Part three of our analysis into the impact of COVID-19 on the shipping industry focuses on how the current pandemic is leading to changes in operations that, whilst commercially viable, has implications on risk profile. Read on to learn more.
We began this series with a data-driven review of how the COVID-19 pandemic impacts shipping behaviour. Changes within key sectors of the industry were identified, including a general reduction in average ultra large containership vessels (ULCV) mileage and port visits. These two metrics are significant as they indicate both vessel utilisation and variation in trading geography, respectively.
Average ultra large container ship mileage saw a 9.8% reduction in early March, with distances falling from 1,857 to 1,675 nautical miles compared to the same time in 2019. The initial reduction in port visits seen in Asia was repeated in Europe, highlighting a period of less berthing operations.
In contrast to the initial reduction in containership activity, we have also seen operational changes that have resulted in a drastic increase in mileage for certain carriers. This raises interesting considerations for risk profiling.
We can better understand these differences when analysing the path of containerships on the Europe-Asia trade route. These vessels frequently utilise the Suez Canal to significantly reduce the distance of travel, and therefore transit times, between ports. The toll charges for using the Canal are high but the benefits, including a large reduction in total fuel consumption, usually outweigh the costs. It has therefore remained an important part of global trade.
Figure 1, a screenshot taken from Concirrus’ Quest Marine platform, shows the voyage history of a ULCV operating on the Europe-Asia route between 30th April 2019 and 12th March 2020. The trading route is relatively consistent, with port calls generally in Northern Europe, the Middle East, and the Far East. As areas of operation remain the same throughout the year, the associated behavioural risk profile stays consistent.
Figure 1. ULCV operations between 30th April 2019 – 12th March 2020.
During the COVID-19 pandemic, global oil prices have seen an unprecedented fall, leading to lower prices for marine fuel. Some carriers have taken advantage of the situation, re-routing around the Cape of Good Hope, rather than using the Suez Canal. The journey is roughly 3,000 nautical miles longer, yet reduced fuel oil prices are one of the reasons is has become commercially viable. Figure 2 shows the voyage of the same ULCV up until 30th April 2020.
Figure 2. ULCV operations between 30th April 2019 – 30th April 2020.
Let’s look at two behavioural risk factors from an insurance perspective:
- The dramatic increase in mileage for each voyage; and
- The exposure of cargo ships to heavier weather conditions seen in the South Atlantic, Southern Ocean and Indian Ocean compared to the calmer waters of the Mediterranean.
Concirrus’ risk models combine weather data provided by our data partner Meteomatics, with global AIS ship position data to assess environmental exposure. Results are derived for both historical and real time scenarios. Figure 3 below shows the average significant wave height between 2012 and 2020 for the two routes taken by this ULCV. The route around the Cape of Good Hope sees significantly harsher wave conditions (peaking at 3.1m) when compared to the Suez Canal (peaking at 2.0m). This represents a 55% increase compared to the usual route taken by this vessel. The corresponding maximum individual wave heights, rather than average significant wave height, seen around the Cape of Good Hope will be far greater than those seen on the alternative route.
Figure 3. Average Significant Wave Height (2012-2020) On Voyage Routes
If we display this information in a different way, we can compare the two different routes more closely. Figure 4 shows the average significant wave height between Singapore and Gibraltar, with key features of the voyages labelled for ease of reference.
Figure 4. Average Significant Wave Height (2012 – 2020) On Voyage Routes Between Singapore and Gibraltar
Another wave metric to consider is the average peak wave period along the route. The wave period represents the time, in seconds, between successive wave crests passing through a stationary point. This is also a good general indicator of the typical swell wavelength in the various regions sailed through on these voyages. The wave period is an important consideration when looking at risk to vessels because it provides insights into how much roll and pitch motion the waves are likely to impart onto the vessel.
For example, a large wave height with a very low wave period is not likely to cause much motion on a ULCV. However, a wave with a large wave period could, in some circumstances, cause excessive roll motion on even large vessels. In extreme scenarios, a phenomenon called parametric roll can occur causing the vessel to roll excessively from side to side. One of the triggering conditions for this is when the wavelength is between 1 to 2 times the ship length. Although this phenomenon is rare, it has been responsible for several container loss events in recent years, resulting in substantial insured losses.
Figure 5 shows the average peak wave period for the two different routes. The average for the route through the Mediterranean stays around 6 seconds, while the route around the Cape of Good Hope averages approximately 12 seconds. This potentially represents more hazardous conditions for vessels of this type.
Figure 5. Average Peak Wave Period (2012 – 2020) On Voyage Routes Between Singapore and Gibraltar
ULCVs are of course large ocean-going vessels that are designed to operate safely in hazardous conditions. The mariners operating them are also fully aware of the challenges that the Southern Ocean can present. From an insurance perspective however, applying this basic level of analysis across the global shipping fleet allows for the automated and real-time identification of changes in behaviour that correlate to risk.
Another consideration when assessing risk between these two routes is the availability of emergency response assets and salvage considerations. If something were to go wrong, such as a main ship engine failure or cargo fire, the response time would be critical to avoid a large insured loss incurring. Wilco Alberda of SMIT Salvage provides comment on this topic.
“South Africa has an ETV (Emergency Towing Vessel) and so there shouldn’t be too much of a concern in this region. However, in the middle of the Indian Ocean there is less immediate available tonnage and potentially a longer lead time due to the distance to cover to a vessel in distress. The type of distress obviously determines whether this longer transit time to the casualty’s position is a problem or not (e.g. engine problem vs. cargo fire).”
The fire seen on the Maersk Honam in 2018 is a good example, showing how much damage a container fire on a ULCV can cause. Response time in such an event is critical for both saving lives and reducing the insured loss.
Alberda adds the following regarding the route around the Cape of Good Hope:
“South Africa is heading into winter, so it should be expected that vessels on this route are likely to run into a good Cape storm or two, which occur from May/June until about September/October. We have no doubt the ULCVs can handle a bit of bad weather, they might just slow down from their usual speed of 22 knots. If they have a breakdown off the South African coastline during the winter, it is likely that they will be blown toward/onto the coastline (unlike the summer winds which often blow the vessels away from the coastline) which is why there are often salvage cases during winter in South Africa.”
The changes in shipping behaviour highlighted in this article are expected to be short-term. However, such clarity from an insurance perspective, even in the short-term, cannot be understated. A data-driven approach provides context to potential changes in risk profile that would otherwise be difficult to quantify, or go unnoticed. With this level of understanding, insurers and P&I clubs can effectively mitigate loss and ensure that short-term economic benefits don’t translate to a greater expense.
Read our overview on the impact of COVID-19 on the shipping industry, or alternatively, discover how the pandemic has caused risk aggregations in the Caribbean.