Undercurrents in the Shipping Industry

SMITH BRAIN TRUST – Most of the world’s cargo ships don’t move very far without shipping loans.

So when global financiers say they’re putting the interests of the environment first when deciding whether to extend shipping loans, it makes some waves.

That’s exactly what’s happening. Last month, JP Morgan Asset Management announced at the International Shipping Week conference in London that it was joining other global financiers in thinking more about the impact of environmental, social and governance factors when deciding where to deploy shipping capital. Together, they’re urging shipowners to comply with a series of emissions-cutting measures that kick off in January, and extend to 2050.

The ripple effects could transform the industry, says Maryland Smith’s Gary Cohen.

Shipping giants, such as Maersk, might weather the costs associated with the new requirements with relative ease, says Cohen, clinical professor of Supply Chain Management and Director of the Supply Chain Management Center at the University of Maryland’s Robert H. Smith School of Business. But for smaller shippers, the costs could prove prohibitive.

“It’s going to be interesting,” he says. “We may see more acquisitions – more consolidations – as a result of those industry pressures. This may prove a trigger for those moves.”

It may also prove a trigger for new collaborations. In recent years, shipping companies have begun cooperating with one another in new ways, taking a page from air freight companies who have long shared capacity with one another. It’s about efficiency, Cohen says, and it’s enabled by today’s digital and data-analytic capabilities. “If one company doesn’t have capacity, but someone else does, then that makes sense.”

Shipping is a capital intensive industry. The barriers to entry are high and margins, among smaller firms, can be razor thin.

Even if global banks and other financiers offer attractive financing for smaller shippers, the new expenses are likely to deliver a heavy burden.

Beginning next year, roughly 60,000 ships around the world will be forced to slash sulfur emissions by more than 80%, as part of a mandate from the United Nations’ International Maritime Organization. The IMO, which functions as the world’s marine regulator, has set a timeline to cut greenhouse gas emissions from ships by 40% in the next 10 years and by 50% in the next 30 years.

For many of the vessels, meeting the requirement will require switching to new low-sulfur fuel or other blends, a move that is expected to add billions to costs in the next few years.

“This is going to be a transformational time in the shipping industry as a result of this initiative,” says Cohen. “It’s a good initiative, a worthwhile initiative, reducing the carbon footprint around the world. I think we can all agree with that around the planet. But it will bring changes, some of them unintended.”