Trade war

Walking onhot coals

Dimitris Seirinakis of the American Club analyses the significant impact of the Chinese ban on Australian coal for the maritime sector. As ever, major international trade disputes can lead to complex implications for shipowners and their insurance partners

By now, China’s ban on Australian coal announced at the end of last year will have pricked up the ears of even the most casual observer of the maritime industry. The severity of the ban, however, cannot be exaggerated. Australia exports more to China than to its five next biggest markets combined1 and ships over 50% of its 170m ton metallurgical coal exports to China2. The trade is estimated to be worth some US$23bn.

Tens of ships are stuck off China’s coastline, threatening the delicate commercial relations between shipowners, their charterers, and the interests whose cargoes they carry. This is also the latest calamity to befall hundreds of crews, compounding their already deteriorating mental and physical wellbeing caused by their prolonged stay on board because of Covid-19.

CAUSE OF THE DISPUTE

In retrospect, the inevitability of what is now a full-blown trade war between China and Australia, should have been obvious as far back as May last year.

It was around that time that China’s ambassador to Australia, Cheng Jingye, warned the “Lucky Country” that it was treading on dangerous ground by pressing for an independent inquiry into the origins of the coronavirus. A reference to ordinary Chinese not wanting to “drink Australian wine, eat Australian beef” should have left the Australian authorities in no doubt as to China’s intentions.

By the end of May 2020, China had placed tariffs of over 80% on Australian barley and banned beef from Australia’s four biggest abattoirs. The abattoir ban alone blocked an estimated 35% of Australia’s exports of beef to China. Australian barley growers send around half of their annual exports to China (US$393m). The tariffs all but killed the trade3 .

It was, therefore, little surprise that, in October 2020, one of The American Club’s China-based Correspondents (Oasis P&I) reported of substantial delays to vessels carrying

Australia exports more to China than to its five next biggest markets combined and ships over 50% of its 170m ton metallurgical coal exports to China . The trade is estimated to be worth some US$23bn.

Australian coal to China.

At that time, the delays in waiting for a discharge berth were ranging from 2 or 3 weeks up to 3 months. By the end of the year, there were reports of some vessels remaining at anchorage for more than 200 days.

Ostensibly, the delays were attributed to a strict interpretation by the customs authorities of import regulations and stricter enforcement of quota controls. It was also suggested that there was a weaker domestic demand for imported coal.

By the beginning of November 2020, the row was already six months old and escalating. It was understood that China’s Central Government had verbally communicated the ban to all Chinese state-owned and private traders. Those who could, diverted cargoes to India, Korea or Vietnam.

By the end of November 2020, when China had presented 14 grievances to the government of Australia4 setting out how Australia was “poisoning bilateral relations”, no rational observer would have hoped for a prompt resolution.

TIME AND VOYAGE CHARTERS

Shipping has long learned to navigate geopolitical quagmires. With rare exceptions, the industry is famously non-partisan when it comes to diplomatic quarrels, its sole interest here being who should bear the costs of a stuck vessel. A number of legal issues arise from the delays.

Under a time charter, owners seek assurances that they will continue to receive hire. After all, they have kept their side of the bargain – their vessels are available to perform the service required of them. Normally, the risk of delay lies with the charterers, but, if someone in a charterparty chain withholds payment of hire or freight (in the case of a voyage sub-charter) it has a domino effect.

Owners are usually permitted to suspend service pending payment of hire. But this is hardly a threat to charterers when the vessel is at an anchorage doing nothing.

The draconian measure of withdrawing the vessel from service and terminating the charter is, in theory, still available to owners. But this is severely blunted by the fact that owners owe separate obligations to the cargo receivers under bills of lading. The coal itself can be a useful bargaining chip, but, Chinese law only permits owners to exercise a lien over the cargo in rare circumstances.

Under a voyage charter, the owners are likely to have received most of their freight before arriving at the discharge port. If the vessel is delayed beyond an agreed period (laytime), owners are entitled to demurrage, essentially liquidated damages payable by charterers for breaching this agreed period.

The rate of demurrage is intended to estimate owners’ losses although it does not always reflect the vessel’s earning potential back in an open market. Nevertheless, huge amounts of demurrage can accumulate.

Laytime is triggered (and, subject to exceptions, runs out making its way for demurrage) when the vessel tenders a valid Notice of Readiness (NOR). Exceptions can also apply to demurrage. Congestion is not normally an exception.

Voyage charters can be “port” or “berth” charters. If it is a port charter, an NOR can be tendered at anchorage and the delays will be for the charterers’ account. If it is a berth charter and the vessel is delayed at anchorage, a valid NOR cannot be tendered and owners will have to bear the loss of time.

Could charterers look to plead a case of force majeure? There is no such general doctrine under English law; it can only exist as an express clause in the charterparty.

