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RESEARCH AND BRIEFINGS

Top Global Maritime Issues Facing the Shipping Industry

 


Our 2019 Global Maritime Issues Monitor looks at some of the critical issues facing the maritime industry. Based on a survey of senior maritime stakeholders from 46 countries and commentary from more than a dozen other leaders and experts.

The report was produced in partnership with the Global Maritime Forum and International Union of Marine Insurance (IUMI).

Looking at survey respondents’ views regarding likelihood, impact, and preparedness, four key areas stand out: environmental issues, economic crisis, geopolitical risk and digital. We explore these in more detail within this article.

Environmental Regulations To Have Major Impact In Coming Decade

Important environmental initiatives are underway within the maritime industry, yet shipping must play an even larger role in addressing climate change, largely through mitigating carbon emissions.

With its global reach, the maritime sector is a key stakeholder when it comes to both the causes and solutions related to climate change.

Reflecting this, survey respondents said that new environmental regulation is the issue most likely to occur in the next 10 years, while also seeing it as having the third highest impact.

This is driven in part by the pending 2020 sulphur regulation, which represents a paradigm shift in fuel requirements — one that may well increase fuel prices.

An encouraging related finding is that respondents are fairly confident in the industry’s ability to cope with fuel price increases.

The preparedness score for this issue is at 2.69, higher than for 15 other issues in the 2019 survey.

Respondents selected decarbonisation of shipping as number two in terms of its impact on the industry. It was also the issue for which they see the maritime sector as being generally unprepared.

This is especially significant as the industry will be fundamentally changed by the decarbonization of shipping.

Under the International Maritime Organization’s strategy, greenhouse gas (GHG) emissions are to be reduced by at least 50% — relative to 2008 — by 2050.

The long-term solution is to switch to netzero carbon fuels, a transition that will be driven by technological developments, the economic performance of zero-emission vessels, environmental considerations, and the development and implementation of international regulations and policies.

This year’s survey included a new issue for respondents to consider: societal demands for sustainability.

Respondents placed it quite high on the impact and likelihood scales, and low in preparedness.

Ranking Table of issues impacting the maritime industry

The interest in sustainability among maritime shippers has snowballed in recent years, driven by outside pressures and the industry’s desire to play a role in the greater good.

One way forward is for individual shipping companies to improve their sustainability practices by setting targets for specific environmental improvements, following ambitious ship recycling standards, improving safety performance, investing in employee training, and expanding workforce diversity.

There is also a need for collaborative efforts involving a coalition of stakeholders across the maritime spectrum, including shipping companies, banks, investors, insurers, and regulators.

Isabelle Durant, Deputy Secretary General of the UN Conference on Trade and Development, says UNCTAD sees the ongoing transformation of the maritime sector in the acceleration of the sustainability agenda.

“We are convinced that public opinion and demand for environmental concerns and sustainability will only increase in the future, critically influencing the parameters for maritime transport,” she says.

Durant points to UNCTAD’S Review of Maritime Transport 2019 as concretely showing how new imperatives — such as the compliance of fuel economy with climate-related emissions and reductions of the sulphur content of ship fuel — shape the context to which the sector needs to adapt.

“These are challenging times, but certainly interesting ones,” she says. “Our oceans and seas constitute a major environmental public good, which hold a special place in the hearts and minds, as well as in the livelihoods, of people across many different societies and cultures.”

Global Economics And Politics Top The Impact List

The issue with the most potential impact in the next 10 years, according to this year’s respondents, is a global economic crisis.

The issue is also considered one that the industry is least prepared for, although it is considered relatively unlikely.

Dr. Ricaurte Vasquez Morales, Administrator of the Panama Canal, agrees that a global economic crisis is a major concern for the maritime industry. And he also agrees that the likelihood is low.

“While this issue is very important to the industry, the probability of a global crisis to occur does not rank high in our possible scenarios,” he says.

“At this moment, the Panama Canal is more focused on slower global trade and shifts in trade patterns as a result of the frictions between China and the US, which will also have an impact on the industry.”

Otto Schacht, Executive Vice President of Sea Logistics at Kuehne + Nagel, says it’s understandable that a global economic crisis remains a top issue, though it could be overtaken in coming years.

“The subject of sustainability, zero emissions, and so on is new, and could surpass global economic crisis once we are faced with tougher consumer demands,” he says.

“It has to be highlighted to the public that sea transport is the most environmentally friendly transport mode. Consider that shipping a laptop by air from Shanghai to Amsterdam versus in a container produces 3000% more CO2.”

