pole. Why does this matter? Artic trade routes could reduce shipping time from Europe and North America to Japan by ~33% (or two weeks), reducing costs and the burden on global supply chains2.
Who has skin in the game?
It is difficult to discuss shipping without mentioning Maersk Line. The Danish shipping giant is the largest in the world, operating a fleet of more than 600 vessels representing ~15% of global capacity3. In an industry plagued by low margins and intense competition, they have been able to use their scale and resources to maintain an edge on the competition by investing in new ships and new technologies.
The most recent innovation, tied loosely to climate change, has been a new class of larger and more efficient container ships. The EEE ships (Efficiency, Economies of Scale, and Environment) are the largest in the world. They are also amongst the slowest. In order to achieve ~20% reductions in fuel burn and emissions, the ships have been designed to cruise more slowly to reduce wasted energy.4 Maersk has been able to leverage its scale and infrastructure to reduce delays in ports and canals resulting in cheaper shipping in a competitive timeframe.5
Should Maersk be concerned?
Each EEE class ship costs Maersk ~$200M to build6, and represents a significant bet that slower speeds and fuel related cost savings are the way of the future. But will that bet pay off if competitors begin shifting their operations to the Arctic?
The two greatest contributors of variable cost to maritime shipping are fuel burn (~46%) and port & canal fees (~21%)7. As discussed above, new routes are expected to reduce journey lengths by ~33%, which should translate to equivalent reductions in fuel burn. Those savings would outpace what Maersk has been able to achieve with the EEE class by more than 50%.
But perhaps the more interesting savings comes in the form of canal fees. In 2016, the average fee to transit the Suez Canal was ~$465K8. While large at face value, it is stunning when compared to an average annual operating cost of ~$15-20M7. In a world where the average ship could transit the Suez Canal 10+ times, switching to Arctic routes could save as much as ~33% of total operating costs.
How is the market responding?
Arctic shipping reached a peak of 71 voyages in 20139. When compared to the ~17K trips through the Suez Canal10 that number seems trivial. There are many potential explanations for the relatively low adoption, ranging from lower fuel prices to higher insurance rates. Most recently, the Copenhagen Business School released a report that proclaims Arctic shipping won’t be economically viable until 20402. Maersk seems to have bought into that sentiment, and hasn’t changed its public position since they declared Artic shipping a “long-term” opportunity in 201311.
But there is also a sense that change may be on the horizon. China, which has been ramping up investment in northern latitude resources, recently made a public push for more of their ships to use Arctic routes12. They are also beginning to increase pressure on Canada to lessen restrictions on the Northwest Passage (which Canada claims as its territory).13
Russia, the country with the largest Arctic coastline, is also making significant advances. This spring marked the first time that an ice-breaking tanker (owned by OAO Yamal) visited a Siberian port. The Russian government hailed the journey as a significant milestone, and expressed optimism that Arctic traffic will increase as more petroleum production is brought online in the region later this year.14
What comes next?
As we look ahead, it seems paramount for Maersk to keep an eye on developments in Arctic shipping. Will the economics remain attractive? Will businesses continue craving more predictable supply chains? Will diplomacy keep pace with new trade routes?
Russia and China are poised to lead the charge, but Maersk should aim to retain their position as a leading innovator in the shipping industry. I would be keeping a close eye on OAO Yamal as they enter this new frozen frontier with their new fleet of 15 ice-breaking tankers15.
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Sources:
- Review of Maritime Transport 2015. United Nations Conference on Trade and Development. http://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=1374.
