Marine Market report 2023
half year review
Plus ça change, plus c’est la même chose
Miller’s marine market review of 2022 discussed the impact of supply chain hiccups within the global socio-economic climate, coupled with the conflict in Ukraine; regulatory changes, principally relating to decarbonisation; and sanctions.
The report also concluded that the marine insurance industry was in a ’fragile equilibrium’, which perhaps was not an inapt description at that time.
Although penned over 174 years ago, the famous epigram by Jean-Baptiste Alphonse Karr in his journal, Les Guêpes of “the more things change, the more they stay the same”, serves as the title of this report, typifying the first half-year of 2023.
The supply chain issues of 2022 look to have eased, but it could be argued that the turmoil of that year, along with the Russia-Ukraine conflict, accelerated the emerging latent economic downturn. Fast forward to mid-2023, and many of the underlying drivers remain active. The global macroeconomic environment is still far from favourable, and with significant monetary tightening continuing, many analysts predict that there will be a strong likelihood of recessions in Europe and the US.
Supply chain
The United Nations Conference on Trade and Development (UNCTAD) reported that trade growth was positive for the first quarter of 2023, but that there had been a slowdown in second quarter, as negative factors outweighed the positives. The forecast for the remainder of 2023 by UNCTAD remains gloomy, to say the least.
Many containership operators, perhaps the best barometer of trade, have removed almost a quarter of their capacity from the trans-Pacific trade lane in the past year, as freight rates have sunk below pre-pandemic levels. Examples of the slowdown are many, but a few illustrate the measure of that slowdown. Alphaliner, in its inactive fleet report for March, shared that 300 containerships of over 500 TEU were out of active service (representing nearly 1.6 million TEU, or about 6% of the industry’s total capacity). This was more than double the corresponding period in 2022. Tradewinds reported that revenues for China’s Orient Overseas Container Line (OOCL) in Q1 2023 were down 60%.
Excess supply of tonnage, especially in the feeder size, has resulted in downward pressure on charter rates in the range of 25%. Rates for larger ships remain stable due to much of the tonnage being on longer-term charters, and little coming off hire. This is likely to be an artificial short-term situation that will manifest more when some of those longer-term charters mature. Port declarations have no doubt contributed to this situation. The Port of Los Angeles, for example, reported that for the first two months of 2023, total container volume of 1,213,860 TEUs was down 30% (admittedly from an artificial high for several reasons) from the 1,723,360 at the same point in 2022.
Russia-Ukraine conflict
The future of the Black Sea Grain Initiative looks bleak following the Russian refusal to extend the deal beyond 17 July.
Russia’s specific demands to extend the date include the reconnection of the Russian Agricultural Bank (Rosselkhozbank) to the SWIFT banking payment system, that supplies of agricultural machinery and parts to Russia be resumed, and that restrictions on insurance and reinsurance are lifted. The chances of any one of these being agreed, let alone all of them, looks remote. At this stage, it looks like Ukraine will be forced to export grain almost exclusively via its Danube river ports.
The impact of the wording imposed by reinsurers in contracts renewing at the end of 2022 has effectively excluded the aggregating of multiple vessels caught in the same war risk event. For example, the aggregating of losses due to deprivation at the date of the incursion into Ukraine. Each vessel is now deemed to be a separate loss. The impact of that wording change has shifted exposure previously borne by the reinsurance market, back into the direct market. With far reduced reinsurance coverage, direct underwriters have been forced to reduce their average line size on the risks that they do write, resulting in capacity reduction for war risks. There is still more than adequate capacity to cover all the vessels in the world fleet, but with reduced capacity, the laws of supply and demand have dictated higher premiums for war risks than might otherwise have been the case. Those insurers who have continued to maintain high levels of war risks premiums have, so far, been rewarded due to a continued absence of material loss, as the fear of loss exceeds the reality.
