By Krishna Kotak, Chairman, JM Baxi
The port and maritime segments have witnessed some incredible developments in the last several months. Starting with the onset of tariff tensions in the US, authorities in the US (including maritime authorities) have proposed additional toll fees on ships that are not American, that is, not flying the American flag or not built in the US. To add to this, ships built in specific countries, such as China, would attract even greater penalties and fees.
The second fallout has been the changing profile of cargo and container volumes at different ports, not only in the US but across the globe. Further adding to this mix of challenges has been the war in Iran and the closure of the Strait of Hormuz. The Strait of Hormuz connects major ports such as Jebel Ali, various ports in Abu Dhabi, Kuwait, Iraq, etc., thereby disrupting not only the flow of energy products like crude oil, liquefied natural gas (LNG) and liquefied petroleum gas (LPG), but also cargo such as fertilisers, rice and large volumes of container traffic.
Stranded ships, cargo and containers mean only one thing – congested and disrupted ports. Not too long ago, we witnessed the disruption caused by the immobilisation of the Suez Canal by motor vessel Ever Given from March 23 to 29, 2021. As those dates indicate, while the Suez Canal remained closed for only six days, the entire shipping and port system took almost six to eight months to return to normalcy.
It is also a reality that during such disruptions, not only are port operations affected, but revenues and income are also significantly impacted. Between trade, shipping companies, and governmental authorities, ports are often asked to provide free storage, expedited ship handling, or discounted tariffs to support affected parties. Unlike shipping companies and trade, which have flexible pricing mechanisms, ports and terminals do not enjoy similar demand-supply driven pricing flexibility.
With crude oil prices also witnessing a sharp increase, transportation costs are expected to rise further, causing an additional cost shock to the system.
Recent reports indicate that ports across East Asia, South Asia, Africa and Mediterranean Europe are experiencing congestion – not due to increased volumes, but because of stranded ships and containers. Congested ports are invariably accompanied by disruptions in inland transport connectivity. Such disruptions lead to reduced productivity and slower movement of goods, along with rising transportation costs.
With crude oil prices also witnessing a sharp increase, transportation costs are expected to rise further, causing an additional cost shock to the system. Even prior to the war in Iran, supply chain disruptions were already emerging, and this event may well prove to be the last straw on the camel’s back.
Back-of-the-envelope calculations show that approximately 500-700 container ships are deployed towards the
Middle East-Persian Gulf sector, connecting various parts of the world to that part of the Middle East. These ships are all affected, and the various impacts can be divided into disrupted schedules, disrupted trade flows and redeployment of ships and containers. The shipping, port and trading sectors will need to grapple with all three outcomes simultaneously and try to find a solution. Regretfully, the port sector will have the least capability of manoeuvring in this scenario, facing problems of chaotic congestion, reduced productivity and reduced revenues.
Coming back to the comparison with the Ever Given Suez Canal crisis, in that case, ships and trade had an opportunity to go around the Cape of Good Hope as an alternative route. In the current situation, there is no alternative route. So, now we are not only seeing over a month of disruption as compared to just six days during the Suez Canal crisis, but also the absence of an alternate route, and unsafe Red Sea transit.
Are there likely to be any positives to emerge from this disaster? While the flag of doom hangs over us for the next few months, one should be able to see that, with the massive redeployment of ships that will need to happen, Indian ports and trade may be able to attract more and larger ships, which will help improve freight competitiveness and lead to increased volumes.
It is a reality that during maritime disruptions, not only are port operations affected, but revenues and income are also significantly impacted.
In the non-container segment, this crisis has guided us to further build on the energy resilience framework. Our LNG, crude oil and LPG imports are critical. To achieve a level of diversification and spreading of risk, India will need to have both a large fleet of gas and crude carriers, as well as enhanced storage facilities, especially for gases. This could well turn out to be an opportunity for the government to implement urgent reforms to enable the roll-out of sorely needed facilities for storage across the major ports of India.
To cope with such crises, we will need to change our outdated and irrelevant pricing structure of land leases. It will be necessary that such critical infrastructure be built and be available at affordable rates. This is a problem which will not disappear, and it would be better if it is tackled head-on instead of waiting for business as usual.
We must also relook at our policies and priorities. Since the era of reforms started in the late 1990s and 2000s, greater importance has been given to “opening” the markets, which has resulted in international conglomerates entering and dominating the Indian economic landscape.
In those sectors which already had established Indian companies, such as automobiles, pharmaceuticals or petroleum and petrochemicals, we have seen both foreign and Indian companies flourish. In those sectors where there was positive encouragement for Indian companies, such as telecom, steel or aviation, we have seen Indian companies truly become global champions. Regretfully, in the ports and shipping sector, foreign companies have continued to receive preferential treatment, which has resulted in not achieving the desired levels of “Atmanirbhar”.
In the containerised trade segment, 95 per cent of trade being carried by foreign shipping companies is downright dangerous. Having foreign shipping companies flying an Indian flag is not a solution; if at all, it is hiding the problem.
Similarly, in non-containerised trade, Indian shipping companies participate in less than 50 per cent of the carriage of crucial commodities. Within the port sector too we have increasingly seen that foreign port operating companies, owned and controlled by foreign governments or large shipping/logistics conglomerates, are controlling substantial port handling facilities in India.
In the past 10-15 years, India has reached a maturity level and strength where we can and should recalibrate our steps and strategy to achieve the goals of Atmanirbhar Bharat. Seeing the challenges and events on the global and regional stages, it would be reckless not to do so expeditiously.
To achieve a level of diversification and spreading of risk, India will need to have both a large fleet of gas and crude carriers, as well as enhanced storage facilities, especially for gas.
