With ongoing conflict in Ukraine showing little sign of being resolved, global shipping is facing several challenges. ITM Editor Joseph Clarke examines these issues in the shipping industry
If global logistics were not already under enough strain from a two-year pandemic, things have grown even more complicated as three of the largest shippers in the world have cut ties with Russia, putting further pressure on global trade and supply and demand. With the world only just beginning to show real signs of recovering from COVID-19, and as the war in Ukraine may persist longer than hoped and expected, the repercussions of such a crisis could have devastating effects on the world’s post-pandemic economic recovery.
The war in Ukraine has created barriers in the market, disrupting the transportation of resources like auto parts, oil, and grain. Moreover, this extreme impact on our supply chains has provoked weekly price increases. Consequently, most businesses, along with millions of consumers worldwide, have been left feeling severe economic strain.
A recent report carried out by Dun & Bradstreet, “Global Business Impacts: Russia-Ukraine Crisis,” reveals that over 300,000 businesses worldwide rely on Russian suppliers and more than 200,000 depend on Ukranian ones. Some of the countries feeling most of the brunt include Australia, Canada, China, US, Italy and Brazil. The global shipping industry is in desperate need of a functional and feasible contingency plan in order to overcome this crisis.
Challenges for Russia
Since the Ukraine-Russia crisis began, Russia has been presented with a number of economic sanctions. These sanctions have been at different areas, with one example being the UK banning all Russian ships from entering British Ports. The European Union stopped imports of Russian oil brought in by sea from December 2022 and all imports of refined oil products from Russia in February 2023. What sanctioners hope to achieve from these financial penalties is the freezing of bank accounts or assets, as well as the halt or detention of Russian cargo.
Three of the world’s largest shipping companies, Maersk, MSC and CMA CGM, have in fact suspended all of their shipping to Russia, leaving global shippers both to and from Russia with very strong disruptions to deal with. Maersk has also revealed that entire goods passing to or from Russia are audited by the European customs authorities, thus resulting in even longer delays for shipping in or out of the country.
In 2021, more than 50% of Russia’s crude oil exports were being shipped across to Europe. In 2022, however, UK imports of oil from Russia began to fall sharply, along with those to many other European countries. While some countries in Europe remain heavily reliant, such as Hungary or the Slovak Republic, Russia has been forced to seek other alliances. India, China and Turkey are three of the countries to take advantage of this opportunity. Together they now make up 70% of all Russian crude flows by sea.
At the start of 2022, Russia supplied less than 2% of India’s oil imports, but it is now set to become its largest single supplier. China’s imports of Russian oil have also risen over the past year. Yet, with plans from the UK, EU and US to make even further cuts on imports from Russia, Putin will have to continue to secure trade deals with other nations, often via less convenient, more costly routes.
Challenges for the rest of the world
Russia has reacted to the limitations imposed upon its shipping industry in several ways, all with obvious negative repercussions for the global supply chain.
Shipping in and out of the Sea of Azov — one of the few access points to ocean trade in Ukraine – has been closed, causing a huge buildup of vessels in the Kerch strait. As 70% of Ukraine’s exports are made via ship, this congestion is getting worse and worse by the day. What is more, parts of the Black Sea and Sea of Azov have become extremely dangerous or completely unpassable due to missile attacks on vessels, or ship arrests and lane closures for commercial shipping. In Ukraine, ships have been hit, killing and injuring seafarers of varied nationalities, and trapping many others on ships in ports.
Having shut down, from being damaged or under attack, the Ukranian ports of Odessa and Mariupol are at a complete standstill, leaving supply chain cargo movements both in and out of Ukraine at null. Countries that were once so heavily reliant on the Ukraine for fuel and other commodities are now having to look elsewhere.
While obstacles in Ukranian ports pose challenges to this country and the rest of the world, Russia has also banned exports of more than 200 goods, including telecoms, medical, vehicle, agricultural, electrical equipment and timber products. Interest payments to foreign holders of government bonds have been blocked, and payments by Russian firms to overseas shareholders have been banned. Foreign investors who hold billions of dollars-worth of Russian investments have also been prevented from selling them.
Shipping and supply chain costs
Over an 18-month period following on from March 2020, the cost of shipping a container on the world’s transoceanic trade routes increased seven-fold. The cost of shipping bulk commodities rose even more. In addition, the turnaround of shipping cargo by major carriers has risen to 60 days in comparison to the normal 50. Subsequently, 20% more containers were “in shipment” than was once the case in 2019, while 20% of the world’s 9000 active container ships were stuck in congested ports in early May 2022.
Although a few years ago the shipping of one container from China to the US cost between 2000 and 3000 US Dollars, it has now reached an incredible 10,000 to 15,000. The knock-on effect being that costs are pushed up across the board. One worrying result of this is that some shipping operators have begun to use non-container vessels to transport containers, raising safety questions.
Essentially, the war between Russia and the Ukraine is leading companies to reexamine the nature of their global supply chains. Many are looking back upon leaner, lower-cost and just-in-time strategies and trying to find goods from different places to minimise shipment and production disruptions.
