The Y-Splitter Conundrum
By solving one problem do we create another?
(Article originally published in July/Aug 2022 edition.)
Why go through the hassle of rebuilding an entire electrical system when you can just pop in a y-splitter? Many shipowners had this same thought and are now using these convenient extension plugs to increase the number of refrigerated containers (reefers) they carry on board.
The UK’s Standard Club, a protection and indemnity insurer for shipowners, recently took note of this practice by warning against fire risks and overloaded circuits and conductors even while acknowledging that the “club fully understands the commercial attractiveness of such opportunity…”
It’s possible shipowners have an intuitive grasp of when to make a trade-off and when not.
Reefer operators are looking back on a strange 2021. Eskesen Advisory lamented last year that reefers took a “back seat to the dry market” while indicating that “dry container shipping has become much more profitable than the reefer segment,” which is “unfortunate as the investment in the reefer asset is pretty significant.” By late 2021, however, the page had turned. Drewry noted that in Q2 of 2021, reefer prices had spiked 32 percent year over year and projected a further 50 percent increase in Q3.
Now, reefers are hitting the same wall that ordinary containers ran into last year, except in reverse. When exports from Asia were being shuffled across the Pacific en masse, containers ended up sitting empty in North America and Europe. Conversely, according to Rabobank, “nearly a third of reefer containers are … stuck in Asia, mainland China; exporting regions including Central and South America, Oceania and South Africa” – on the other hand – “will continue experiencing reefer shortages.”
Imbalanced Cargo Flows
Both ordinary containers and reefers are victims of imbalanced cargo flows. These supply chain disruptions are largely due to government-ordered lockdowns designed to “slow the spread” of COVID-19 (see “Mr. Container’s Wild Ride” in the May/June 2021 edition). According to German forwarder Kühne & Nagel, “containers are piling up at the terminals, and more and more containers cannot be returned on departures, including those to Asia.”
This phenomenon, once called “transitory,” has persisted since 2020 and reflects a new normal. Some factories in China are requiring empty boxes be given back to them to fill orders – like bringing your own to-go cup to Starbucks.
Clever shippers have unplugged those empty reefers in China and simply filled them with general cargo bound for European and North American ports. Like the y-splitter, that addresses the immediate problem by creating a new one. Taking reefers off the market makes them scarcer. Reefer cargo would normally wind up on an airplane if it can’t find a vessel to sail on – except airplanes are hard to find too. For expensive berries or COVID-19 vaccines, airfreight is worth it, but not for onions.
These factors all bake extra costs into products – like food – that we need. This drives the record inflation that everybody is suffering. Still, paying the price is better than going without.
Indeed, for some, the distinction between “too expensive” and “not available” is irrelevant. The World Bank’s Food Security Update from July 15, 2022 noted that “record high food prices … will drive millions more into extreme poverty.” Food insecurity is now a reality for 335 million people, up from 135 million in 2019.
The report identified COVID-triggered supply chain issues and the Russian invasion of Ukraine as the reasons why 200 million more people no longer regularly have enough to eat. Each time politicians declare a lockdown, they should know they are potentially starving millions of people because a properly functioning supply chain able to do its job is essential to feeding the world. And blame Russian President Vladimir Putin, who already has blood on his hands, for the rest.
The y-splitter metaphor reflects the essence of decision-making, namely, that we live in a world of imperfect trade-offs. There is no perfect score in life. Winning is making the best of it.
With the economy stressed, perhaps it’s wise to avoid kicking new hornet’s nests. Oil prices already are making some business relationships and transactions unfeasible. “The world has never witnessed such a major energy crisis in terms of its depth and its complexity,” states Faith Birol, Executive Director of the International Energy Agency. The price of marine fuels is way up too.
Even so, some top decision-makers just can’t help but risk it all for that ineffable “do good” feeling.
As with food, the inability to pay higher prices leads to shortages. In Sri Lanka, gas stations are empty with no relief coming. Flights to Sri Lanka must land with enough fuel to make the return trip to their airport of origin. These shortages have led to unrest and political instability, even to riots and street violence.