Respondents identified geopolitical tension as another leading issue facing the industry, placing it higher on the maritime agenda than was the case in 2018, but also deeming themselves better prepared to face it.

This year it ranked as the second most likely, the fourth highest for potential impact, and in the middle for industry preparedness.

Ranking table highlighting likelihood of maritime issues

“We are living through a period of unprecedented geopolitical change, marked by the erosion of 20th century institutions and the norms they uphold, as well as a shift in economic momentum toward 21st century powers,” says Meredith Sumpter, Head of Research, Strategy and Operations at Eurasia Group.

“This change has marked implications for the global trade patterns and growth that propel industry activity, as well as for the global alliance structures that have underpinned maritime security, which are now shifting.”

The 2008 financial crisis marked the beginning of a once-every-few-generations shift in the global geopolitical landscape, one that could take 20 to 30 years to play out, adds Sumpter.

She identifies four key geopolitical risks for the maritime sector as fragmentation of global trade, erosion of international institutions, a shift in alliance structures, and an uptick in government intervention.

“Erosion of international institutions makes it harder to collectively address key global challenges affecting the industry,” she adds, pointing to shifts in alliances that could upend traditional security relationships.

Such a situation can be seen in the South China Sea and recent events in the Strait of Hormuz, the world’s busiest sea route for oil.

As the demand for power and energy drives global economies, interruptions to and the volatility of the global supply chain can manifest in many ways.

Still, it is wrong to conclude that tensions manifesting themselves in the Strait of Hormuz will necessarily be a “quick flash to bang,” says Julian Macey-Dare, Managing Director with Marsh JLT Specialty’s Political Risk and Structured Credit Practice.

“Significant, longer-term uncertainty and risk is more likely — thwarting growth, investment, and trade,” he says.

“Proactively managing risk and diversifying supply chains becomes vital to navigating risk.”

Respondents in 2019 also identified changing trading patterns as an issue likely to occur in the next 10 years, and to have a high impact if they do.

This was likely driven by major issues such as trade conflict between the US and China, tensions with Iran, and the increasing importance of emerging markets.

Yee Yang Chien, President and Group CEO of MISC, notes that it’s important to differentiate between fundamental changes in trade patterns from economic and industrial drivers and those induced by trade policies.

“We should pay more attention and respond against changes brought about by economic and industrial supply/demand dynamics, which are the true fundamental and long-term drivers,” he says.

“Trading policies come and go with changes in the political philosophies of trading nations and, without doubt, will introduce short-term volatility, but they may not necessarily alter long-term, fundamental trends.

A healthy dose of foresight and conviction in views is necessary for one not to be distracted by short-term uncertainty and volatility.”

In the current environment, resilience is increasingly important. “It’s about the way the maritime industry positions itself to be resilient and nimble in the face of disruption,” Sumpter says.

Attacks On Shipping Keep The Focus On Cyber Risks

Survey respondents this year placed cyber risks and data theft as fifth in terms of impact, and third in terms of likelihood and preparedness, no doubt reflecting the maritime industry’s experience with major cyber-attacks in recent years.

In mid-2017, the maritime industry was shaken by a cyber-attack against Maersk, which led the sector to take a deeper look at cybersecurity.

More recently, there have been high-profile incidents involving COSCO and Austal, as well as ports such as San Diego and Barcelona.

Richard Smith-Bingham, Director of Emerging Risks at Marsh & McLennan Companies Insights, says that shipping will always be a target for cyber-attacks due in part to its nature as critical infrastructure.

“Cyber-attacks on critical infrastructure are at a high,” he says. “This is compounded by shipping’s vulnerability to geopolitical tension in certain parts of the world.”

The maritime sector’s global scope creates additional issues, Smith-Bingham notes.

“By virtue of being international critical infrastructure, cyber-based intelligence exchanges between governments and shipping companies may be weaker than those for fixed, land-bound assets such as power stations and airports.”

Additionally, he says, the increased use of automation and advanced analytical technologies will increase exposure points at a time when the threat is rising.

Much of the promise from new technologies is rooted in big data and artificial intelligence, which 2019 respondents rank as the fourth most likely, sixth in terms of impact, and seventh for how well prepared the industry is.

Ranking table highlighting preparedness of maritime industry

Big data and artificial intelligence are positioned to radically transform the entire global supply and logistics chain, notes Andreas Berger, CEO of Swiss Re Corporate Solutions.

“Within the next 15 years, we expect the global maritime industry to be fully interconnected, integrated, and digital,” he says.

