As year-end reviewers chronicle their perspectives on the COVID-19 pandemic’s crippling worldwide impacts and the mounting human toll, the maritime industry deserves recognition for its steadfast commitment to executing its mission under unprecedented operational adversities. Indeed, looking back at the multitude of disruptions the industry encountered during the past year, one marvels at how it maintained its resilience and delivered critical goods to more than seven billion people worldwide. Meanwhile, more than a quarter of its “essential” seagoing workers were treated as uninvited annoyances who would not go away, or better still, stay on board their ships.
This year has revealed the vitality and the resourcefulness of commercial shipping despite facing black swans far more disruptive than a transient hurricane or other mundane nemeses of mariners at sea; all this while serious existential threats loom in its future.
The Global Shipping Market
Well before the COVID-19 outbreak in 2020, international maritime trade growth was in troubled waters. The rising skepticism toward globalization by several trading nations, their inward-looking policy maneuvers, and even social unrest in some countries held back world gross domestic product (GDP) growth in 2019 and, therefore, growth in maritime trade. From the first quarter of 2020, the manufacturing hubs in China and nearby Asian countries came under severe health and economic stress triggered by the virus, and this disrupted production. The economic lockdowns that ensued set off a collapse in consumption and a near cessation of commercial activities, followed by many supply chain disruptions.
With 80 percent by volume of world merchandise transported by ships, shuttering manufacturing hubs in China—from where one-fifth of all world imports by sea originate—had immediate consequences. Images of laid-up ships and reports about restrictions on the movement of ships’ crews and other personnel, that the unavailability of key port workers, shortage of basic personal protective equipment, and scarcity of COVID-19 testing options became widespread. A recent OECD Economic Outlook Report (volume 2020, no. 2) projected total world trade decline by more than 10 percent in 2020 and recovering modestly thereafter. Other forecasts show international maritime trade shrinking about 4 percent in 2020. Concurrently, the cost of operating ships, because of COVID conditions, escalated at the fastest pace in more than a decade, with the crewing component alone going up 6.2 percent.1
Although all shipping markets reacted predictably during the early stages of the pandemic, what followed has been anything but predictable. There are clear winners and losers, with outcomes driven more by an atypically “shaky” invisible hand in the marketplace rather than the elegance of any coordinated contingency strategy.
Liner market behavior in the arterial trade routes in 2020 is a classic illustration of microeconomic theory. The production curbs in China and other Asian countries introduced early in the year led to uncertainty and confusion. Hapless exporters canceled or cut back container bookings, affecting the carriers’ vessel scheduling and optimization plans, which then responded by canceling many previously scheduled voyages from Asia to Europe and North America. By April 2020, with about one-tenth of worldwide container-carrying capacity laid up, the operators projected a cumulative loss of $23 billion for the year.
These developments, although market driven, had a significant impact on liner service reliability and supply chain efficiency. The overall effects trickled down to supply chain members, including port and terminal operators, port workers, warehouse operators, inland transportation providers, and others. Had it not been for the lower-than-expected cost of low-sulfur fuel oil, a weak ship chartering market, and a relatively subdued supply of new ships, the early effects on carriers would have been cataclysmic.2
As the lockdowns began to ease in Asian countries by late spring and early summer, a clear market reversal became apparent. Asian manufacturing hubs ramped up production, and the number of export containers rose rapidly.
By late summer, the market sentiment transitioned from its usual “just-in-time” orientation to a “safety-stock,” inventory--driven supply chain strategy. And by that time, with no additional tonnage to charter in, market behavior turned the other way. Cancellation of sailing became an exception, and estimated annual profit projection skyrocketed to $14 billion, much to the chagrin of the shipper community.
Freight rates since have escalated on all major trade routes, and shippers are scrambling to find ships and containers and to meet the increased demand “just in case” the 2021 winter lockdowns repeat 2020’s bitter lessons. There are widespread reports of container shortages, rollover of export containers, and worsening bottlenecks at major gateway ports that might throttle a post-pandemic global economic recovery. Anticompetition watchdogs in the United States and other countries are keeping a close eye on liner operators’ business practices and societal welfare outcomes within this revered quasi-common carrier shipping market.
The fate of the dry bulk market in 2020 was similar to that of the liner market, without the histrionics and public outcry. The sudden decline in economic activity in early 2020, especially in the wake of what was a relatively good 2019, with freight rate indices trending upward, led to a supply shock. Trade in all major and minor bulk commodities, such as iron ore, coal, cement, and steel, initially was hit hard. However, most trades recovered smartly in the second half of 2020 and ended with an annual decline of only 1.3 percent (by weight), a major outlier being coal trade, which experienced a steep drop of 12.7 percent.
Current trade statistics clearly indicate the increasing China-centric nature of dry-bulk shipping and its influence on market outcomes. The strong post-pandemic Chinese economic recovery led to a sudden boost in demand for imports of iron ore (7.1 percent), soy beans (12 percent), and other bulk commodities. Chinese dry-bulk imports now constitute almost half of the entire market and helped soften the collapse.
