Navigating the turbulent waters of the global supply chain from geopolitical uncertainty, to evolving sanctions, and the adoption of decarbonization

A panel of industry experts delved into the pressing issues facing the global supply chain as part of Reed Smith’s London International Shipping Week (LISW) event. The speakers engaged in a discussion that focused on the biggest challenges facing the sector, including geopolitical uncertainty, the complexities of sanctions, and the adoption of decarbonisation.

A packed audience from across the shipping industry joined to hear the views of Aimee Nolan, Cargo Line Underwriter at Hiscox London Market, Mark Jackson, Chief Executive Officer at The Baltic Exchange, Faye Thompson, Legal Counsel at Peninsula, and Alexander Brandt, sanctions partner at Reed Smith.

Panel moderator and Reed Smith shipping partner Nick Austin introduced the first topic of how to decarbonise shipping. The panel’s consensus was that the industry’s approach is mixed and there is widely debated confusion over a range of new regulations from the International Maritime Organization (IMO).

A risk of supply chain disruption ‘as we make our way towards the decarbonisation target’

Thompson, from Peninsula, one of the leading global marine energy suppliers, explained: “There will be bumps along the road and a risk of supply chain disruption as we make our way towards the decarbonisation target. One example at the forefront of our minds is future fuels. We are about to embark on a journey towards a multifuel world with transition phases in between, and we don’t quite know how that looks in the long term. In the short to medium term, we’re likely to see an uptake in the use of drop-in biofuels, bio-blends and LNG, to reduce the CO2 factors before e-fuels pick up.”

The discussion also touched upon the much-discussed Carbon Intensity Indicator (CII), the IMO’s new regulations aimed at grading ships on their carbon emissions. Thompson emphasized the need for holistic supply chain planning, going beyond cooperation between owners and charterers, stating, “It really does need forward planning with the whole supply chain.”

Nurturing an insurance industry that fosters the growth of the renewable market

Addressing the critical topic of insurance, Nolan, who as a cargo underwriter is involved in the risk transfer and risk mitigation relating to the physical loss or damage to cargo, delved into the challenge of nurturing an insurance industry that fosters the growth of the renewable market.

Nolan explained: “As a cargo underwriter who is also involved in project cargo, it’s an exciting time because there’s a whole new renewable industry that is growing at pace. We are working with clients to find new insurance solutions, for example for the storage and transportation of solar panels and wind turbines, as we want to play our part in the industry’s sustainable future. We are also working with the auto sector as it moves away from combustion engines to electric and other fuel sources, to ensure there is a solution during this transition phase.”

Nolan further emphasized the dual nature of the challenge: “There is a short-term problem that demands immediate attention, and there will also be a longer-term solution. Many of our longstanding clients are looking to energy transition over the next few decades. Therefore, we have to navigate this transition phase by supporting our clients, enabling them to sustain their operations while simultaneously investing in research to meet the growing demand for low and zero-emission fuels, aligning with ESG requirements.”

Addressing the introduction of regulated carbon markets

Addressing the introduction of regulated carbon markets in the shipping sector, such as the European Emissions Trading System (EU ETS), the panel discussed how the system could split the market into those who trade in the EU, and those who don’t.

Jackson, who has over 40 years of shipping industry experience said: “When regulation is introduced its transition to business-as-usual tends to be quite slow. With the EU regulation forging ahead, there’s a lot of grey areas and for many of the smaller to medium sized companies, the de-risking option is to not go there. That in itself presents opportunities because you end up with those who specialise, who will spend the money setting up in the EU and learning how to acquire and surrender allowances. Companies that get ahead have the first-mover advantage will have a pricing advantage over others. Therefore, in the initial phase for these companies there will be the opportunity to make money out of regulation. However, I always advise not to make regulation your core business, it should be the icing on the cake.

“From a simplistic and helicopter view you can see that there will be opportunities there. It’s bad for the consumer with increased prices, relatively good for business services and for driving the de-carbonisation agenda. The business service sector benefits when you get split markets and these opportunities emerge, there are also those grey areas where the two meet – leading to the potential for disputes, delays, and operational challenges.”

Sanctions challenges can cause ‘considerable disruption to global supply chains’

The collective view from the panel was that the ongoing impact of the evolving sanctions landscape, particularly in the wake of the Russia-Ukraine conflict, continues to have a significant impact on every organisation involved in the supply of goods.

Brandt, who co-leads Reed Smith’s sanctions practice, discussed the challenges his clients are grappling with amid the rapidly unfolding sanctions programs. He stated: “The splintering in approaches by the EU and UK, and the different compliance practices and policies within the industry has and will continue to cause considerable disruption to global supply chains.”

Brandt emphasized ‘three inescapable truths’ that have surfaced in recent years, dating back to 2018. He said: “Firstly, there are more sanctions, they come out very quickly, and we are still in an area where this is evolving. As we move into more unsettled geopolitical times, regulators have become more comfortable in their skin and we have seen an increasing number of goods targeted, for example, some clothing to Russia is now sanctioned. Consequently, there is a need for more organisations to have sanctions compliance policies in place.

“Secondly, the sanctions are different, you have a splintering among programs – even among allies, such as the EU, the UK, and the U.S., where the sanctions authorities talk to each other on a weekly, if not daily basis. Rather than a unified approach, what we have ended up with is increasingly different sanctions. And thirdly, quite frankly, the sanctions are confusing. Looking at FAQs, it’s evident that despite everyone’s best efforts over the past 18 months, the EU’s Frequently Asked Questions generated absolute chaos in the market.”

Brandt concluded that the supply chain needs to be protected. He added: “Compliance is an evolving beast and to keep up requires investment, however not all clients have the resources in terms of time and finances to keep pace with evolving compliance practices and policies. It is a huge endeavour that throws a lot of sand in the gears of trade.”

“One area where we can help ourselves is to have clearly drafted regulations. Increasingly, we have two sets of rules to look at. What the law says and the guidance around it; the real battle ground is all the grey on the EU and UK side caused by this. This gives rise to very practical challenges, particularly where market participants may have different appetites to risk. To help ourselves, we have to try and help the regulators understand what it is they are legislating for and provide meaningful guidance, so we are at least singing from the same page. We need to make sure that the language is right for us. An exercise that the industry is starting to do.”

The ‘dark fleet’

As the discussion drew to a close, the panel turned its attention to the concept of the ‘dark fleet’, with Jackson arguing that, while there is a dark fleet, there is also a ‘bright fleet, and a grey fleet.’

He said: “When sanctions were initially imposed, there was a fleet operating in areas that had long been subject to sanctions. However, we are now witnessing the emergence of a new generation of shipowners, in regions like the Middle East, India, and China, who are able to trade with Russia. This is not a dark fleet; it’s a bright fleet that operates in plain sight. Many shipping dynasties have come out of wars and now we are seeing the potential for another shipping dynasty in the making.

“We have to face the fact that we will continue to have this split and there will be countries that will take advantage of that. So yes, there is still a dark fleet operating below the radar with very low standards but there is another fleet that keeps their standards up and sees it as an investment.”

The event concluded with a talk from Ian Stokes, head of corporate engagement at the seafarer charity, Stella Maris, who spoke about their work supporting thousands of seafarers globally every year who are struggling with loneliness, exhaustion, bullying, and exploitation. He ended with a plea for donations to the four official charities of LISW; Stella Maris, Sailors’ Society, The Mission To Seafarers, and The Seafarers’ Charity.
Source: Reed Smith

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