Whilst the change in the reinsurers’ wording is impacting marine hull business, it is also affecting other specialty lines, particularly aviation. The marine loss from the incursion into Ukraine is estimated to be around the USD400m mark, however this pales into insignificance when compared with the aviation loss, where more than 400 aircraft, worth almost USD10bn, have been stuck in Russia after lessees did not return the jets.
Sanctions
Shipping appears to have become the de facto policeman of sanctions.
With 95% of the world’s tonnage having a mutual P&I entry, the pressures for insurers, both on property damage and liability, are very tangible as enforcement agencies look for strict insurance sanction compliance. There has been a good level of success as insurers have certainly improved sanctions monitoring and enforcement, but outside of the insurance industry, there have been unintended consequences. The bifurcation of trade, with some nations taking economic and/or political advantage through the cracks of poor unanimity in the enforcement of sanctions, is one of them. A further unintended consequence has been the emergence of the ’dark’ fleet. An armada of tankers ferrying sanctioned oil around the globe is enhancing the risk of environmental casualty. These vessels are typically older than the average vessel in the world fleet, and they may not be properly inspected or maintained. The occurrence of a catastrophic spill is only a matter of time. The explosion onboard the 26-year-old 95,800 DWT Pablo, carrying 700,000 barrels of crude oil in the South China sea off Malaysia in May 2023, should be a salient reminder of the dangers. Thankfully, the vessel was nearly empty.
For nearby maritime authorities, the headache has just begun. The Pablo, flying the flag of Gabon, appears to be just one of the reported hundreds of old tankers purchased by undisclosed buyers. The tanker had been deleted from three different registries from June 2021 to October 2022 (as reported by Tradewinds). There is little evidence of the owner, a Marshall Islands registered company whose fleet contains no other ships, and no trace of insurance.
The Pablo was a near-miss, and vessels like the Turba are near-hits. Regulators have been advised that the 26-year-old, 106,500 DWT VLCC has not had a full inspection since 2017. The tanker, owned by a Seychelles-based company, is sailing under the flag of Cameroon, which is listed as the highest-risk registry by the Paris MoU (the 27-nation body that inspects foreign-owned ships). In March 2023, S&P Global Market Intelligence identified a 443-strong shadow fleet, and nearly 2,000 vessels at high or medium risk of breaching sanctions, owing to their ownership or trading patterns.
Whilst it is difficult to police international waters, it is down to individual authorities to monitor their own national waters, and to be comfortable allowing substandard sanction busting vessels into their territories. This includes ship-to-ship (STS) transfers of cargo, which is often undertaken in an attempt to legitimise the cargo.
So far in 2023, the EU has outlined some tough restrictions. If any tanker carries out a Russian STS transfer on the way to an EU port, anywhere in the world, and if there are suspicions about the transfer, it can be banned from entering without having to undergo further investigation. Similarly, deceptive automatic identification system (AIS) transmissions that suggest tampering, ‘spoofing’ or ‘going dark’ will alone be sufficient to merit a port ban.
ESG/IMO regulations with regards to decarbonisation
The insurance industry can cajole and encourage, but it cannot dictate the rate of decarbonisation in the shipping industry.
The Poseidon Principles for Marine Insurance, adopted by shipping banks, include a standardised covenant clause in each new finance agreement, requiring shipowners to provide specific data. By the end of 2022, 30 shipping banks representing ~USD200bn of available ship financing (two thirds of the market), had signed up to these principles. The impacts of financiers’ power can be noted as recently as June 2023, when it was reported by Loadstar that Legal & General Investment Management (LGIM) sold its stake in China’s Cosco, after condemning its efforts to decarbonise.
There are, no doubt, many similar actions being taken within the financing industry. Financiers are reviewing not only current environmental concerns, but also their positions regarding financing to ‘future proof’ their investments. To meet the Paris Agreement of 1.5C, recently ordered ships will have to evolve to use scalable zero emission solutions or be scrapped before end-of-life.