That future may not be far away for the E.U., whose self-hating relationship with its fossil fuel consumption has a venerable history (see “Cowboys vs. Cossacks” in the January/February 2019 edition, for example). After years of underinvestment and neglect, there’s been a sudden burst of effort to build liquefied natural gas (LNG) terminal infrastructure – but if Russia turns off Nordstream 1, it isn’t guaranteed that LNG can arrive in sufficient quantity to save the winter.
Consumers and industry are crying urgently about spiraling energy costs even though many of those costs are not due to the market but to new European and German CO2 taxes and climate charges.
Those who can pay more – the U.S. and E.U. – are on a fossil fuel shopping spree. Diplomatic envoys are hopping from one petrostate to the next. Italian Prime Minister Mario Draghi recently signed a $4 billion gas import deal with Algeria. French President Emmanuel Macron concluded an LNG deal designed to swap out Russia for the United Arab Emirates. President Joseph Biden traveled to Saudi Arabia to “normalize” relations after the murder of journalist Jamal Khashoggi against a backdrop, as always, of securing – solidifying – American energy interests.
Talk of rationing gas come winter or of implementing public “heat shelters” – basically warm rooms where freezing citizens can congregate – is not calming nerves. While it’s true that bad news does not improve with age, reporters in Europe have been rushing out sensationalist, fear-inducing headlines, some of which – as yet – are still hypothetical. “Draft of EU Emergency Gas Plan: now only 19 degrees in your office!” and “Vonovia reduces tenants’ furnace temperatures at night – to save gas” read two examples from German government-funded Tagesschau.
Is optimism also in short supply?
For all the talk of a green revolution and energy independence through wind and solar, the economic power and political influence that gas- and oil-exporting countries still wield is impressive.
European shippers are, of course, not immune to market forces. Nor are they immune to taxation. Entering at stage left to remind all of us that things could always get a little bit worse: the planned inclusion of shipping within the European Union’s existing Emissions Trading System (ETS). While ETS is nothing new – it’s existed since 2005 – it isn’t until now that shipping was included in its scope.
Starting January 2023, Maersk, the largest European carrier, will set dry cargo ETS fuel impact fees of between $150 and $200 per box. For reefers, the fee will be between $150 and $325 per box. The ETS, which is designed to apply a price to the assumed CO2 production of various activities, will hit shipping at a time when drastically increased supply chain prices are a widely recognized problem.
“The cost of compliance with ETS will likely be significant, therefore impacting the cost of shipping,” says Sebastian Van Hayn, Head of Asia Europe, Network & Markets at Maersk. “To ensure transparency, we plan to apply these costs as a standalone surcharge effective Q1 2023.”
What’s more, the stated costs are only the result of the first stage of the E.U.’s ETS. In each of three subsequent years, the CO2 tax is scheduled to escalate. While the 2023 level only charges the assumed cost of CO2 at 20 percent, by 2026 it will scale up to 100 percent (in other words, the tax will increase 400 percent by 2026). Using Maersk’s metric, we’re adding on new taxes equal to $750-$1,000 per dry cargo box or $750-$1,650 per reefer box.
Parts of the world that are currently starving may end up needing to pay this E.U. tax too. That’s because the ship, rather than the cargo owner, is responsible for the payment. Booking space on an E.U.-operated liner service sailing outside the E.U. and taking the same cargo off that vessel before it ever reaches E.U. waters would still trigger the ETS tax because that vessel originated from or sailed to an E.U. port.
Other ETS proposals directed at “phasing” the shipping sector into the ETS go even further, mandating that all voyages be included, even those departing from and arriving at ports that are not within the geographic territory of the E.U. This would apply specifically to any “transshipment ports” that can demonstrate a share of transshipped cargo exceeding 60 percent and are within 300 nautical miles of the E.U., e.g., Algiers or Tunis.
The European Parliament, on June 22, 2022, voted to adopt the ETS for shipping. Its implementation is more radical, asking the shipping sector to pay 100 percent of the CO2 tax immediately. However, the Council of the European Union is still promoting the original, more gradual proposal.
I’ve long believed the saying that, without shipping, half the world would freeze while the other half would starve. All these “y-splitter” trade-offs, in the words of UK’s Standard Club, have undeniable “attractiveness” to the bureaucracy, but at some unknowable point they’ll put that saying to the test.
The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.