effects of global warming on singapore maritime industry
TRANSCRIPT
Effects of Global Warming on Maritime
Effects of Global Warming on Singapore Maritime Industry
Introduction
Global warming, which is the continuation of the rising global temperature, has
draw much attention from the whole world. Since the mid-20th century, global surface
temperature has increased 0.74 ± 0.18 C, caused by increasing concentration of green
house gases. It is estimated that the temperature will probably rise a further 1.1 to 6.4 C
during this century.
Global warming brings drastic changes to the world. First of all, global warming
triggers geographic and climatic changes. Given shipping’s dependence on water ways
and weather, such changes will definitely affect maritime industry. On the other hand, in
order to fight against global warming, people will change what commodities they trade
and consume, which are very important factors for shipping demand. As a result,
shipping industry will definitely have to undergo transformations to accommodate these
changes.
Maritime industry contributes approximately 7% of the Singapore’s GDP and
provides over 96,000 jobs in various sectors. Moreover, port of Singapore remains the
world’s busiest in terms of shipping tonnage and container throughput. It’s also the top
bunkering port in the world in terms of bunker sales. Therefore, maritime industry is a
vital part of Singapore economy. Hence, Singapore is highly sensitive to any shifts in
the global maritime industry, and has to watch out for any potential problems and
prepare in advance. The objective of this report is to provide some insights about the
potential changes brought by global warming in both near and far future and to analyze
their impacts on Singapore maritime industry. We hope this report will help the shipping
companies and port operators for their strategic decisions in the future.
We will discuss five aspects of global warming effects on Singapore shipping
industry, changed demand for energy products, new north sea route, shipping insurance
cost, regulation on ships’ carbon emission, and shipbuilding cost. We will analyze the
general trends in every aspect and apply them to Singapore context. We will link the
analysis to either the cost or revenue of the shipping industry parties such as ports,
shipping companies, and ship insurance companies. However, the discussion in this
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report is not meant to be exhaustive. We are only interested in the relevant factors to
Singapore context.
Discussion
Declining demand for energy products
As global warming becomes more and more evident, people start to be aware of
the adverse consequences of greenhouse gas (GHG) emission. They will make an
effort to reduce the usage of fossil energy such as coal and oil. This may not be a short-
term issue as it takes time to find efficient alternative to fossil energy. However, many
governments have already taken the steps to cut the burning of coal or oil. For example,
with heavy taxation on oil and carbon emission, Denmark emphasizes more on green
energies such as solar and wind power. Successfully, 16 per cent of Denmark’s total
energy consumptions are from such sources. (Friedman, 2008) this percentage is
expected to grow with cheaper techniques becoming available. Thus, it is reasonable to
believe that these efforts will lead to the declining demand for crude oil and coal in the
future. According to a recent news report from The National, International Energy
Agency (IEA) predicts that “new limits on carbon pollution likely to be agreed on this
year will reduce the world’s need for oil more quickly than previously forecast.” (2009)
As those alternative green energies are normally locally produced and
consumed, hardly generating any demand for sea borne transport, decreased demand
for fossil energy products will cause shrinkage of demand for oil tankers and bulk
carriers, leading to a surplus supply. From the market pricing mechanism (Figure 1), we
can see that the freight rate for tankers and bulk carriers carrying those fossil energy
cargoes will eventually go down.
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Figure 1 Market Pricing Mechanism
Moreover, the number of charters as well as the charter years will go down. Such freight
market breakdown was present in the history. During the oil crisis triggered by OPEC’s
collusion to raise oil price in 1973 and 1974, similar phenomena were observed.
(Tenold, 2006) (Figure 2) Although the causes are different, the true driving force is the
same – the plunge in demand.
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Figure 2 Chartering and Freight Rates, 1970-1977
Source: Tenold, S., (2009) Tankers in trouble: Norwegian shipping and crisis of the 1970s and
1980s, p30.
