Effects of Global Warming on Singapore Maritime Industry

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

1


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.

2


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.

3


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

4


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

5


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

6


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

7


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

8


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.

9


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

10


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

11


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

12


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.

13


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.

14

Documents

Effects of Global Warming on Singapore Maritime Industry