- As Arctic Ice Banishes, New Shipping Routes Open. Jugal K. Patel and Henry Fountain. New York Times. May 3, 2017. https://www.nytimes.com/interactive/2017/05/03/science/earth/arctic-shipping.html
- Maersk Line Profile. https://www.maerskline.com/about/profile
- Maersk ‘Triple E’: Introducing the world’s biggest ship. Eoghan Macguire. CNN. June 26, 2013. http://edition.cnn.com/2013/06/26/business/maersk-triple-e-biggest-ship/index.html
- Innovation. APM Terminals. http://www.apmterminals.com/es/about-us/innovation
- Maersk’s Triple-E vessels: The world’s largest container ships might change the face of shipping industry. Soumyajit Dasgupta. Marine Insight. December 26, 2016. https://www.marineinsight.com/future-shipping/maersks-triple-e-vessels-the-worlds-largest-container-ships-might-change-the-face-of-shipping-industry/
- Operating Costs of Panamax and Post-panamax Containerships. Dr. Jean-Paul Rodrigue. Hofstra University. https://people.hofstra.edu/geotrans/eng/ch3en/conc3en/containeroperatingcosts.html
- Containerships could save thousands by skipping the Suez Canal. Luke Graham. CNBC. February 26, 2016. https://www.cnbc.com/2016/02/26/cargo-ships-could-save-thousands-by-skipping-the-suez-canal.html
- Shipping Plans Grow as Arctic Ice Fades. Ed Struzik. Yale Environment 360. November 17, 2016. https://e360.yale.edu/features/cargo_shipping_in_the_arctic_declining_sea_ice
- Suez Canal Traffic Statistics. Suez Canal Authority. 2016 Report. http://www.suezcanal.gov.eg/English/Downloads/Documents/2016.pdf
- Arctic Shipping Routes Still a long-term proposition, says Maersk. Richard Milne. Financial Times. October 6, 2013. https://www.ft.com/content/f44bd53a-2e74-11e3-be22-00144feab7de
- China wants ships to use faster Arctic route opened by global warming. Reuters. April 19, 2016. https://www.reuters.com/article/us-china-arctic/china-wants-ships-to-use-faster-arctic-route-opened-by-global-warming-idUSKCN0XH08U
- China sent a ship to the Artic for science, then state media announced a new trade route. Adam Taylor. National Post. September 14, 2017. http://nationalpost.com/news/world/china-sent-a-ship-to-the-arctic-for-science-then-state-media-announced-a-new-trade-route
- Russian tanker forges path for Arctic shipping super-highway. Olesya Astakhova. Reuters. March 30, 2017. https://www.reuters.com/article/us-novatek-lng-putin/russian-tanker-forges-path-for-arctic-shipping-super-highway-idUSKBN1712K6
- Christophe de Margerie Class Icebreaking LNG Carriers. Ship Technology. http://www.ship-technology.com/projects/christophe-de-margerie-class-icebreaking-lng-carriers/
It is interesting to see how free trade and capitalism will allow firms to take advantage of what is arguably one of the biggest tragedy in modern history.
Although I am in favor of using the Arctic route when it becomes economical, I would argue for very strict ways in which the additional profits can be used. The very reason why this is available in the first place is that our environment is in terrible shape. It seems only reasonable that the profits generated by shifting traffic to the Arctic be reinvested in technologies to reduce the impact of shipping on carbon gas emissions.
I am hopeful that all governments with Arctic coastlines will be able to levy taxes on passages equivalent to part of the additional profits earned by shipping companies, and then use the taxes to contribute to the Paris Agreement. It remains to be seen…
The Arctic route does indeed present an opportunity for the shipping industry to capitalize on climate change, and we might also consider the resulting reduction in CO2 emissions (through reduced fuel spend) to be net positive for global climate.
But taking advantage of the Arctic route, simply because it is economically viable, could have dire effects on the Arctic, as well as global climate. This is because the pristine environment of the Arctic will be extra sensitive to aerosol emissions – especially black carbon which is a bi-product of burning high-sulfur bunker fuels (which the shipping industry currently relies on). One example of a direct impact of increased black carbon in the Arctic would be a reduction in the Arctic albedo – i.e. ice’s ability to reflect sunlight decreases as darker particles are deposited on the ice. This would lead to an acceleration of ice melting in the region.
The impacts of emissions in the Arctic and beyond are well known to groups such as the Arctic Council and the International Maritime Organization. These groups will likely push to regulate Arctic shipping, and the shipping industry might be required to rely on higher grade fuels (which combust more efficiently) if it chooses to go through the Arctic.
Interesting reading!
From my perspective one of the remaining challenges that arises from this topic is how to achieve an effective incentives alignment among the different stakeholders of the transportation market to make this artic route sustainable in the long term for everyone; clients, shipping companies, governments, insurance companies, ports administrators and the planet itself. It seems clear to see that if incentives are not aligned the climate change situation that we are already experimenting could get worse rapidly.
As Kristina was mentioning there are founded reasons to think that taking advantage of the Artic route can accelerate the ice melting in the region, but at the same time maintain the status quo can be even worse as less efficient ships and longer routes could have a major impact in the environment.
¿What is the proper balance of this tradeoff? Here is where the correct scheme of incentives can play a major role. One effective idea that should be studied in more detail is to create a market of Artic shipping rights , a scheme similar to what we are seeing for the CO2 emission across different industries, where those players that are more efficient and clean have an advantage over those less efficient.