The profit margins for shipowners and operators will decrease. Shipowners may
first slow down the fleet, but given the significance of energy trade to tankers and bulk
carriers, the supply surplus will be so great that slowing speed is not enough. Therefore,
the least efficient fleet will be laid up and eventually they will be scrapped. The world
fleet of tankers and bulk carriers will decrease in number. The outcomes are similar to
the crisis in 1970s. However, the sudden disruption in 1970s was hard to anticipate
while the effects of global warming gradual. This provides owners and operators of
tankers and bulk carriers with time to adjust. Hopefully, the outcomes will not be that
drastic and catastrophic.
Since neither is oil the only cargo for tanker nor is coal the only cargo for bulk
carriers, one way to adjust is to move to other bulk shipping sectors. For example,
tankers used to carry oil can carry some vegetable oil or liquid chemicals instead; bulk
carriers used to carry coal can carry grain and or iron ore. However, this doesn’t
eliminate the supply surplus. Some players must be forced out so that the market can
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achieve its new equilibrium. As a result, the survival of a particular ship owner or
operation depends on its operating efficiency. The one who can more efficiently cut
various costs and better utilize the ships’ productivity has a better chance to survive.
It is good to emphasize that we don’t believe oil and coal markets will totally
collapse. Oil and coal are also feedstocks of other industries, such as chemical, medical
and even cosmetic industries. Global warming has little influence on the demand from
these industries. Thus, a certain volume of oil and coal will be moved across the world
anyway. It is because energy market is so significant for tanker and bulk carrier trades
that it has a great impact.
In Singapore context, all these impacts will more or less evident. From the list of
members of Singapore Shipping Association, we can see that many shipowners in
Singapore have business in oil or dry bulk sectors. Firstly, there is a list of 17 bunker
tanker shipowners, who provide bunker using their own fleets. More common players
are those companies who have ocean going vessels operated in oil or dry bulk markets.
J. Lauritzen Singapore Pte Ltd is one example of this group. (2003) J. Lauritzen has
core businesses in both dry bulk cargoes and oil cargoes. (2006) In long run,
companies like J. Lauritzen will confront challenges describe previously. How to
efficiently divert core businesses from oil and coal trades and achieve high efficiency in
operating will be crucial to these players.
The declining demand for oil and coal will influence ports as well. Since the origin
and destination of sea borne transport are ports, the decreased sea transportation will
demand less port facilities and services. According to Statistics Singapore, Singapore
ports handled approximate 500 million tons of bulk and oil cargo in 2008 and about 200
million tons in the first two quarters of 2009. (2009) (Appendix 1) Though Singapore
ports are well known as a container hub, oil and bulk cargoes contribute a considerable
share of the cargo handling operations. Therefore, fewer tankers and bulk carriers
calling at the port of Singapore indicates a substantial decrease of revenue from facility
charge. These facilities incur cost no matter being working or idle. Thus, port operators
may face a decreased or even negative profit margin. Furthermore, Singapore ports
also provide pilotage and towage services for ships going through the Straits of
Malacca. Figure 3 clearly shows a considerable volume of crude oil is transported
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through the Straits of Malacca to Far East. When less oil is demanded, the number of
ships going through the Straits will also decrease, leading to less demand for Singapore
port services. This will result in loss of service charge revenue. Therefore, ports are
presented with a challenge how to utilize the surplus facilities and improve efficiency in
providing services in order to stay profitable.
Figure 3 Crude Oil Sea Routes
To summarize, global warming will result in the decreased oil and coal demand
and thus the corresponding sea transport. Shipping companies and ports will face
declining profit and challenges of improving operating efficiency in order to survive or to
maintain profitability.
New Northern Sea Route
With global warming and ice melting in the polar area, the 2 new northern sea
routes (NSR) through the Arctic Ocean may be opened to influence 2 major sections of
trades: Europe-Far East container trade and Transpacific container trade (From east
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coast of North America to Japan and North China). As the change in transpacific
container trade will not have big impact on Singapore’s shipping Industry, we shall focus
on the Europe- Far East Container Trade. This NSR is primarily from the northern ports
of Europe (Hamburg, Rotterdam, Antwerp, etc) to the east coast of China as well as
Japan and Korea, along the northern coast of Russia, as shown by the red dot line in
Figure 4. This sea route will serve as an alternative to the regular container route (The
Royal Route) through the Suez Canal (As shown in the map by the solid black line).
