Linking the World through Global Shipping

Linking the World through Global Shipping

Connectivity’s key role in supporting trade

White Paper

INTRODUCTION

Connectivity is a key enabler of global trade, and shipping and maritime logistics are among its most important drivers. More than 80 percent of global trade volume is carried by ship, which means that disruption and higher costs have a direct impact on national economies and living standards, driving inflation, disrupting supply chains, and ultimately leading to shortages.

However, connectivity has been frayed in recent years by a range of global issues. The COVID-19 pandemic closed ports, caused endemic congestion, and shifted demand patterns significantly, forcing shipping companies to prioritise major ports and key trade routes, and often side-lining other markets. The disruption sharply exacerbated existing trends of

EXECUTIVE SUMMARY

The shipping sector faces significant external pressure following a period of instability and volatility in shipping rates and service levels. Rising demurrage and detention charges and port call cancellations are adding to the costs and challenges of providing an e cient service.

In response to these pressures, many shipping companies are looking to focus on their most profitable routes. The consolidation that has occurred in the industry over recent decades is exacerbating this trend, with the shipping giants prioritising the main trade channels and the comparatively few ports capable of receiving the largest vessels. As a result, customers using smaller ports are faced with the option of either paying above-market rates for freight or seeing shipping services curtailed.

For import-dependent nations, access to shipping routes is essential for economic growth. High shipping costs have a disproportionate impact on these markets. Resolving this imbalance ultimately requires international support for the development of resilient and sustainable maritime transport supply chains. However, there are immediate opportunities to resolve and address the connectivity needs of these other markets through the provision of targeted services.

Areas of focus identified in this whitepaper include:

• Acknowledging structural issues: The ongoing consolidation of the shipping sector, combined with the increasing fragility of smaller providers due to market volatility, increases the potential for impacted connectivity. Increasing the number of routes, connections and services should be a priority for global trade.

consolidation in the maritime sector, which has seen a divide develop between the top carriers and largest ports, and the other players in the market.

Post-COVID, the industry shows no sign of regaining balance. Technical factors (such as the development of larger and larger carriers, limited investment in port infrastructure, and new regulatory requirements – as well as geopolitical challenges such as conflict and potential recession are combining to push smaller players further to the margins, degrading connectivity in the process.

What can the maritime industry do to close the gap and ensure that no-one is left behind? What solutions are available to help create a more connected world?

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Environmental responsibilities: The shipping sector is facing a new range of environmental regulations that will reduce emissions but increase costs, at least in the short- to medium-term. This again intensifies pressure for smaller operators.

A new model for shipping services: The pressures outlined in this report create opposing and at times contradictory challenges for the shipping sector. On the one hand, customers require the agility and local focus o ered by the niche providers, while also seeking the economies of scale, innovation-led and environmentally aware approaches of the shipping giants.

The whitepaper was initiated in parallel with the major expansion of AD Ports Group’s maritime services arm, SAFEEN Group, which was supported by a series of strategic acquisitions designed to increase the company’s reach and portfolio services. Part of the research aim was to assess potential market demand for the expanded group.

ABOUT OUR RESEARCH

During the second half of 2022, we conducted telephone and video call interviews with a range of senior executives from shipping, port, and maritime services companies regarding current challenges in the sector, perceived gaps in service levels and views on the future direction of the industry.

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Boosting transshipment and feeder services: Transshipment and feeder services are increasingly important as a tool to foster connectivity and ensuring the free flow of products to developing markets.

• Digital disruption and opportunity: The rise of e-commerce has created new pressures for the shipping sector, through increased demand and shorter timelines. Deploying digital technology such as AI and machine learning will be critical if shipping companies are to adapt and build resilience.

The team cross-compared their commentary against industry sources, validating quotes and figures, in addition to integrating recent material from several international bodies, including the United Nations Conference on Trade and Development (UNCTAD) and the International Maritime Organisation (IMO).

UNDERSTANDING THE CONNECTIVITY CHALLENGE

COVID-19 created one of the biggest connectivity crisis in living memory, with congestion, closed ports and rapid changes in demand for routes and services. Even coming out of the depth of the crisis, the past two years have seen historic volatility in global container freight rates, which reached a record high of nearly USD 10,400 in September 2021 and entered a significant correction phase at the end of 2022. The global freight rate index stood at USD 2,400 in November 2022.

Historically high freight rates distorted global connectivity, as shipping companies looked for the highest returns from the most connected markets. Figures from UNCTAD’s Review of Maritime Transport 2022 suggest that certain key markets – such as China and India – have consolidated their leadership positions as the most connected nations due to high demand and upgraded port capacity. However other markets, such as most of Africa and Latin America and the Caribbean, have seen significant reductions in direct connections in the current period.

