An Interview With Mfb Solicitors Discussing Global Shipping Trends

An Interview with MFB Solicitors discussing global Shipping trends – Lexology

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This article is an extract from GTDT Market Intelligence Shipping 2022Click here for the full guide.
Ukraine conflict
Russia’s invasion of Ukraine, which began on 24 February 2022, has been widely condemned by the international community. The ‘specialist military operation’, as it has been called by Russia’s President Putin, marked a dramatic escalation of the conflict that began in 2014 with Russia’s annexation of the Crimea and the uprising of Russian-backed separatists in part of the Donbas region. At the time of writing, fighting has been fierce, with Russian forces meeting considerable resistance by determined Ukrainians armed by some NATO countries, as well as Sweden. Ukrainians fleeing the fighting have crossed borders into neighbouring countries, notably Poland, sparking Europe’s biggest refugee crisis since the Second World War.
Shipping has been affected on numerous fronts – at the time of writing, much of the Black Sea and Sea of Azov is closed to commercial shipping, fighting is ongoing in several Ukrainian port cities and Ukrainian ports are closed for operations, with some vessels having been strategically sunk to block entry and exit. Most of the more than 100 ships stuck in Ukrainian ports are bulk carriers or general cargo vessels, together laden with around 1.25 million tonnes of grains and oilseed, which is in danger of spoiling. Exports of such commodities have dropped from up to 6 million tonnes per month to around 200,000 tonnes in March 2022. While most of the crew members of the ships trapped in Ukraine have been evacuated, around 500 seafarers remain on board as members of skeleton crews tasked with caring for the ships and their cargoes.
Commercial vessels entering the Black Sea face dangers such as floating mines, some of which have reportedly drifted away from their original location, and risk becoming collateral damage of attacks against port infrastructure. All ports in Russia and certain sea areas in the Black Sea and the Sea of Azov have been included in the Hull War, Piracy, Terrorism and Related Perils Listed Areas by the Joint War Committee, triggering the payment of additional war-risk premium for vessels transiting, or stuck in, those areas. For some vessels blocked in Ukrainian ports, premium payments could exceed the value of the vessel.
The knock-on effects of the conflict have sent shock waves through global markets. The cost of energy has increased as a result of reduction of supply from Russia. Governments have sought to punish Russia with far-reaching sanctions on Russian entities, individuals and goods. Coming on the back of supply chain and logistical disruption resulting from the covid-19 pandemic, the closure of Ukrainian ports and trade restrictions targeting Russia have stifled export of commodities such as grain, oilseeds, vegetable oils and metals from both countries, causing global shortages and high prices. Efforts to export Ukrainian goods via Romania, requiring transit by train, lorry or via small Danube River ports, will only go so far to make up for the dramatic reduction of exports of such commodities.
Sanctions
New sanctions have been introduced to weaken the Russian economy and encourage Russia to cease its actions in Ukraine. Financial, trade, shipping and immigration restrictions have been imposed by many Western countries, notably the EU, the US and the UK, with new sanctions implemented on an almost daily basis, not always synchronised between the various regimes, and creating confusion for operators across the industry. Many major companies have been keen to distance themselves from trade and business in or with Russia and Russian entities. Many industry players are avoiding doing business with Russians even if they are not on the official sanction list, from fear of being inadvertently caught by sanctions in cases where ultimate ownership is not clear. Among the shipping companies affected is the Russian state-owned Sovcomflot, which has one of the world’s most modern fleets of oil tankers and gas carriers; sanctions imposed by the EU and the UK have forced the P&I Clubs with which Sovcomflot ships were entered, including Gard, West, the UK Club and North, to terminate P&I insurance cover.
Russia has retaliated by imposing bans on exports to Western countries of a number of products, including telecoms, medical, vehicle, agricultural and electrical equipment, as well as some forestry products such as timber.
At the time of writing, the recent wave of sanctions targeting Russian interests include the following.
US sanctions
Sanctions imposed by the US:
EU sanctions
The EU has adopted five packages of sanctions since 23 February 2022, including:
UK sanctions
The government extended existing sanctions, which were imposed following Russia’s annexation of the Crimea, to the non-government-controlled areas of Donetsk and Luhansk. Additional individuals, companies and financial institutions have been added to the UK sanctions lists, aiming to stifle the Russian banking system’s access to UK financial markets. New restrictions on trade and export controls against Russia’s hi-tech and strategic industries were also announced. Russia’s national airline Aeroflot has been banned from UK airspace and Russian ships are banned from UK ports. UK persons are prohibited from broking, chartering and selling vessels to persons connected with Russia.