“This will lead to unprecedented performance improvements and efficiency gains. It will also push novel and fully integrated data-driven shipping, as well as data-driven financial and insurance services.

In this context, we need to work together to establish data lakes and data protection standards because digital partnerships will help us monetise the benefits of digitisation.”

2019 Sees Attitude Shifts In Financial, Safety, And Trade Issues

In this, the second year of our survey, it’s worth noting a few issues for which respondents’ views have shifted.

For example, respondents showed more confidence in 2019 in some financial areas:

This year’s respondents were less likely to view insufficient access to finance as a significant issue, and its score dropped to 2.65, down from 3.01 in 2018.

Michael Parker, Chairman, Global Shipping, Logistics & Offshore at Citi, feels the rise in confidence regarding access to finance can be traced to a number of factors.

“First, owners feel that excess capacity is being absorbed. With a view that most freight markets will enjoy stronger earnings in 2020, a better outlook will translate into renewed investor interest in debt and even equity markets,” he says.

“Second, the unwinding of the distress in the shipping finance sector is near completion, with the banks exiting the sector or reducing their exposure having achieved their objective, leaving a clearer and competitive group of committed lenders focusing on high-quality owners and projects.

Third, the challenges of new regulations, such as IMO 2020, the IMO’s commitment to the 50% reduction in GHG emissions, which everyone knows is just a first step, and the broader impact of the ESG agenda on the maritime supply chain are making everyone realize that scale and financial strength are going to be essential.

“For those companies that can manage through these new more complex issues, finance will be forthcoming, and that is why one can see renewed confidence in access to finance from that type of industry participant. For small and medium sized owners, access is there through some banks and the alternative lenders, though at a price.”

Unlike the gain in confidence for financial issues, respondents in 2019 felt that a major safety incident would have a more significant impact than in 2018.

The impact score was 3.11 in 2019, compared with 2.76 in 2018, while its likelihood score remained relatively low, just as the year before. It also maintained a reasonably high preparedness score.

However, Alastair Marsh, CEO of Lloyd’s Register, sees three key reasons why maritime stakeholders should be concerned over the likelihood of a major safety incident.

“First, there is the inherent risk from new regulations, which often demand changes to ways of working and the use of emerging technologies,” he says.

“Second, as vessels become more reliant on increasingly complex and interdependent technology, predicting a failure becomes an equally complex task. There is also the increased risk of cyber-attack, which has the potential to lead to a major safety incident.

Third, there are factors that are beyond the industry’s control due to geopolitical uncertainty.”

While safety in shipping has improved over the years, 100 ships are still lost every year, on average, and there continues to be a high number of work-related injuries and fatalities compared to other industries.

Marsh says there are several ways the maritime industry can address these risks and improve its safety performance: “We need to continue to work to assess and model the risks surrounding new technologies, with focus on the cyber threat.

We could equally benefit from looking at other sectors, such as aviation, to see how they have managed the risks associated with rapidly changing technology.”

Meeting The Challenge Within The Maritime Industry

Much of what keeps maritime professionals awake at night involves issues ripped from the headlines of the global media.

Cyberattacks and threats involving data and new technology.

An economic crisis and trade wars. Geopolitics in places like the Strait of Hormuz and the South China Sea.

Climate change and the reality of limited resources.

Cyber-related threats stayed near the top of the list of concerns in the 2019 survey, and are likely to remain high on the list in the future.

Shipping is part of global and local critical infrastructures, which have come under increasing attack over the past few years.

Also maintaining a high level of concern this year are economic and geopolitical concerns. Financial concerns are driven by issues such as the trade tensions playing out between the US and China.

Should the global economy stall, the maritime industry will be swiftly impacted. And our survey respondents do not believe the industry is well prepared to weather such a storm.

Environmental issues took a central place in the survey results this year, with some areas that were newly added drawing much concern: decarbonization of shipping, which placed at number two for impact, and new environmental regulation, tallied as third in impact.

The lion’s share of concern here was undoubtedly climate change and efforts to decarbonize shipping, which we explore in a deep dive chapter elsewhere in this report.

Perhaps the main takeaway from our look at the top issues of 2019 is the lingering feeling respondents have that the maritime industry is relatively unprepared to deal with them.

This has not changed from last year. But rather than be a point of worry, we hope this view of preparedness is taken as a challenge.

Our qualitative research indicates that the industry has the power to influence many of the top long-term issues identified, and the expertise and resources to focus on them.

Download our 2019 Global Maritime Issues Monitor.