SHIPPING & COMMODITIES: An Introduction

As parts of the world, and in particular China, emerged from the severe restrictions imposed in response to the COVID-19 pandemic, a predictable increase in container and freight rates took place when demand recovered but the supply of tonnage and containers had not yet caught up. This trend, which developed towards the end of 2020, has been even more pronounced in 2021 as the economies of more of the world’s big importers began to reopen, triggering an increase in demand that could not be matched by a sufficient increase in available tonnage and containers. The result is a very significant increase in containers and bulk carrier rates especially on supply routes from South-East Asia. In 2021 alone, rates have typically more than doubled.

In 2021, the effects of demand exceeding supply have been exacerbated by supply chain inefficiencies connected with the continuing effects of the pandemic. Since the market for containerised goods is at the limit of capacity, small operational incidents at ports can have significant knock-on effects resulting in port congestion. Outbreaks of COVID-19 continue to cause staffing and operational problems at ports. The terminal in Ningbo, China was closed for two weeks following a single port worker testing positive for COVID-19. Elsewhere in other countries where lockdowns of some form are still in place, there are different problems such as in Ho Chi Minh City, where the port temporarily stopped accepting imports by businesses that had suspended production during an extended lockdown in order to clear a huge backlog of containers that had piled up. In addition, for a significant period of time, the blockage of the Suez Canal by the Ever Given, an event which attracted a huge amount of mainstream press coverage worldwide, added to the problem and the increase in rates.

As such, whilst demand is high, schedule reliability is low. In other words, in the current market, importers and exporters of goods are paying a high price to transport their goods but in return are receiving an unreliable and uncertain service.

The elevated rates are a welcome boost to the container and dry bulk sectors, which have for many years been in the doldrums. The consequences have been, and are likely to continue to be, relatively high time charter and freight rates and a significant uptick in newbuild orders, with a record number of ships ordered in 2021, and a reduction of ships sent for demolition. However, in a very uncertain world it is hard to predict for how long the circumstances which have driven this rise in rates will persist. The market consensus is that the lack of supply and high rates will certainly continue well into 2022 but that fundamentally the phenomenon is temporary. This is because as and when life returns to normal some of the supply chain issues will fall away and the end of pandemic-related stimulus packages is likely to cause a slowdown in consumer demand for imported goods.

In this event it is possible that within the next 12 months market conditions will be such that attempts at the renegotiation of longer-term charters and shipbuilding contracts may start to appear. If rates fall to the pre-pandemic levels, charterers may seek to cancel their charterparties and in turn owners may seek to cancel newbuilding contracts.

The drive to reduce carbon emissions is another long-term driver. In November 2021, the UK Government will host the UN Climate Change Conference (Cop 26) in Glasgow. Recent policy announcements from both the USA and the UK have made clear that there will be a significant focus on the shipping industry in meeting emissions reductions targets. The International Chamber of Shipping has organised a cross-industry event during the Conference to address key strategic issues in the shipping industry’s move towards decarbonisation. In June 2021, the 76th Session of the IMO’s Marine Environment Protection Committee (MEPC 76), held remotely due to the pandemic, adopted further technical and operational measures to reduce carbon intensity of international shipping which will take effect from 2023. There can be no doubt that decarbonisation is a long-term process, but in the course of 2021-22 it seems likely the requirements which will have to be met will start to emerge.

Over the last 12 months, the courts and arbitral tribunals continued to be kept busy with a large number of disputes in the shipping and commodities arena. The adoption of remote and hybrid working systems by the Commercial Court and arbitrators has allowed such disputes to be resolved despite the restrictions imposed in early 2020. This experience means any restrictions that may need to be re-imposed in late 2021/early 2022 are unlikely to impact on dispute resolution.

In that period, the Supreme Court heard the first appeal in a collision case to come to the highest court for nearly 50 years, relating to the “crossing rules” as set out in rules 15–17 of the International Regulations for Preventing Collisions at Sea 1972. At the time of writing, judgment is also awaited from the Supreme Court in the CMA CGM Libra, which concerns the legal test of seaworthiness and the carrier’s non-delegable obligation to exercise due diligence in the context of a defective passage plan. Finally, the Court of Appeal will shortly be hearing the appeal in The Eternal Bliss, which concerns the circumstances in which damages can be recovered in addition to demurrage where a vessel has been detained at a port beyond the permitted laytime, which is of relevance both to voyage charters and also to certain commodities contracts.

Simon Croall KC and Paul Toms

Quadrant Chambers