Yachts owned by Russian individuals and entities
Around 10 per cent of the world’s superyachts are owned by Russians. At least 16 superyachts, worth an estimated US$2 billion, have been seized in Europe since the invasion of Ukraine, due to alleged links to sanctioned Russians. Most seizures have been by European authorities, as well as by the US and UK.
Supply chain issues – disruption, delays, freight increases
The disruption brought by the covid-19 pandemic has continued into 2022, with travel restrictions and quarantine measures imposed in response to outbreaks of the disease. China’s commercial capital and busiest port, Shanghai, has recently been under strict lockdown. When this is combined with increased consumerism during the pandemic, as household spending changed from vacations and restaurants to consumer products such as video games and exercise equipment, demand for shipping currently outstrips availability. In response, shipping carriers have concentrated their vessels on the routes with most demand, in particular China to North America. Ship traffic at popular ports has backed up, with up to a fifth of all the world’s containerships reportedly stuck in port congestion, a quarter of those in China.
As a result, container shipping rates remain high, with container shipowners continuing to enjoy high charter rates, and corresponding high freight rates for shippers. The container sector as a whole is making record profits.
Consumers are bearing the increased costs and delay, with disruption to every part of a container’s journey. In addition to ship congestion, the pandemic and its restrictions have also limited the availability of dockworkers and lorry drivers, causing delays in handling cargo. Empty containers left uncollected on less popular routes compound the issue by creating a lack of availability of containers.
Environmental measures
The global cap on sulphur emissions imposed by the International Maritime Organization (IMO) entered into force on 1 January 2020.
The driving factor behind the global cap is to improve vessels’ environmental footprints. One of the most harmful pollutants that vessels emit is sulphur dioxide (SO2), produced from the combustion of fuels containing sulphur. SO2 is considered to have significant adverse effects on both the environment and human health.
Under the global cap, the IMO set strict limitations on vessels to use fuels with a sulphur content of no more than 0.5 per cent, rather than the previous limit of 3.5 per cent. Potential implications for shipping are substantial, particularly the availability of compliant low-sulphur fuels and their effect on ships’ engines.
Focus now seems to be moving to ‘zero-carbon bunker fuels’, namely shipping fuels that emit zero or, at most, very low greenhouse gas (GHG) emissions across their life cycles. Two alternative fuels – ammonia and hydrogen – have been identified as the most promising zero-carbon bunker fuels for shipping, being more scalable and cost-competitive than other biofuel or synthetic carbon-based options. However, ammonia is highly toxic and this raises safety and environmental concerns. Hydrogen also poses practical issues, as its low energy density means that large volumes of fuel will have to be carried by ships to avoid frequent refuelling stops.
In August 2021, Maersk announced that, in the first quarter of 2024, it will introduce eight container ships capable of operating on carbon-neutral methanol. The vessels will be built by Hyundai Heavy Industries and have a nominal capacity of around 16,000 TEUs, the intention being to replace older vessels, which Maersk estimates will generate annual CO2 emissions savings of around one million tonnes. There is currently very little methanol produced worldwide, but Maersk hopes that its announcement will encourage the energy sector to increase production.
Meanwhile, LNG is expected to play a limited role in the decarbonisation of the shipping sector, for specific niche applications on pre-existing routes or in specific vessel types.
Autonomous vessels
Interest in autonomous and remotely controlled ships continues to gather pace. From completely unmanned vessels, to vessels remote-controlled from ashore, to vessels with automated processes and decision support systems, the field is a wide one.
On 18 November 2021, the world’s first electric and self-propelled container ship, Yara Birkeland, completed its long-awaited maiden voyage in Norway. Meanwhile, in China the world’s first autonomous, electric container feeder ship, the Zhi Fei, with a capacity of about 300 TEUs, has begun operating between Qingdao Port and Dongjiakou. Back in Europe, in a collaboration between the City of Amsterdam, the Amsterdam Institute for Advanced Metropolitan Solutions and the Massachusetts Institute of Technology, a fleet of autonomous, fully electric vessels called RoBoat is in production, with one vessel having been launched at the time of writing. Designed to transport people, goods and waste through Amsterdam’s vast network of canals, the project aims to reduce the city’s congestion in a sustainable way while making profit.