There also was clear evidence of the consequences of being on the wrong side of China geopolitically. Australia’s outspoken support for investigating the origin of COVID-19 reportedly irked Chinese authorities who, in turn, retaliated by halting the discharge of coal imports. Many ships fully laden with Australian coal are still waiting at anchorages in northern Chinese ports, and more than 1,200 mariners on board have become ill-fated silent pawns of this political stalemate. Flexing its trade muscle even further, China imported coal from Indonesia, Russia, South Africa, Colombia, and even Mongolia to meet its peak winter demand.
By contrast, the market for oil tankers experienced polar opposite conditions in 2020. The spectacular rate increases in late 2019 caused by tense oil politics continued into early 2020, defying the pandemic. Unlike the other markets, the crude oil price war between Saudi Arabia and Russia further deflected the initial shock of COVID-19, which resulted in global oversupply. As major oil-importing nations took advantage of the lower price and began boosting oil reserves, entrepreneurial oil traders sensed a strong “contango” opportunity and chartered tankers for storing the surplus oil. Once again, charter rates rose to astronomical levels for the larger tankers, rivaling the 2019 highs. By May 2020, 210 fully loaded tankers were waiting for orders off the U.S. coast alone.
Shortly thereafter, circumstances changed drastically and demand for storage tankers receded. The global demand for crude oil in 2020 dropped to 90 million barrels per day—down from about 100 million in 2019—because of the lockdowns, and it is not expected to reach pre-COVID levels until 2022. The resulting decline in demand caused charter rates to drop precipitously for all tankers, with the daily earnings for some falling below break-even levels by fall 2020.3
Separately, the entry of new tankers picked up pace in 2019, when 103 very large crude ships were added and just one removed. To make matters worse, while Saudi Arabia’s unilateral decision in January 2021 to cut back crude oil production boosted the OPEC cartel’s revenue, it caused a decline in the demand for tankers. The number of floating storage tankers also dropped from 11 percent of the fleet in spring 2020 to 7 percent by early 2021, increasing the number of ships looking for cargo. An additional 102 new large tankers are anticipated to enter the market in 2021 and 2022, per Drewry (2020) statistics; so, stormy waters lie ahead for oil tankers unless recycling of older ships picks up enormously.4
U.S. oil production also declined in 2020 and is expected to remain flat in 2021. Regardless, crude exports from the United States have been a major boost to the tanker market in terms of both volume and distance. The European Union imported 25.7 percent of all U.S. seaborne crude exports in 2020, and China, 15 percent. In 2021, China is expected to surpass the United States as the world’s largest refiner and strengthen its domination of the market for oil tankers.
The problems facing commercial shipbuilders worldwide are fundamentally complex and cannot be ascribed solely to the pandemic. Besides the ongoing economic fallout, there are key long-running issues facing the industry, the most complex being uncertainty about decarbonization initiatives and acceptable ship propulsion options beyond 2030 that would help attain the 2050 net-zero emission target. Shipowners are reluctant to invest in new ships without that clarity, and the global orderbook is now at a 30-year low. New building orders at all top-tier shipyards in South Korea and China declined 50 percent during the first ten months in 2020, and medium-size yards are being restructured.
The Cruise Lines International Association (CLIA) began 2020 on a very optimistic note, expecting 32 million passengers to sail on 278 cruise ships and continue its market growth momentum. However, COVID-19 turned out to be an unending black swan event for this sector, and there are no signs of a respite ahead. The sector continues to be predominantly under “no-sail” orders worldwide. Now, CLIA estimates a more than $25 billion loss in economic activity and the loss of more than 164,000 jobs in the United States. Even worse, vivid pictures of virus-infected passengers stranded on board cruise ships flooded television screens worldwide and caused lasting damage to their brands. The owners and operators are awaiting normalcy and, in the meantime, attempting to lower costs by scrapping older ships prematurely.5
The U.S. Maritime Sector
Although excluded from the federal emergency assistance provisions of the CARES Act, the U.S. maritime industry demonstrated extraordinary resilience and poise throughout the pandemic. Even during the early days of the outbreak, when guidelines for safe operations were scant at best, U.S.-flagged ships continued sailing and fulfilled their economic and naval auxiliary responsibilities. The operators discontinued crew changes until dedicated health and safety protocols could be developed to keep their ships virus-free. They faced the same challenges as others in finding personal protective equipment, sanitizing paraphernalia, and securing options for testing; yet, the ships continued delivering essential goods to the American public.
Throughout the pandemic, the Maritime Administration (MarAd) remained busy in its advocacy role by regularly checking the industry’s pulse and highlighting its concerns to other federal agencies and executive offices for more effective coordination of COVID-relief activities. The U.S. Coast Guard also demonstrated tremendous flexibility in accommodating the credentialing needs of merchant mariners. It approved multiple extensions to credential expiry dates and enacted temporary measures to help cadets enrolled in mariner credentialing programs meet their sea-time and graduation requirements. An interagency working group was established under the auspices of the U.S. Committee on the Marine Transportation System. Co-led by MarAd and the Coast Guard, its goal was to enhance communication and facilitate the coordination of federal actions in response to COVID-19. The group did yeoman’s work by disseminating timely information on best practices and mental health support resources for mariners and hosting webinars on COVID-19 testing and vaccines.