Figure 4 Sea Routes from Europe to Far East
To analyze this new alternative, the feasibility and cost of NSR will be discussed
to show its short-term and long term effect on global, and especially Singapore shipping
industry.
There are two aspects in the feasibility of this NSR, economical and technical
feasibility. We shall analyze the economical feasibility first. First of all, with the fast
growth of economies and people’s purchasing power in Asia, the demand of Far East
for manufactured goods will continue to increase in the near future. The industrial shift
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from manufacturing to services in Europe causes Europe to import more manufactured
goods. In addition, the liberalization of the Russian economy will also increase its
demand for imported manufactured products. These all result in an increase in
container shipping demand. In 2008, with 21.6 million TEU, the Asia–Europe axis
represents 30% of global container shipping. (Global Insight, 2008) United Nations
economists have estimated that this market will grow at an annual rate of 5–6%
between 2008 and 2015. Secondly, with the increase in container shipping along the
Royal Route, the limited capacity of Suez Canal is one constraint on the shipping
supply. It is possible that the canal will reach the limit of its capacity for container ships
in the near future (Selkou and Roe, 2004) Then, alternatives need to be found to
accommodate the traffic. Since the Cape route will increase the distance dramatically
and the capacity of land and air transportation is limited, NSR becomes an attractive
choice. Finally, the economic centre is shifting to the Northeast in Europe with the
development of Eastern Europe. At the same time, the growth of China is moving Asia's
economic centre from the Southeast to the North. We can expect more trades between
Eastern Europe and North Asia and this again makes NSR more attractive.
Regarding the technical feasibility, the distance reduction and navigation
feasibility of NSR also show NSR is preferable. NSR would reduce the length of
voyages from North Asia (ports of Japan, South Korea, and China) to North-western
Europe (Hamburg, Bremen, and Rotterdam) by about 2500 nautical miles. This
translates into a gain of about 10 days. With the current ship building technology, The
NSR is currently navigable at an average speed of about 15 knots from June to
December, and 11 knots from January to May due to climatic hazards (Jensen,
2006).Further melting of ice will increase the speed to 17 knots.
However, problems are unveiled when we consider the costs of NRS. Large area
along NSR is uninhabited; so the ships may face problems in bunkering and supply and
cannot optimize its cost as they do on the Royal Route where these services are
abundantly available. Another problem is that with great climate and sea condition
uncertainty, special investment on upgrading ships are needed to meet the standard of
polar navigation. Maintenance cost of the ships will also increase. In addition, Russia's
Northern Sea Route Authority (NSRA), imposes a heavy administrative burden on
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maritime companies. All these imply the rising costs for sailing along NRS. A modelling
research conducted by Verny and Grigentin (Table 1) shows that the shipping cost of
NSR is twice of that of the Royal Route. However, compared to other modes such as
railway or air, NSR has large advantage in term of either shipping capacity or cost.
Table 1 Shipping Cost for 4 Transport Modes
Therefore, some ships will move along NSR when Suez Canal reaches its limit
because NSR is the best alternative. However, the flux of traffic through the royal route
is unlikely to be affected in short term since NSR is not cost competitive. In the long
term, when the sea condition in NSR is improved due to further ice melting, the
maintenance and bunker cost can be largely reduced and makes NSR more cost
competitive. Then, the scenario will be different.
Next we shall apply to Singapore shipping industry. With regard to Singapore
port, since the number of ships passing through the Straits of Malacca (Royal Route)
will not drop much in short run, few challenges are faced by the port of Singapore.
However, in the long term, NSR may become cost competitive to the Royal Route and
makes the sea route choices of ship owners more volatile. Singapore, as the largest
transhipment and bunkering port on Royal Route, is likely to be affected. Hence
increasing port operation efficiency and reduce port charge level becomes crucial to
maintain the competitiveness of the port.