The potential benefits of autonomous vessels are attractive to the marine industry. Crewless vessels not only reduce crew wages and expenses but can also eliminate systems once needed to make the vessel habitable for crew, simplifying vessel design and creating more space for cargo. Autonomy also offers the potential for reducing human error, which is currently estimated to account for 75 to 96 per cent of shipping-related incidents. This has the obvious appeal of reducing costs relating to accidents and insurance. Also, by enabling operations that do not put human lives at risk, the number of human tragedies will be reduced. Without crews to hold hostage, the issue of piracy may also be reduced.
Although this has obvious appeal, there are nonetheless many challenges that will need to be addressed before this technology can be put fully into operation. For example, although risk of human error is reduced, new risk factors will emerge, such as possible technological failures and inadequacies. Cyberthreats could also present new forms of piracy. While the developments will affect existing market players such as shipowners, charterers, banks and insurers, new parties will enter the picture, including suppliers of autonomous systems and onshore operators controlling or supervising vessels.
Insurers face the challenge of understanding and pricing the risk correctly, as autonomous vessels present new, as well as existing, risks. They will also need to consider how the current legal framework will fit with the new technology, not only with respect to technical requirements but also as to liability. For example, if an autonomous vessel is involved in an accident and causes damage to a third party, the question arises as to who is liable.
In June 2019, the IMO approved interim guidelines for trials of Maritime Autonomous Surface Ships (MASS), addressing the identification and reduction of risks, appropriate training of personnel and cyber-risk management of the systems and infrastructure. In May 2021, the Maritime Safety Committee (MSC) of the IMO completed a scoping exercise to consider how MASS could be regulated, and how safe, secure and environmentally sound MASS operations might be addressed in IMO instruments. Existing IMO treaty instruments were analysed to identify provisions which applied to MASS and whether action is required. The next steps will be considered at a future session of the MSC, and could involve the development of a MASS instrument, which might take the form of a ‘MASS Code’.
Meanwhile, consideration is being given to the commercial framework for the use of autonomous vessels. It is anticipated that charterparties may not be appropriate in the future, as vessels will initially be designed and built for dedicated routes. Instead, early users of autonomous ships are expected to be non-maritime companies, which will contract with experienced ship managers for the vessels’ operation. BIMCO is currently adapting an existing standard contract, SHIPMAN 2009, for such use. The ‘service-based’ structure of SHIPMAN will be adapted to add autonomous ship-related services and to build in provisions for the operation and manning of a remote control centre.
Cybersecurity measures
Since 2017, all of the four biggest container shipping companies (APM-Maersk, COSCO, MSC and CMA CGM) and the IMO have been hit by cyberattacks. The shipping industry is considered to be a vulnerable and highly lucrative target, with maritime companies’ shore-based networks particularly exposed to ransomware. The ‘NotPetya’ malware cyberattack on Maersk in 2017, which reportedly cost the company around US$300 million, highlighted the opportunity for cybercriminals to bring a critical industry down, meaning payment of a ransom was perhaps more likely than other industries. Shipowners and operators should be aware that traditional marine insurance products might not cover all the risks of cyber-incidents.
We also note that cyberattacks can produce benefits for the shipping industry: on 7 May 2021, Colonial Pipeline, which carries fuel from Texas to the eastern United States, suffered a ransomware cyberattack, resulting in the pipeline’s operations being halted to contain the attack. The ransom (of around US$5 million) was promptly paid, but the impact on operations was significant, leading to tankers being booked to carry fuel that would otherwise have been carried in the pipeline.
Ransom payments to cyber-criminals could put companies at risk of breaching sanctions, as well as other national and international laws and regulations, which could lead to severe penalties and enforcement action.
There is increasing concern that as the maritime industry becomes more reliant on technology, the exposure to cyberattacks will increase. In recent years, the industry has taken measures to tackle the cyberthreats and adopt the appropriate crisis management tools. In 2017, the IMO Maritime Safety Committee approved various measures intended to enhance maritime security, including adopting a resolution (MSC.428(98)) that required shipowners and operators to incorporate cyber-risk management into their ships’ safety management systems by no later than the first annual verification of the company’s Document of Compliance after 1 January 2021. The third edition of BIMCO Guidelines on Cyber Security Onboard Ships in 2018 provides additional guidance for shipping companies in carrying out appropriate risk assessments and to include measures in their safety management systems to protect ships from cyber-incidents.