These challenges are exacerbated by low fleet growth. In the Review of Maritime Transport 2022, UNCTAD’s research suggests that the global commercial fleet grew by less than three percent in 2021 – the second lowest rate since 2005 – resulting in an aging fleet, with the current average age by number of ships 21.9 years. Low fleet growth reduces the industry’s capacity to respond to new demand and limits e orts to connect markets.

Some of these issues are a result of structural imbalances in the container shipping sector, which has seen significant consolidation over the past decade, through mergers, acquisitions, and vertical integration. The top 20 carriers currently supply around 91 percent of total container capacity, while the four largest control more than half of global capacity, according to figures from UNCTAD.

What does this mean for the global shipping industry?

A MENA-based maritime executive interviewed for the research explained: “High freight rates and disruption had a concentrative impact in the post-COVID period. Routes in the MENA region were comparatively under-served because the largest shipping companies prioritised their most profitable markets. Shipping from frontier markets became prohibitively expensive, because companies e ectively needed to outbid the most-connected ports to draw interest.”

Does this mean that the correction in the market will result in restored balance and connectivity? The executive expressed scepticism. “The maritime industry is cyclical. The falls in freight rates we’re seeing now typically cause smaller players to leave the market and push the global players to focus on their core. It creates an opportunity for a provider to emerge that supports these markets now and benefits when freight rates rise again, but that provider must have the resources to plug the connectivity gaps.”

BOOSTING TRANSSHIPMENT AND FEEDER OPTIONS

With frontier markets currently being underserved by direct routes, the industry has seen an increase in the range of options for transshipment, where containers are transferred from one vessel to another at one location, before being shipped to their intended destination.

Transshipment plays a key role in the global supply chain, supporting connectivity by enabling cargo to reach ports in all markets. Originally developed to service smaller ports that could not accommodate large container ships, the growing sophistication and complexity of the maritime industry has fuelled the evolution of specialised transshipment hubs.

Geography has played a part in this development, with hubs proliferating at the crossroads of shipping routes, typically in areas with low maritime deviation and strong connectivity between north-south and east-west shipping lanes. Demand for transshipment is particularly strong along Asia–Middle East–Europe trade routes, with the Port of Singapore as the world’s busiest transshipment hub, followed by Shanghai, Shenzhen, Busan and Hong Kong.

Companies benefit from the availability of transshipment because the increased flexibility can deliver significant cost benefits, enabling them to consolidate smaller shipments or redistribute larger ones depending on need. Global transshipment incidence currently represents approximately 30 percent of maritime trade, reflecting its importance to the industry.

The rise in the number and scale of transshipment hubs has encouraged a parallel increase in demand for feeder services, where medium-sized vessels are used to collect shipping containers from di erent ports and transport them to central terminals or transshipment

hubs where they are loaded onto bigger vessels for further transport. The popularity of this ‘hub and spoke model’ for container logistics is likely to continue growing, particularly if current trends in shipbuilding continue.

The new generation of vessels rolling out of shipyards are much larger and capable of carrying increased loads, but these ‘mega-ships’ can only service the largest, most sophisticated ports. Smaller vessels, feedering and transshipment services will be required to service customers in ports that are not on the floating giants’ trade routes.

This trend points to the core structural weakness in the industry: the divide between the global shipping leaders – the companies with the largest fleets that are capable of purchasing and deploying mega-ships –and the smaller, typically family-owned businesses that fill the gaps in connectivity.

One interviewee explains: “The challenge is that the larger shipping lines, by the nature of their business, are focused on the main routes and have little incentive to provide connectivity for smaller ports away from the shipping lanes. The small businesses are there to fill that gap, but when market conditions are challenging – such as in a global recession or during COVID – they don’t have the resources to expand or even stay in the market.”

Several interviewees identified this connectivity gap –the need for a provider with the resources of the larger shipping companies, but the responsiveness of the smaller operators to meet unmet demand. They argued that the availability of the services of such a company would be most valuable on Asia–Middle East–Europe trade routes.

MEETING ONLINE DEMAND WITH DIGITAL SOLUTIONS

New technologies, and their impact on customer behaviour, o er both a challenge and an opportunity for the shipping sector, according to interviewees for this research.

One lasting impact of the COVID-19 pandemic has been a generational surge in e-commerce, which has increased the volume of consumer goods in transit via containers. In addition, e-commerce is an extremely time-sensitive sector, so shipping companies are being pressed to accelerate delivery times to remain competitive.

The industry has adjusted, with shippers, retailers and logistics companies adapting their operations and increasing investment in adjacent industries such as final-mile delivery to meet the shift in demand. In the long-term, digitalisation and deployment of machine learning will likely be essential to manage this enhanced pace.

For example, machine learning likely o ers the most e ective tool for managing the structural imbalance of global transport of containerised goods. At present, empty containers make up a significant proportion of container transports – up to 40 percent in over-land and 20 percent of marine transports. Matching regional supply and demand for empty containers and making accurate forecasts of container availability would enable companies to make faster, more e ective relocation decisions and reduce transport costs of empty equipment.