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With regard to the Singapore shipping companies, the timing to enter NSR
market may become a crucial decision in the short run. Upgrading ships to meet polar
sea conditions involves large amount of investment. The increase in maintenance and
bunker cost is another challenge. However, instead of queuing at congested Suez
Canal, travelling along NSR may be able to charge a higher freight rate due to reduced
distance and time saving. The pirates in the Aden Gulf may also make the shippers feel
safer to go through NSR. Cost benefit Analysis should be done with close attention to
cost variations on the Royal route and NSR to choose the best time to entre and leave
the NSR market.
Shipping Insurance
The emerging routes and climate change triggered by global warming have
influence on maritime insurance industry. For new routes, we use NSR discussed above
as an illustration to explain the impact on shipping insurance in both short and long
terms. In the short run, there are risks on new sea routes in Arctic areas when the ice
has not melted completely. Ships can only sail in limited areas which are not as safe as
current routes such as those through Suez Canal or around Cape of Good Hope. Ships
and cargoes have a higher chance to be damaged by underwater iceberg. Insurance
companies will reflect the higher risk level in their premiums or compensation levels.
(Bode, Isensee, Krause, and Michaelowa, 2002) Shipping companies may pay more
insurance premium for charter types in which the insurance cost is on shipowners. If
they don’t insure the ship or the cargo in some cases, they will face higher risk of loss or
damage. On the other side of the coin, P/I and ship insurance companies will gain more
profit. In the longer term when the Arctic ice melts more and the sea route is safer for
sailing, insurance premium may start to decrease since risks might be reduced.
Despite the shipping risks involved in new sea routes, climate change caused by
global warming will impose danger ships. There will be more unpredictable weather
patterns at seas like storms, cargoes and ships will be more prone to loss and damage.
The way of calculating insurance premium needs to be changed to adapt to the new
challenging situation. The insurance companies may either increase premium or choose
not to cover the loss/damage under certain conditions which used to be covered in the
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past. In addition, personnel safety on board the ship also has to be taken into account.
Employers have to ensure crew’s safety in order to comply with rules and regulations.
The insurance for crew may consequently go up. Similarly, this means the raised cost
for ship owners and operators and increased revenue for maritime insurance
companies.
Regulation on Carbon Emission from Ships
Researches from Institute for Physics and Atmosphere in Wessling, Germany
reveal that annual emissions from shipping range between 600 and 800m tonnes of
GHG, or about 5% of the total global emission. (Vidal, 2007) In spite of this high figure,
GHG emissions from shipping industry traditionally did not come under Major Climate
acts such as Kyoto Protocol or other legislation regulations. With the increasing concern
on global warming, various international and governmental bodies have already started
to respond to this problem. One leading country is UK. The UK Chamber of Shipping
has launched the emission trading scheme at the end of year 2008, which enables
shipping companies to invest in emission reducing research and operating practice to
qualify for carbon credits.
According to the Review of Maritime Transport 2008 from UNCTAD, Singapore,
with a registered fleet of 869 ships of total 28,632,554 tons, makes up 2.73% of the total
world fleet. (2008) Based on these figures, Singapore fleet contributes 0.1365% of the
total global GHG emission, far higher than the total domestic emission of the whole
country. Therefore, given the global trend, we can expect that Singapore will adopt or
work out schemes to control the emission, and also promote research on technologies
and innovations of ship design.
The quota on the emission and promotion of innovation will affect Singapore
shipping companies. In short term, the strict restriction on emission level will probably
bring challenges to ship owners and operators, because the technology is not in place
yet to make sure the ships can meet the quota without incurring large expenses. In
some cases, ships are banned from trading because they cannot meet the standard.
These will both result in the reduction of profit for ship owners and operators.
Nevertheless, the scenario is different in long term. New designs and innovations on
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ship hulls, engines and propellers all create additional improvement on ship’s
performance and fuel efficiency. For instance, “thrust fins” created by Hyundai Heavy
Industry can reduce propeller turbulence and convert it to extra thrust, reducing fuel
consumption up to 6%. Other innovations such as wind solar energy capturing devices
on ship could offer 15% to 30% fuel savings, hence, reducing GHG emission. Improved
fuel efficiency means a saving on operating cost. Thus, Singapore shipping companies
will benefit from the advance of ship design.