Some critics say, however, that the shipping industry disproportionately prior-itises the less likely ship hacking scenarios and should instead focus on the more common attacks on shore-based systems, including the rise of ‘cyber-piracy’, where container booking applications are hacked by criminals looking for ship manifests, container identity numbers, and ship sea routes to organise theft of containers transporting high-value goods such as electronics and jewellery.
Shipowners face an increasing obligation to avoid and mitigate the risk of cyberattacks, to develop a cyber response plan and to train and educate crew and other relevant personnel. Failure to keep up to date in this respect could expose ship-owners to allegations of ‘unseaworthiness’ in the event of a cyber-incident affecting a ship, shore-based control systems, electronic cargo documents or handing systems and the like. The development of autonomous vessels also presents the possibility of remote access to vessel controls, which could put autonomous vessels at risk of hijacking or sabotage.
Electronic bills of lading
The covid-19 pandemic has accelerated the digital revolution and renewed the interest of the shipping industry to move towards more wide-scale adoption of electronic bills of lading (e-Bills).
E-Bills are currently used only in closed systems through platforms whereby subscribers sign up to a set of rules that set out the specific form of electronic trading documentation to be used and by which subscribers agree that using such documentation shall mirror the position as if they were paper documents.
This self-evidently has significant limitations; where a subscriber to an electronic trading platform enters into a transaction with a party who is not subscribed, the electronic platform cannot be used and the parties must resort to issuing paper documents.
Currently, seven such platforms are approved by the International Group of P&I Clubs. Those Clubs provide cover for liabilities where e-Bills are issued within these platforms, but only if such liability would also have arisen under a paper bill of lading.
However, the use of e-Bills also potentially exposes users to risk from hacking, systems collapse, e-theft and viruses, which are not traditionally covered by P&I Clubs and would need to be insured separately.
Meanwhile, BIMCO continues to champion the cause, having included an ‘Electronic Bills of Lading’ clause in the latest iteration of the popular NYPE form time charterparty and more recently having teamed up with the International Chamber of Commerce with the goal of establishing a global standard for e-Bills in the dry and liquid bulk sectors and encouraging their acceptance and adoption by regulators, banks, carriers and insurers.
While e-Bills have been given recognition in Singapore, and the England and Wales Law Commission recently published its Electronic Trade Documents Report and draft Bill, it seems unlikely that legislative change in a few jurisdictions alone will result in a substantial increase in their use. The breakthrough, it seems, will come once they are recognised as transferable documents in all the jurisdictions through which they pass.
Major casualties
In shipping circles, 2021 will be remembered for the grounding of the Ever Given, one of the largest container ships in the world, operated by Taiwan-based Evergreen Marine Corp, in the Suez Canal on 23 March 2021. The canal was blocked for almost a week, causing delays to hundreds of ships waiting to transit. Many others chose to divert around the southern cape of Africa. Releasing the Ever Given took numerous tugs, diggers and dredgers.
Evergreen’s woes continued into 2022, with the Ever Forward grounding in Chesapeake Bay off the US city of Baltimore. Carrying over 5,000 containers, refloating efforts took over a month. The State of Maryland has reportedly demanded over US$100 million in compensation for damage to the local environment and seafood industry.
In May 2021, the brand new container ship X-Press Pearl caught fire off the coast of Sri Lanka, carrying almost 1,500 containers, including chemicals. After burning for 12 days, the vessel sank on 2 June as it was being towed to deeper water, resulting in Sri Lanka’s worst marine ecological disaster.
In August 2021, the bulk carrier Ambition Journey drifted aground in shallow waters of the Philippines after suffering engine failure while en route from Homonhon Island to China, laden with 49,550 tons of nickel ore.
The car carrier Felicity Ace caught fire in the Atlantic on 16 February 2022 carrying nearly 4,000 cars from Germany to the US, including Audis, Porsches, Lamborghinis and Bentleys. She sank about 220 nautical miles off the coast of Portugal’s Azores Islands on 1 March.
In its annual report last year, the UK Marine Accident Investigation Branch (MAIB) raised large container ship safety as an issue for the shipping industry. The MAIB identified weather routing and parametric rolling as causes of the container collapse in one casualty it investigated. The agency also mentioned container storage standards and inaccurate declaration of container weight as contributory factors.
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