The BRS shipbrokers 2023 review reports that at the end of 2022, a little less than 30% of the worldwide shipbuilding orderbook (and 22% of the worldwide shipbuilding orderbook excluding LNG carriers) was dual fuel. At this pace, it will take more than 100 years to have a dual fuel fleet in place. With regards to liquefied natural gas (LNG), whilst current regulations can incentivise LNG capable vessels now, the Paris Agreement requires moving away from LNG as a fuel. As LNG is 90% methane, unburnt fuel will be primarily composed of a gas that traps 86 times more heat than the same amount of CO2. The LNG capable fleet ‘at risk’ of otherwise early retirement, could be around USD850bn by 2030, as reported by UCL Energy Institute.
Vessels with a poor carbon intensity index score (the measurement of carbon emissions), are already proving difficult to sell. It is likely that the development of a differential in freight rates between compliant and non-compliant vessels will occur. Klaveness Combination Carriers (KCC) is already claiming a first in the tanker and bulker sectors, by linking charter fees to CO2 emissions. The charterer pays a supplement to the agreed charter rate if emissions are below an unspecified level, and gets a rebate if emissions exceed that agreed level.
These emission ‘swing’ charters help make up the funding proposition when banks are approached. As these gain traction, they are likely to become a more meaningful aspect of any financial consideration.
The International Maritime Organisation (IMO) set a target of 50% reduction in emissions by 2050, compared to 2008 levels. Historically, the IMO has moved at the pace of the slowest member states, resulting in criticism of the pace of change, with China even lobbying for this 2050 date to be further pushed out to 2060. Pressure, however, is being applied to accelerate that rate of reduction. In July 2023, the Maritime Environmental Protection Committee (MEPC) met at the IMO. It was hoped by many observers that the 2050 target would be revised and also that intermediate targets for 2030 and 2040 would be set.
The outcome of the meeting was a somewhat disappointing, with very non-commital statements made. As reported by Jonathon Saul at Reuters, the goal to reach net zero emissions has been set “by or around” 2050, and this is even further undermined by whether or not “national circumstances allow” it. Intermediate goals have been set of 20% (striving for 25%) by 2030, and 70% (striving for 75%) by 2040. Despite a periodic review of the strategy, these appear to be more aspirational than hard targets, and with no apparent stick or carrot for unsuccessful or successful achievement.
The outcome of this meeting is extremely unlikely to take the pressure off the shipping industry, and the monitoring of progress is likely to remain in the crosshairs of pressure groups. It can only be hoped that the lead taken by the EU ETS and, to a lesser degree the Poseidon Principles, will help accelerate the pace of change.
Day-to-day market
It is worth noting a couple of significant losses in the first half of 2023. One was the Kodiak Enterprise, which caught fire at Tacoma, US. The 1977 built US flag vessel appears to be a total loss. Were the vessel to be declared a total loss, the insured loss to the market is believed to be in the region of USD160m. This was followed by a fire on the Skandi Buzios on the 2 June 2023. It is understood from market sources that the pipelaying vessel has an insured value of over USD250m. Early views were that the vessel would not be a total loss, but the damage is likely to be very significant.
Rightship has also reported that rates of seafarer abandonment are increasing. It reported that 9,925 seafarers had been abandoned over the past 20 years, including 1,682 who had been impacted by 103 vessels marked as abandoned at the close of 2022.
One piece of good news is that the number of containers lost overboard from ships reached a new low in 2022 based on the percentage of containers handled each year, according to the World Shipping Council. This strong reversal is in total contrast with previous years, where the three-year average was 1,566 containers lost at sea per year. Just 661 containers were lost at sea in 2022, representing a minuscule percentage of the estimated 250 million boxes transported each year.
Losses from the hull and machinery property damage class appear to endure.
What has changed however, is that following over 24 quarters of premium increases, the base is far more resilient to withstand the expected losses. Those such as the Kodiak Enterprise and the Skandi Buzios, as well as the fear of those types of shock loss, would still skew the results of affected insurers and add to the volatility of the account. It is this fear that is keeping insurers disciplined as cost of capital is high.
Plus ça change, plus c’est la même chose.