The current chaos in global supply chains has a variety of causes, but one which has been overlooked - at least by much of the media - is decarbonisation. Politicians are increasingly concerned at shipping’s growing role in greenhouse gas emissions and regulations are tightening to force change. This need not be overlooked by investors, however; nor the many investment opportunities it offers.
Let’s survey the current situation. Global freight company, Kuehne + Nagel, estimates that there are currently 584 container ships waiting outside ports, almost double the quantity at the start of the year. Waiting times vary by port. According to the Financial Times, the average waiting time in August was one to three days at Shanghai, up to six days at Rotterdam, and at Long Beach anything from seven to twelve days.
A lot of this is due to short-term disruption caused by Covid. Apparently a single case paralysed a terminal within the main Chinese port of Ningbo, outside Shanghai, for a fortnight. It is even more due to the bounce back in consumer demand following months of lockdown globally, and a shift in trade patterns as manufacturers end “just-in-time” policies and seek to move manufacturing back closer to the consumer, responding to political pressures.
But there is one other key factor. Jacqueline Broers, the Senior Analyst at Utilico, told me: “There has been a noticeable reduction in shipping speeds – a fall from an average of 19 knots per hour in 2008 to just 14 knots now.” These slower shipping speeds are a direct result of the industry’s attempt to reduce fuel consumption. They are also a response to the growing political pressure to reduce emissions.
According to the International Maritime Organisation maritime transport emits around 940 million tonnes of CO2 annually and is responsible for about 2.5% of global greenhouse gas (GHG) emissions. Moreover, shipping emissions “under a business-as-usual scenario (will) increase between 50% and 250% by 2050” becoming a major hurdle in the battle to prevent further global warming. The IMO introduced stricter emissions regulations in 2020, and has committed to a 40% cut by 2030.
As an aside, it is worth noting that the countries who are the main contributors to GHG emissions from this source, are not “the usual suspects.” The US is there of course, but it is preceded by Norway (30% of estimated emissions) and followed by France (10%), UK (8%) and Germany (6%). This is one area where developed countries still have a lot to do.
Switching to green fuels will be a big part of decarbonisation. Andy Dacy, Managing Director – Global Head Transportation Group at JP Morgan says concerns over what this means for ship design “may explain why the amount of new build at the moment is somewhat constrained”, further exacerbating demand supply disruptions. There is a delay until more fuel-efficient ships come online (order books show a big spike in 2024/5). A large number of ships may well become “green obsolescent” in 2023.
Investors increasingly realise there are significant capital needs here. And there has been a plethora of investment initiatives. In the United States, Breakwave Advisors, recently launched “The World’s First Green Technology Shipping ETF” BSEA (Breakwave Sea Decarbonization Tech) which is “a vehicle for investing in maritime technology tied to carbon reduction.” It seeks to reflect the Marine Money Decarbonization Index, an index of 50 public companies leading decarbonisation efforts. According to Harold Malone, Principal at Sea/Switch, Breakwave’s partner, the amount of private capital needed to fund decarbonisation is anything from $1.5trn to $4trn dollars.
The potential for private capital to be deployed in the decarbonisation of shipping was specifically referred to by KKR, the private equity giant, in announcing its (€688.6m) deal to buy Ocean Yield, a Norway-based ship owning company with investments in vessels on long-term charters. Vincent Policard, Partner, and Co-Head of European Infrastructure at KKR, spoke of the role of long-term capital to meet the substantial investment needs of the sector. And the attractions of “a strategy of investments in modern fuel-efficient vessels on long-term charters.”
In the UK, Ed Buttery at Taylor Maritime Trust is making sure his handy-size ships are considerably greener than the large container carriers. They emit only 7 grammes of carbon per kilometre carried, compared to the much high emissions of large cargo ships let alone a Boeing 747 which emits some 500 grammes per kilometre carried.
What are the alternative fuels? Dacy says, maritime fuel LNG “is not the ultimate solution to the question of improving shipping's fuel consumption, but it is easily deployable.” Taylor Maritime is not keen on LNG because of the methane emitted and has instead been switching to ultra-low sulphur fuel oil which “reduces emissions by over 80%.” Buttery says he will shortly be making a biofuel announcement, and further out: “hydrogen may come in in 10 to 15 years.”
Asia is in the lead. Singapore’s new Global Centre for Maritime Decarbonisation (GCMD) recently requested proposals for the safety and operation of ammonia bunkering. And new notations are now being introduced for vessels on the Singapore Registry of Ships to recognise investment in technology and environmental performance.
It’s not just about shipping. The ports themselves can play a role. DWS, the fund manager, is part owner of Peel Ports. Regarding decarbonisation, Hamish Mackenzie, Head of Infrastructure at DWS argues: “the shift in global energy supply towards more renewables is an area of huge opportunity.” He adds: “Ports will need to convert their facilities to service the growing offshore industries. Hydrogen is also a potentially massive opportunity” and concludes “Whilst it is true that ports need capital investment going forward, I do not believe it will be at the cost of lower returns.”
John Arbuckle, Partner, and Infrastructure Specialist at Gerald Eve, the real estate consultant agrees. “Beyond cargo, the growth in the UK alternative energy generation market is clustering around ports.” Offshore energy from wind has a requirement for port-based manufacturing and service bases, increasing demand for port facilities. Ports are also attracting alternative power generation uses, including energy from waste.
Arbuckle also points out “Ports will play a significant role in the decarbonisation of the shipping industry by supplying … hydrogen fuel.” The hydrogen can then be used to power port vehicles and equipment which cannot be easily electrified.
Digitalisation can of course also play to the green angle with “port truck and crane automation reducing fuel and vehicle consumable usage by up to 50%” according to Peter Bachmann at Gresham House. He cites AiDrivers (AiD) that has focused solely on automating port and airport trucks and cranes.
Drewry, the maritime consultant, argues that disruptive technologies could be a game changer. They looked at APM Terminals’ cost structure and found 48% of costs were labour-related. “Terminal automation has the potential to lower this cost significantly as automated terminals require less labour to operate.”
Sometimes being a green hero also has monetary rewards.
Christopher Walker is a writer on business and politics. He sat for several years on the asset allocation committee of a major asset manager.