The Smaller The Better

Felipe Simian, Nachipa, Chile, explains why minor bulk cargoes are the future in a time where decarbonisation and green solutions are becoming increasingly important.

Global debates about energy production, shipping policy, and political strategy are currently fi lled with talk about the demise of hydrocarbons and the arrival of clean technologies. However, it is true today and it will be true for many more years that the two largest bulk cargoes by trade volume are coal and iron ore.

In 2019, iron ore and coal’s shares (by volume) of total dry bulk trade were 32% and 27% respectively, together amounting to nearly three-fi fths of all dry bulk cargoes. The upturn in demand for the two biggest major bulk cargoes is unlikely to grow from these fi gures, however. Power production around the world is phasing out coal as a source of energy, and increased steel recycling (particularly in China) is likely to constrain substantial growth from the current levels of iron ore demand.

Chinese demand for coal and iron ore is approximately 20% and 60% respectively. Given the economic outlook, only one country could create Chinese levels of steel demand with its industrialisation: India. But there is limited evidence that New Delhi has the will or fi nances to take this step.

The shape of things to come

Minor bulks – minerals, metals, grains, cement, etc. – have approximately a quarter share by volume of total dry bulk trade. Yet despite this, they are commodities that are growing much more rapidly.

The international effort to create a more sustainable global economy and ‘green’ the world’s energy sources will have an enormous impact on minor bulk cargoes. Take lithium-ion batteries, as an example. They use minerals such as lithium, cobalt, and nickel, and are a much more sustainable energy source that could hugely reduce the use of hydrocarbons.

In maritime, the industry is starting to see lithium-ion batteries’ impact in hybrid and fully electric vessels, such as ferries, coastal vessels, and other small passenger ships. Recent months have also seen the expansion of battery technology into larger sea-going vessels with dual-fuelled operations. It is evident that this will continue to develop as the pressure for shipping to reduce its greenhouse gas (GHG) emissions heightens.

Elsewhere, lithium-ion batteries are being deployed by a host of electric car manufacturers with the same premise: better performance, lower emissions. It is a market in which Deloitte expects to see compound growth of 29% over the next decade. Many electric vehicles also require commodities such as bauxite and manganese to build infrastructure and operating systems. And as with most commodity trades, consumer demand for greener solutions will play a key role in their acceleration.

Copper is also set to feature heavily in a green recovery, as many electric and hybrid vehicles and infrastructure make use of the commodity to establish operations with reduced environmental impact. Given that electric vehicles use more than double the amount of copper in their construction than other, standardised combustion engines, the commodity will likely increase in the coming years as global demand for electric and hybrid operations escalates.

By contrast, it is also the effects of climate change which could well escalate the demand and trade of minor bulks. Approximately 30 - 50% of high production regions for some of the most widely utilised minor bulks – including copper, zinc, and gold – are signifi cantly impacted by water stress. That is, areas with high flooding, high risk of flooding, and rising water levels. It is likely that, given the current outlook and changing landscape, these fi gures will worsen, making the coming years vital for minor bulk trade. Australia’s recent floods are emblematic of these effects, and have seriously impacted steel trade and coal exports, as was noted at the Port of Newcastle earlier this year.

Minor bulk, major impact

In the medium- to long-term, demand will also be shaped by the growing global population. When it comes to grains and fertilizers, the clear and obvious pathway for these commodities to develop is through increasing numbers, both directly and through livestock.

There are also high expectations for more circular material flows, such as more steel scrapping and reduced iron ore. The Chinese government has set ambitious steel scrap targets, with plans to triple the amount used (since 2016) by 2030. If this target is vigorously enforced it would reduce iron ore demand substantially, as China is currently responsible for nearly 60% of global steel production. In fact, these trends might be better described as an evolution of the dry bulk market, and could indicate a wider, more permanent shift in the world’s trade patterns.

This is also pushing the requirement for dry bulk operators and owners to adjust how they operate. Nachipa’s intimate knowledge of the global dry bulk markets enabled the company to anticipate this sizeable shift a number of years ago, and begin to refresh its business focus to an asset-light, cargo-fi rst approach that better accommodates the evolving changes in demand. It has also been a key driver of Nachipa’s efforts to reduce the median age of its Handysize vessels to fi ve years old, and operate only the most effi cient vessels.

The shrinking outlook for the largest dry bulk vessels – which disproportionately carry iron ore and coal – in the medium-term could strengthen those for Handysize and Handymax segments, as minor bulk cargo becomes more prevalent in demand. Currently, over 10% of the global Handysize sector fleet is more than 20 years old. This makes this method of trade not only an ineffi cient one, but one which unnecessarily contributes to shipping’s emissions through greater levels of fuel consumption.

Slow steaming: the way ahead?

The threat of increased emissions comes at a time where shipping is facing increasingly stringent regulation designed to reduce its environmental footprint. While a hot market has many benefits, chasing berths and cargoes with greater intensity than usual – as the industry is currently seeing – can result in an overall acceleration of operations, and higher vessel speeds mean higher fuel consumption. One of the key challenges here is that the energy and competition of the current market has resulted in reduced scrapping of older, less efficient vessels; vessels which are not optimised for the speeds and rates which the sector needs to meet the demands of the current climate. More often than not, older vessels incur higher levels of CO2 and other harmful GHG emissions.

The median age of a fleet is far from the only component which can support decarbonisation efforts, particularly in the dry bulk segment. Mandatory slow steaming is a signifi cant step with real and immediate impact. Slowing speeds by 25% could achieve more than 50% reduction in main engine fuel use so a low, constant speed feels like a good course of action – if it is adopted by the global fleet.

During the past 12 months, for example, there have consistently been two to three week waits at ports such as Abidjan (Ivory Coast) or Sao Luis (Brazil). By reducing the number of vessels rushing to wait at terminals, Nachipa will cumulatively minimise the fuel consumption of hundreds of vessels.

The post-pandemic era is steering the trend towards minor bulk cargo. For a generation that will be required to urgently decarbonise its operations, the effects of the pandemic have brought the need for green solutions to the forefront, increasing the demand for the materials to help reach the endpoint.

There are many practical solutions available that can be implemented now, such as the scrapping of ineffi cient tonnage and mandatory slow steaming. Building the effi ciency of the company’s global fleet – within and external to the dry bulk segment – will not only support these collective goals towards a more sustainable industry, but create a more profi table and streamlined industry for the years to come. Yet it is only through the establishment of an equal playing fi eld that the benefi ts can be realised and the industry can move towards a better future.