I think that Canada needs to be carefully planning for the future to take advantage of potential economic opportunities and protect there own resources. Can they develop, maintain, and protect a route that can become the standard route before the ice melts? Will there need to be additional Canadian settlement or colonization to support these routes and potentially provide additional? Do these trade routes potentially open up access to additional Canadian natural resources that weren’t previously economical? Do they have the authority to toll ships passing through?
I also think Maersk is making a mistake by taking a back seat to Russia and China. A 33% reduction in shipping time is a game changer and I have a feeling that shipping companies (particularly those that are government-subsidized) will be eager to gain a strong foothold along these routes before they become truly economically profitable and in time, erode Maersk’s market share.
Great read.
I agree that there are significant cost savings with potential Arctic “short-cut” passages but I also believe that there are important geo-political considerations in play as well. Despite Russia being continually ostracized in the international political community, the country becomes an increasingly important player in international trade with nearly all of the new Europe-Asia arctic trade route bordering the country. I’m not an expert in trade or shipping, but I assume that this could give Russia leverage in trade negotiations and is an important bargaining chip against various US/European sanctions as it could impose higher port fees, passage rights/taxes, etc.
I also like that Maersk is able to find an environmental friendly approach to cost savings (lower variable costs with higher shipping volume). These two variables are often in tension and usually represent a trade off – not complementary – decision for companies.
Normally, we always focus on the downsides of global warming so it was interesting to read your essay on Maersk which has benefited from rising temperatures on the Arctic sea. It does seem like the economics are attractive and will remain so in the future. I do wonder if there is a way for Canada or other organizations to impose some fees on shippers using this route so that some of this benefit can then be redirected into environmental efforts. Rising temperatures in this region are certainly worrisome so it would be great to put in place some mechanisms to ensure that the shippers are not solely the ones benefiting here.
To me, the impact of arctic shipping on Maersk will be dependent on whether these new volumes being sent through the new route were originally thought by Maersk to be shipped over more traditional routes. Instead, arctic shipping could be displacing things such as railroads or alternative transportation. If arctic shipping does take share from traditional routes, the market will have to decide if it is worth building new ports to accommodate these routes. Ships are very capital intensive, but the ports they dock in are even more so… therefore this may not have much of an affect on moving trade routes. Ultimately, I believe the headwinds against arctic routes will be so strong over the next 30 years that Maersk should not be affected by this change, but this article certainly raises interesting points!
Thanks for sharing! I also wrote my paper on the numerous challenges and opportunities the shipping industry, and Maersk in particular are facing with the rise of global warming. Despite the opportunities you’ve discussed in this paper, I believe the rise of global warming will hurt these companies on numerous other fronts to include massive changes to their portside infrastructure and changing locations of populations throughout the world. It is interesting and quite impressive that Maersk has taken an industry leading role in climate change reform and increased shipping regulation. It could be that they are just trying to capitalize on their increased capacity relative to their peers.
Fantastic article and great comments!
I find it very interesting how the megatrend of climate change interacts with the megatrend of increasingly isolationist trade policies. Lower financial costs coupled with shorter shipping time on a major trade routes make the world a more tightly-knit global village. Not only is it more economically advantageous to consolidate production in one place, but also less strategically beneficial to have a plant nearby in order to expedite time to market. Drawing from what we learned in our Marketing class about how fast fashion players operate, the two-week difference in time-to market of new collections can be a game-changer in their design of the supply chain, encouraging placing production in lower-lost countries potentially located further away.
Will this be enough to dampen the effect of isolationism on global trade? Can it be the case that potentially the largest blight for a group of developing Asian countries – climate change – can also be a blessing for them?
Fantastic article with great analysis! I agree with the analysis that given rising temperature and melted ices, the arctic shipping will be more and more viable in the future. However, it poses great concern to me that the arctic shipping activities will push for the climate change even more aggressively, creating an viscous cycle effect. To be specific, in light of the fluid mechanics, the flowing water is less likely to be frozen, meaning the shipping routes will only be broaden when the traffic increases, less ice area on the sea will lead to less sunlight reflection and more heat absorption, driving the earth even warmer, thus creates a vicious cycle. Given above foreseeable result, governments shall actively restrict arctic shipping or charge high fee on the travel, using charged fee for environmental protection so to balance the environmental impacts.