Despite the maritime industry’s role in enabling a semblance of normalcy to our daily lives during the pandemic, its value to the nation remains misunderstood. Ironically, 2020 being the centenary year of the Jones Act—the central pillar of U.S. shipping policy—led to a higher than usual dose of criticism from antagonists. However, strong bipartisan congressional support for the industry continues unabated, and the Biden administration’s outspoken endorsement of the Jones Act also is a timely harbinger of federal support for the nation’s merchant marine.
The Fiscal Year 2021 National Defense Authorization Act contains provisions to address recapitalization of the aging sealift fleet, maritime workforce development issues, and construction of the fourth national security multimission vessel. Another key provision establishes a much-needed Tanker Security Program (TSP) to fill a gaping hole in the nation’s critical sealift capability. Although the authorization is well short of the optimal number of tankers required to meet fuel supply needs of deployed ground forces and the Navy combat fleet, the acknowledgment of a critical lacuna in U.S. sea power and force projection capability assumptions is a historic change.6 The TSP, along with the hallmark Maritime Security Program and the Cable Security Program approved in 2020, will serve as foundational pillars of the U.S. maritime future.
Another epoch-making change in federal support for the maritime sector is a new initiative to designate centers of excellence for domestic maritime workforce training and education. Per the federal notice, eligible entities include qualified community colleges and maritime training centers. This marks a drastic shift from MarAd’s traditional focus on blue-water mariners toward the totality of the maritime workforce, whether in afloat or shore-based careers. The addition of such a large pool of external stakeholders not only will provide greater visibility for the maritime sector and the well-paying jobs it generates, but also create a nationwide base of well-trained and critically important workers who will boost U.S. economic and national security.
Merchant Mariners: the Unsung Heroes of COVID-19
From the early days of the pandemic, merchant mariners have been deemed essential critical infrastructure workers. They continue to play a selfless frontline role, despite working and living under high risk of virus infection. Merchant mariners maintained the course of their “floating COVID-free bubble,” even as the rest of the world was debating how best to tackle the virus. They stayed on board well beyond their contractual commitments without knowing when they would go home. They delivered goods with no help other than generic CDC guidelines at first and, later, several uncoordinated health and safety protocols. Mariners on leave quarantined voluntarily for two weeks so they could relieve their exhausted colleagues and continue the mission.
The truth of how mariners fared personally during the pandemic is a mixed bag of successes and failures interwoven with significantly added costs, whether pecuniary, physical, emotional, or a mix of all three. Even during the best times, a mariner’s 24/7 work life is highly stressful, and working under COVID-19 conditions worsened it. When new constraints such as a “gangway up” policy to prohibit interactions with those outside the ship are added, particularly when not applied uniformly to all on board, there is a toll on mental equilibrium. Unsurprisingly, mariner welfare organizations are reporting an alarming increase in mariner mental health concerns.
Difficult as the status of U.S. mariners is, the treatment of international seafarers by much of the global community is far more tragic. Many of
them have been working under inhumane conditions, and several thousand still remain stranded on board their ships, well beyond the 11-month legal limit. Many conscientious shipowners, managers, and charterers willing to bear the added cost of crew repatriation from foreign ports have been running into
insurmountable bureaucratic hurdles. Even in the United States, mariner
support groups have reported inconsistent application of national guidelines by local authorities that have abruptly halted carefully planned foreign
Many international agencies, both governmental and nongovernmental, as well as several maritime trade associations, have been pleading the case of the approximately 400,000 ill-fated seafarers who have been facing the vagaries of the very nations that have benefited from their devotion to duty. All frontline critical infrastructure workers combating COVID-19 are important. While the sacrifices made by most are well recognized by the world community, the altruism of merchant mariners remains unknown and an enigma to many.
1. Ship operating costs grew 4.5 percent overall in 2020. See Ship Operating Costs Annual Review and Forecast 2020/21, Drewry Shipping Consultants.
2. The low-sulfur fuel oil (LSFO) that became mandatory for most ships from 1 January 2020 was expected to elevate bunker cost by more than $400 per tonne; however, the cost difference between traditional bunker fuel and LSFO was typically less than $100 during most of 2020.
3. VLCCs were earning as little as $6,000 per day on the Middle East to China route by September 2020, which was the lowest level in more than ten years.
4. There are more than 100 tankers (VLCCs and Suezmaxes) trading in the market that are more than 20 years old, making them ideal candidates for recycling.
5. Carnival Corporation, the market leader, has sold off 19 older ships, delayed taking delivery of new ships, and canceled all sailings until late May 2021.
6. Reportedly, the U.S. military will need more than 80 tankers in a major war for logistical support.