Profitability of the Northern Sea Route for liquid bulk shipping under post 2020 sulphur regulations

Pages313-332
Published date31 March 2020
Date31 March 2020
DOIhttps://doi.org/10.1108/IJLM-12-2018-0314
AuthorTuomo Keltto,Su-Han Woo
Subject MatterManagement science & operations,Logistics
Profitability of the Northern Sea
Route for liquid bulk shipping
under post 2020
sulphur regulations
Tuomo Keltto
Neste Engineering Solutions, Kilpilahti, Finland, and
Su-Han Woo
Departmentof International Logistics,Chung-Ang University,Seoul, Republic of Korea
Abstract
Purpose The purpose of this study is to evaluate the profitability of the Northern Sea Route (NSR) as a
shipping lane from the financial perspective of shipping companies under post 2020 sulphur regulations.
Design/methodology/approach This study develops profit estimation model, and the profitability of the
NSR is assessed for a Handymax Medium Range (MR) tanker vessel using scenarios in combination with spot
market earning levels, the regulation compliance method and destination ports. The required freight rates are
calculated to justify the decision of shipowners to transit a tanker from the Baltic spot market to the NSR
navigation.
Findings Results suggest that the required freight rates from the Arctic trade to justify the transit to the NSR
are higher than the actual agreed rates in the past, which implies low viability of the NSR as a regular shipping
lane. It was also found that the required freight rates are affected by the spot market earning levels, compliance
method and duration of the voyage.
Research limitations/implications This study takes a new approach on assessing the NSR viability by
comprehensively assessing the annual profitability and including the spot market trade as an opportunity cost
for the NSR shipping. Despite various scenarios used in this study, a sensitivity analysis would be useful for
future research.
Practical implications This study suggests how much freight rates a shipping company would need to
charge if it were to offer tanker shipping services to four major Asian ports while simultaneously operating at
the Baltic Sea during the remainder of the year.
Originality/value This study adopts a market-oriented approach by incorporating both earnings and costs
(including opportunity costs) in the profitability model rather than merely analyzing the total cost of shipping
via the NSR. This study also analyzes impact of IMO 2020 Sulphur regulation on the NSR profitability.
Keywords The Northern Sea Route, Profit estimation, Sulphur cap, Baltic sea
Paper type Research paper
1. Introduction
The Northern Sea Route (NSR) was officially opened for international shipping on January 1,
1991, and Russia has encouraged international use of the sea route since the 1990s (Moe,
2014). In the last 10 years, interest in the Arctic shipping has further increased both in
academia and in the media due to the rapid melting of the Arctic ice and global warming
(Lasserre, 2014;Theocharis et al., 2018). The possibility of reducing the current sailing
distance between Europe and Asia by up to 40% appears tempting to shippers and
shipowners alike (Liu and Kronbak, 2010).
Profitability of
the Northern
Sea Route
313
This article is a revised and expanded version of a paper entitled Analysis of Northern Sea Route and
Baltic Sea combined Shipping Competitiveness for Bulk Shipping: Case of Post 2020 Sulphur
Regulationspresented at the ISL Conference, Bali, Indonesia, 8-11th July 2018.
This paper forms part of a special section ISL 2018 23rd Symposium on Logistics, guest edited by
Shams Rahman and Nyoman Pujawan.
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/0957-4093.htm
Received 20 December 2018
Revised 16 September 2019
14 November 2019
Accepted 17 February 2020
The International Journal of
Logistics Management
Vol. 31 No. 2, 2020
pp. 313-332
© Emerald Publishing Limited
0957-4093
DOI 10.1108/IJLM-12-2018-0314
The main drivers toward the Arctic for shipping companies are not merely the
shrinking sea ice coverage and the theoretically shorter distances, but rather, more aptly,
the market opportunities in the Arctic and the relevance of this route to shipping
companiescurrent business models (Lasserre et al., 2016). However, the transition to the
Arctic comes with its own cost. Possible challenges to shipowners aiming for the Arctic
shortcut are higher building costs of ice-class vessels, slower speeds, difficulties in
navigation, remoteness and greater risk (Beveridge et al., 2016;Lasserre et al., 2016;
Lasserre and Pelletier, 2011;Liu and Kronbak, 2010). Therefore, market opportunities
based on profitability incorporating all these costs present a significant focus of studies to
investigate the NSRs potential for commercial use. In addition, to ensure profitability
when a shipping company transits from its existing business to the NSR business,
opportunity costs should also be considered for improved model accuracy, which provides
realistic framework. In this regard, while there are existing studies about the NSR, there
are limited studies on the interests and viewpoints of shipping companies, which are to
decide whether to use the NSR at all in the first place.
This paper argues that simple comparison between using NSR and conventional Suez
Canal Route (SCR) does not cover the whole range of options, as shipping companies may
choose to reject both routes and simply keep operating in local spot market, for instance.
Existing literature largely ignores the spot market or chartering options and focuses on
analyzing profitability between NSR and SCR. This may portray a scenario where
comparison between two undesirable options is made and a less-undesirable option is then
assumed to be a desirable option. Accordingly, this paper argues, when analyzing shipping
companys choice to use the NSR, an option of remaining at spot market trade should be
considered to gain insights on the economic profitability of the NSR, not just profitability
against the SCR. To further provide justification for the study, this paper analyzes how IMO
2020 sulphur regulation will affect the profitability of the NSR depending on whether a ship
uses scrubber or compliant fuels to comply with the upcoming regulation, while the increase
in the price of bunker fuels due to the implementation of a sulphur cap is inevitable (DNV GL,
2016;Sand, 2018).
To account for all these factors, this study aims to evaluate the profitability of the NSR as a
shipping lane from the financial perspective of shipping companies under post 2020 sulphur
regulations. To this end, this study develops a profit model for tanker shipping operations.
While many authors focus on the possibility of commercial-liner shipping in the Arctic, it has
been suggested that bulk and tramp shipping, with its low-valued cargoes, could benefit from
the shorter and seasonal alternative route, where small and agile shipowners could gain
competitive advantage (Schøyen and Br
athen, 2011;Zhang et al., 2016a;Wang et al., 2018;
Woo et al., 2019). Especially in an environment where fuel costs are extremely volatile, which
increases uncertainty in profitability, a port-to-port tramp or voyage charter model where
contracts are made for single shipments in spot markets may be more appropriate for the
Arctic shipping. To best capture these elements, this study focuses on the trade in petroleum
products with Handymax Medium Range (MR) tankers often used in the Baltic Sea.
Further, the model in this study recognizes earnings from the Baltic Sea trading as an
opportunity cost of transiting to the NSR. It also includes costs arising from compliance with
IMO regulations in two different ways: vessels with scrubbers and vessels burning low-
sulphur fuels. The increased capital cost of ice-classed vessels needed in the Arctic operations
is also recognized by considering a tanker shipping company already operating in the Baltic
Sea with ice-class tonnage. Due to regular icing in the Baltic Sea during winter seasons,
ice-classed vessels are frequently used in Baltic Sea shipping (Koskinen and Hilmola, 2005).
Four Asian ports (Singapore, Shanghai, Busan and Yokohama) are used to analyze the
profitability of tanker shipping between the Baltic Sea and the four Asian ports. The required
freight rates for voyages to the Asian ports are calculated.
IJLM
31,2
314

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