Operational problems and crew shortages
The global labour crunch in shipping remains an issue due to quarantine requirements, vaccination issues, strict border controls and travel restrictions brought on by COVID-19. Unfortunately, as around 15% of the world’s seafarers are either Russian or Ukranian, this situation does not show many signs of improvement. In fact, a sharper crunch is expected.
With western sanctions in place, finding a way to pay seafarers from both countries is impossible without being at risk of a sanction breech. This, along with the ongoing war and need for more troops, sees many Ukranian seafarers returning to their homeland to join the military.
Feeling the obligation to help their nation in times of ongoing conflict, from a presidential call for more Ukrainians to join the army and defend their motherland, lower numbers of shipping labourers means that shipping and cargo operations both in and out of the country are on the downfall.
In addition to those leaving their jobs in the shipping industry, and the 2000 plus seafarers thought to have been stranded on vessels in Ukrainian ports when Russia began assaults against Ukraine, the suspension of direct flights to Russia has made it more difficult for seafarers to return home at the end of their contracts.
To ensure the flow of seafarers around the world, regular crew changes are required, but with these ongoing issues, there is likely to be a serious shortage of officers within the next five years.
Marine coverage Issues
Rocket attacks, sea mines and bombings in the conflict zones of the Black Sea and Sea of Azov leaves the insurance industry having to deal with a large number of claims under war policies. Insurers might even receive claims under marine war policies from vessels that are blocked or enclosed in Ukrainian ports and coastal waters neighbouring the Russian blockade.
There is also potential for non-war claims in hull and cargo insurance from vessels that find themselves caught up in the conflict. Typically, marine insurance policies do not cover ships being seized or physical damage caused by war or hostile actions, like damage from sea mines or attacks on vessels. But most experienced ship owners purchase additional war insurance, covering such losses for a limited period of time – usually seven days. Non-war related cover for damage or machinery breakdown may still be available when insurers are unable to cancel hull and cargo policies for affected ships.
Claims that come forward under hull and cargo policies that are not directly linked to the war could be challenging to resolve, as they involve complicated legal questions and policy interpretation. For example, sanctions may forbid a part of an insurance claim, but not all coverage. Claims that involve trapped vessels could come under hull or war insurance, based on the circumstances.
Renewals might also present difficulties for vessels affected by the conflict. Trapped vessels, for example, may be obligated to pay an additional premium to war insurers in order to maintain their coverage, which could become costly if the war is prolonged. Hull insurance may also need to be renewed.
What is particularly challenging is the moving of vessels out of the Black Sea. Even if a vessel is granted safe passage out of the conflict zone, shipping operators may not feel confident about using maritime safe corridors or being at risk of sea mines. The longer vessels remain trapped, the more difficult they are to maintain, and crew welfare also becomes harder to sustain. In some cases, some crews have actually abandoned their ships in Ukraine due to security threats. While trapped vessels or ships may fall victim to sanctions, they are also susceptible to suffering from machinery breakdown or damage by fire, collision or grounding.
Due to the legal and reputational risks, many insurance companies have taken a step back from trade with Russia.
Sailing forward
Given that prices for critical supplies around the world are bound to continue rising, what can the shipping and supply chain industry do?
One idea is to optimise materials management, starting with maintenance, repair, and operating (MRO) supplies. As inflation and risk have both skyrocketed to record levels, prioritising MRO is now a must for all organisations. Being aware of where supplies are in the network, understanding the material data, and optimising inventory targets can reduce risk and improve cash flow across the supply chain. Furthermore, accurate MRO processes will lead to smoother-running shipments, and thus better meet the customers’ needs.
Developing a risk-based assessment process to identify specific risks that could impact the productivity of your shipping and supply chain is also beneficial. It is important to create a flexible plan that will support an agile network, regardless of circumstances and unexpected events.
Carrying out an assessment that maps out suppliers is also crucial for improving shipping. If you gain visibility of your Tier 1 and Tier 2 suppliers and know their locations, you will have a much better understanding of region-specific risks that could impact the import and export of supply.
Once a detailed analysis of suppliers has been completed, make sure to continuously monitor your supply chain. Ensure that you are monitoring the risks associated with both your Tier 1 and Tier 2 suppliers to guarantee that your company has a complete view of your supply chain and can foresee possible complications and think of solutions, before they arise.
Finally, alternative suppliers must be identified for urgently needed goods in higher-risk regions. It is essential to establish how long it would take to get them from warehouses to ships, and how quickly they could be delivered. Will it be faster than waiting for shipments from your original supplier, depending on the type of disruptive event that might or is indeed occurring?
With 70% of Europe’s needs once being met from shipments with Russian involvement, alternative routes are now obligatory. Changing the course of shipments to and from Europe by adding South America is just one alternative.
As the conflict between Ukraine and Russia is showing little sign of imminent resolution, global shipping executives need to consider this handful of actions, not only to protect their business in the short term, but also to transform their resilience over the years to come.
Read more news and exclusive features in our latest issue here.
Never miss a story… Follow us on:
International Trade Magazine
@itm_magazine
@intrademagazine
Media Contact
Joseph Clarke
Editor, International Trade Magazine
Tel: +44 (0) 1622 823 920
Email: editor@intrademagazine.com