Machine learning and probabilistic techniques o er a path to forecast future availability of empty containers and could contribute to solving the connectivity gap. However, in addition to the costs of implementing these new systems, ensuring equal access to the data required to power machine learning solutions remains a challenge.

A Europe-based port operator explains: “It’s about making sure all the stakeholders that are involved in import and export flows have timely, accurate and complete data. If you inject more data into the process, you can increase your e ciency and throughput without the need of developing additional capacity. The problem is trust… nobody is really incentivised to go after the advantage of improved data sharing. However, once you have a ‘burning platform’ — a capacity or e ciency crisis—that is when you start to see encouraging feedback (although slower than you would expect) to start sharing information.”

This highlights the issue of scale. To deploy these advanced technologies would require significant resources for development and implementation. For these solutions to be e ective, they would need to connect with data from a full range of ports and shipping lines to have a truly global perspective. The risk exists of creating a two-tier system, where only the largest companies have access to the necessary information.

BALANCING CONNECTIVITY REQUIREMENTS WITH ENVIRONMENTAL RESPONSIBILITIES

Like many industries, the shipping sector is coming under pressure to reduce its environmental impact. According to the IMO, shipping accounts for around three percent of global carbon dioxide emissions, with more than half of maritime emissions originating from ships berthed in ports.

In 2023, the IMO will introduce directives to reduce maritime greenhouse gas emissions and mitigate the environmental impact of ships, including carbon intensity indicator (CII) regulation, which will require fleet owners to calculate their attained Energy E ciency Existing Ship Index (EEXI) and report their annual operational CII and CII rating.

To meet these new requirements, shipping companies are being pushed to retrofit vessels with energy-e cient technologies and deploy alternate fuels such as low and high sulphur, LNG, biofuels, methanol, methane, ethanol, ammonia, and green hydrogen. Demand for dual-fuel vessels has also increased, as fleet owners look to hedge their options.

However, there are significant costs and risks to this process. Alternative fuels are more expensive than conventional options, reducing their commercial viability, and there is currently no clear path for an

industry transition, so companies may need to look at developing a multi-fuel portfolio ahead of the emergence of an agreed industry standard. In addition, the shift to alternative fuels and low-emission shipping requires cross-industry support to be successful. Ports will need to provide alternative refuelling facilities and low-emission energy infrastructure, as well as increasing protection and clean-up resources to manage bunker spills and other emissions, to achieve environmental goals.

The long-term risk is the creation of a two-tier system of ports and providers in which only the elite minority can manage the transition to alternative energy and meet regulatory requirements. Such a scenario would further impact connectivity, by limiting the willingness of multinational corporations to use non-compliant shipping services and further reducing the viability of frontier ports outside of those in ‘green corridors.’

“It’s an interesting challenge, because most of the industry believes we should make the move to alternative fuels, but there isn’t a clear path to success as yet or business models to make the transition economically viable,” said one US-based maritime executive.

CONCLUSION

The maritime sector is facing a volatile and disruptive period, with a return to the pre-COVID ‘normal’ of supply and demand unlikely in the near- or medium-term. The new normal seems to be characterised by changing priorities, unpredictable pricing, and global shocks, including conflict and recession.

In this context, connectivity seems likely to fall rather than increase, with a range of factors – priority routes, freight rates, environmental legislation, and innovation adoption – all working to exaggerate the divide between the largest ports and their frontier peers.

Addressing these issues requires the emergence of a new breed of maritime services company, with the resources to invest in new fleet and technology and an agile enough business model to respond to demand beyond the main shipping routes.

AD Ports Group is one of the companies working to fill the supply gap and boost connectivity, leveraging its strategic position in the heart of the Middle East to connect East-West and North-South. The company’s SAFEEN Group is the largest and most advanced provider of diversified maritime services in the region, while its feeder business, SAFEEN Feeders, provides container services that support mainliner shipping companies and clients in the UAE, Saudi Arabia,

Oman, Bahrain, Iraq, Sudan, Pakistan, India, Sri Lanka, China and Singapore. In September 2022, AD Ports Group completed the acquisition of a 70 percent equity stake in Transmar, a regional container shipping company that operates across the Middle East, Red Sea, Arabian Gulf and Eastern Coast of Africa in November the group announced an agreement to secure an 80 percent equity stake in Global Feeder Shipping, which has one of the largest fleets of container ships in the world. As a result, AD Ports Group is now a major provider across a broad territory, with an owned fleet of 35 vessels, and a total container capacity of 100,000 TEUs.

“AD Ports Group is in a position to address a wide range of unmet needs in the current market,” said one UAE-based executive interviewed for this report. “They are deploying the resources and the model necessary to ensure connectivity across their global footprint.”

Resolving the global connectivity imbalance will likely require broader international consensus to enable the development of resilient and sustainable maritime transport supply chains. However, the emergence of regional pioneers in the provision of shipping services will likely deliver important benefits in the interim period.

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