Another way to reduce GHG emission is to change the fuel of ships, because
burning fuel is the major source of GHG emission in shipping industry. Among various
researches done, one alternative proved to be feasible is the B20 fuel, which is a blend
of 20% bio-fuel and 80% marine diesel. Research conducted by Innovation Maritime,
Canada has proved the new B20 fuel has no performance differences from normal
marine diesels, but can reduce GHG emission up to 40%. (2006) Besides B20 fuel,
various bio-fuels such as rape oil, residual oil and LNGs all show high feasibility. These
new types of fuel normally have a higher price. This change will affect Singapore
shipping companies and ports in opposite directions, because the bunker price is
expense for shipping companies whilst income for ports. For shipping companies, they
are expected to experience increased bunkering cost and declining profit. However,
government may provide tax incentives and subsidies to promote more environmental
friendly fuel. This will to some extent reduce the effects for shipowners. As the largest
bunker port in the world, and still with continuous annual growths, increased bunker
price means a large growth in revenue for port of Singapore.
Increased Shipbuilding Cost
Global warming will accelerate the rate of the ice melting, hence rising the sea
level. As a result, many coastal regions will be flooded in the future. Since shipyards are
located near the seas or rivers because it is easier for the new-building ships to be
launched. If the sea level rising exceeds a limit, there will be a need to relocate the
shipyards. Therefore, it increases the cost of doing business in shipbuilding industry.
More importantly, production processes of the largest amount of material used in
shipbuilding – steel, needs a large amount of coal both for heating and the feedstock of
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steel making. Burning coal for heating generates greenhouse gases. Production of a
tonne of steel releases almost an equal amount of CO2. (Bonenfant et al., 2008) With
global steel production standing at 1.34 billion tonnes in 2007, that adds up to a
substantial contribution of carbon dioxide emission. Such huge amount will definitely be
subject to environmental regulation. Then, steel industry is forced either to use
alternative energies or to develop innovative techniques. They are normally more
expensive than burning fossil fuel, resulting in the rise of steel production cost.
Although coking coal used as a feedstock of steel making will not generate
substantial carbon emission, it is still influenced by global warming. Since governments
attempt to cut coal consumption, it may impose heavy tax on the sale of coal. In this
way, the production cost of steel is further increased.
As a result, the shipbuilding cost will increase. This cost is ultimately borne by
ship owners. Singapore shipping owning companies will incur higher capital cost and
have a lower profit, which signals a challenge to the survival and profitability of the
companies.
Conclusion
After discussing in depth the five aspects of declined energy product demand,
emerging new sea route, change in ship insurance policy and premium, strict regulation
of ships’ carbon emission, and finally increased shipbuilding cost, we can see that
global warming will influence the different parties in Singapore shipping industry in
either positive or negative way. The reduction of the shipping volume will decrease the
profits of the shipowners and the related sectors. The North Sea route impose no threat
to Singapore port in the short run, however in the long run, it is a potential menace. The
climate change caused by global warming alters ship insurance policy and its
calculation of premium, meaning increased insurance cost for shipowners but greater
benefit for shipping insurance companies. The new regulations lead to the innovation of
ship design and new bunker type which bring challenge to shipowners whereas bring
opportunity for port’s bunkering service. The increased steel price makes building new
ships more expensive, so shipowners face more capital cost and lower profit.
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From an overall viewpoint , the disadvantages of global warming overweigh its
advantages on the shipping industry of Singapore. So, it is essential for Singapore to
make a first move, to tap on the merits and prepare for the demerits. Only a far sighted
prediction and a great sensitivity to any changes would make Singapore’s shipping
industry to survive in the ever changing world.
However, there is no hard and fast rule for individual players to determine
whether global warming is a curse or blessing. The situation has to be analyzed case by
case, and the outcomes depend on how efficient the player can address the challenge
or opportunity and response to it.
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