Are plummeting container shipping rates bad for the environment?
This edition explores why falling container shipping rates may lead to worse environmental outcomes, looks at more shipping incidents in the Bosporus, Rivian's Jesus Nut, and BMW EV production shift
Sky-high container shipping rates have started to cool down as the impact of container shipping capacity shortages and port congestion finally receded. The Drewry’s World Container Index (WCI), which measures actual container rates on East-West trade routes, fell below $3,700 per forty-foot equivalent unit (FEU) from $9,408.81 at the start of this year. Shipping rates of $32,000 from China to the U.S. West Coast are history. Customers will likely rejoice at these rate declines until the traditional blank sailings (skipped voyages), cargo rolls (containers left on dock) and monthly general rate increases (GRI) will start taking hold.
Container Shipping’s Vicious Cycle
After living through this boom-and-bust cycle of shipping rates, mainly caused by the Suez Canal obstruction, it became clear that the temporary shipping capacity shortage due to port congestion was the main reason behind the dramatic rate increases. As congestion eased and ships restarted more regular sailing schedules, the traditional overcapacity problem of the container shipping sector started showing its weight on shipping rates. Low container shipping rates throw shipping lines into the same old vicious cycle: low rates drive the need for efficiency by building and using gigantic ships. Larger ships are more efficient but can access an ever more limited number of ports. This is also called sometimes service rationalisation. Servicing fewer ports limits service differentiation. This makes container shipping even more of a commodity service, thus increasing competition and leading to even lower rates.
Something else also became increasingly obvious: lower container shipping rates are bad for the environment. Even though container shipping is one of the least environmentally impacting transport mode per tonne transported, the outcome of the plummeting rates, ship gigantism and service rationalisation cycle is that less cargo is transported by sea (see TEU-miles graph below). Containers are typically shipped to the closest main port – to then be loaded onto a truck, train, or barge to its destination – transport modes which are typically more environmentally impacting than container shipping. In the context of seeking to achieve Net Zero through fuel decarbonisation, the added cost of dual fuel ships (LNG, methanol) further reinforces this vicious cycle.
Emission reduction targets by transport sector are counterproductive to increase the amount of shipping despite its comparative advantage to other shipping modes. Rather than encouraging the least environmentally impacting transport modes to displace others in supply chains, the blanket approach of reducing emissions for all transport modes simultaneously makes it almost impossible for any immediate reductions in emissions to be achieved. Although shipping would be less a emission intensive transport mode than others, increasing the amount of cargo shipped would increase shipping emissions, despite decreasing overall transport emissions. This is inconsistent with transport mode-based emissions targets.
All hopes must therefore lie with decarbonisation through alternative fuels – liquefied natural gas (LNG), ammonia, methanol, and hydrogen. Same thing with the International Maritime Organisation’s (IMO) low-sulfur regulation. And, as the dual-fuel ship order book grows, several aspects need to be considered:
Dual fuel ships are as environmentally impacting as their fuels. They may have the capacity to run on alternative fuels. As long as those fuels are not available at scale and used in the ships, dual fuel ships are just more expensive but do not reduce emissions.
LNG powered engines which reduce sulfur emissions have been shown to generate more carbon emissions than traditional fossil fuel engines due to methane slip. Trading one emission for another.
The regulatory framework around ammonia is underdeveloped to allow ammonia’s adoption as fuel, as are life cycle assessments of ammonia’s environmental impact. Ammonia’s toxicity is also heavily discussed. In the context of current ammonia shortage in Europe, the food vs. fuel discussion is of significant importance.
The Role of Supply Chain Holistic Thinking
As container shipping rates decrease, shipping lines are getting sucked into the same vicious cycle leading to ship gigantism and service rationalisation which ultimately reduces the extent to which container shipping, one of the least emissions generating transport mode per tonne, is used. While environmental regulation such as transport mode emission targets and low sulfur regulation are well intended, they may lead to unintended outcomes.
If disjoint approaches are ineffective, maybe some holistic thinking would help. Shipping lines and clients (the shippers) could use some lateral thinking to design tailored services in ways that maximise the use of deep sea and short sea shipping. Rather than aiming to be the cheapest carrier that delivers cargoes to one of ten European main ports, to Los Angeles or New York in the U.S., lines can consider calling smaller ports closer to where cargoes are delivered or consumed. Comparing emissions and other potential advantages of shipping from a supply chain perspective (and the different transport modes) can further strengthen the case for shipping in supply chains. At a policy level, two things should be apparent:
Reducing emissions from all sectors concomitantly is impossible without major disruptions to supply chains, economies, and social mobility and,
Increasing emissions in one sector can decrease emissions as a whole – modal shift is the best example of this – taking cargo away from roads to ships increases shipping emissions while decreasing transport emissions as a whole, because of the ships’ emissions advantage.
In many ways, container shipping, like other sectors fails to implement actions that could immediately reduce emissions in the hope that doing the same just with ‘cleaner’ fuels may do the trick - rather similar to what Greenpeace advocate for auto manufacturers. Is this a pattern?
In Other News
Cursed Rudders in the Bosporus
The Bosporus Strait was suspended twice in the last two weeks for vessels suffering from rudders and engine failures. The Annita and the Viva Eclipse both suffered issues while transiting the Bosporus leading to suspending navigation for several hours.
My question remains: What is happening with all these rudders?
Rivian’s Jesus Nut
Rivian has recently recalled all its 13,000 vehicles for a flaw in its steering system which could lead to starring control losses. Should a nut in the steering system fully loosen, the whole steering system fails, quite literally a Jesus nut.
BMW’s Electric Vehicle Production Shift to China
BMW recently announced they will be relocating electric vehicles production for their Mini brad to China from the UK Oxford plant. Officially, the automaker cites challenges in producing electric vehicles alongside traditional vehicles in the same facility. This argument seems unconvincing. I suspect that other factors may be behind this transition away from the UK. China’s dominance in Lithium-Ion battery manufacturing (see graph below) may be one of these factors – both in terms of proximity to manufacturing chains and in terms of supply chain uncertainty.