Most likely, charterers will not be able to invoke a contractual force majeure clause. Such clauses require, among other stringent requirements, that the event in question is identified in the clause, that, at the time of fixing, the ban was not foreseeable, and that charterers could take no reasonable steps to mitigate the ban or its consequences. This is a very high bar to clear depending on the circumstances of the case.

An equivalent doctrine in common law, that of Frustration, is also unlikely to be of assistance. Broadly, it requires that performance of the charter has become impossible. There is currently still no clear policy by the Chinese government that prohibits Australian coal. The current ban is likely to be lifted and, as we will see below, it may have already eased.

CARGO CONCERNS

Coal is a hazardous cargo within Group B of the International Maritime Solid Bulk Cargoes Code (IMSBC Code). The Code’s aim is to facilitate the safe stowage and shipment of solid bulk cargoes by providing information on the dangers associated with their shipment and instructions on the procedures to be adopted.

These significant and relatively unprecedented delays raise concerns about the effect they may have on the both the cargo itself and the safety of the vessel and its crew.

For example, coal cargoes are known to self-heat. The self-heating process causes carbon monoxide to be emitted. It is an odourless and colourless gas, yet toxic when inhaled. Some types of coal

may also emit methane, a flammable gas.

The water draining out of coal can be highly acidic and may cause corrosion to a vessel’s uncoated metal surfaces including its bilge systems.

The provisions of the IMSBC Code are mandatory and contain detailed requirements, in particular as they relate to gas monitoring, ventilation and pH monitoring of a vessel’s bilges.

million metric tons to 15.5 million metric tons in the same period5 . “Shipping has long learned to navigate Russia is another source of coal but cannot satisfy China’s appetite because geopolitical quagmires. With rare of limited production capabilities. Mongolia is also a benefactor of the exceptions, the industry is famously row. Bimco estimates shipments jumped to 8 million metric tons in September non-partisan when it comes to from less than 2 million metric tons in the first month of last year6. An increase diplomatic quarrels, its sole interest in overland coal volumes from Mongolia or increase in China’s domestic here being who should bear the costs of production may hurt the demand for bulk carriers. a stuck vessel. A number of legal issues Overall, however, the effect of the spat may ultimately be beneficial to arise from the delays.’’ shipping interests. China is looking further afield for its Dimitris Seirinakis, coal, importing from Colombia, usually The American Club only a backup, and South Africa after a long hiatus. Long-haul trade from Canada and the US has increased despite China’s relations with the two North American nations remaining decidedly frosty. North American coal, however, is tied up in long-term contracts and cannot match Australia’s volume and quality7 . At the same time, Australian coal is travelling longer distances to India, Pakistan and the Middle East. Even with a more diversified supply, it does not look like China can omit Australia. Already, some stranded cargoes are making their way to berths. This is good news for everyone, HUMAN ELEMENT even if, as suggested, these are cargoes that arrived at China’s Seafarers continue to be collateral damage in the diplomatic shores before the ban came into effect. After all, there is no use dispute. Many, as a result of Covid-19, have stayed onboard fanning up hot coals when you have to walk across them8 . for longer than a year and as long as 20 months. Their already lengthy stay onboard has been exacerbated by the Author’s note: The intention of this article is to remind ban. On some occasions, they are unable to access medical readers of the origins and development of China’s ban on facilities ashore. Australian coal and to highlight the implications for global trade.

The International Transport Workers’ Federation (ITF) has We have considered legal issues arising under both time and called on the two countries to put aside their dispute for the voyage charters, and considered cargo and crew issues common sake of averting a humanitarian disaster and on the industry to both types of charter. Any advice contained in the article is to dig into their pockets, sail to ports where crews can be for information purposes only. Readers who are directly affected disembarked, and carry out much-needed crew changes. by the delays are advised to seek legal advice and consult their

MSC, one of the largest international shipping lines, has insurers. responded to the call by covering the costs and penalties necessary to do so. It is hoped others will follow, even if 1 China punishes Australia for promoting an inquiry into covid-19, The they are not as big. Economist, 21 May 2020 2 China’s ban on Australian coal is blow for bulker owners, Lloyd’s List, 6 November 2020 3 See 1 above. 4 Could Australia’s government have handled China Better? The Economist, 28 November 2020 5 China-Australia dispute leaves coal carriers stranded, The Wall Street Journal, 19 January 2021. 6 Ibid. 7 China’s ban on Australian coal drives diversification, but can it fill the gap? South China Morning Post, 17 January 2021. 8 Attributed to Bernard Malamud.

WHAT NEXT?

According to shipowner association Bimco, China’s imports of Australian coal dropped from 7.8 million metric tons in January 2020 to 1.4 million metric tons in December 2020. By contrast, coal imports from Indonesia rose from about 9