Low growth on the NSR ties to management and market conditions

Explanation to why international transit shipping on the Northern Sea Route (NSR) has experienced limited growth can both be found in international market conditions as well as in the management of the NSR.

  • By CHNL  

Research published by CHNL and Fridtjof Nansen Institute analyzed international shipping on the Northern Sea Route from 2010 to 2019 and points out what lessons have been learned regarding future development of different shipping segments.

Read the full article by Björn Gunnarsson and Arild Moe here.

One important reason for the lack of interest in the NSR as a transit route during the ten years was triggered by the drop in commodity prices in 2014 and even-out of previous price differences of commodities between European and Asian markets. This showed the vulnerability of the NSR to fluctuations on the freight market and prevailing global economic conditions. This led to freight companies profiting more by using large vessels going through the Suez Route. In addition, the US/EU economic sanctions against Russia from 2014 onwards due to the Ukraine crises, and the subsequent countersanctions from Russia, along with geopolitical tensions, did not promote international use of the NSR. Another factor was the lack of ice-strengthened vessels suitable for use on the NSR.

Another influencing factor is the management of the sea route. Russian policies must be favorable for the NSR to be attractive option for shippers. The NSR is increasingly connected to the international economy through deliveries of energy, but new legislation from February 2018 reserves this business for Russian flagged vessels. Subsequent legislation has required that carriers and tankers transporting hydrocarbons out of the NSR area must be built in Russia. These new regulations showed Russia’s increasing control of future shipping along the NSR. 

Important aspects for future growth in international transit shipping is linked to increased modernization of Russian ports, enhanced navigational infrastructure, better ice-navigation, communication system, as well as strategically placed emergency stations.

The role of commodity prices, ice-strengthened vessels, the regulations set by Russia and the need for modernization of maritime infrastructure is explained in-depth by the researchers.

International marked conditions

Today, the NSR`s main role is transporting Russian energy and mineral resources to both the European and the Asian market from Arctic fields in NW Siberia (Ob Bay and Yenisei River).

Another advantage for using the NSR is the shorter transport distance by 14 to 20 days between NE Asian ports and ports in NW Europe, compared to the Suez Route assuming the same sailing speed.

Unfavorable conditions on the freight market have shown to have major impact on the use of the NSR as an international transit route between Asian and European markets. A drop in bunker prices and even-out of price differences of commodities between European and Asian markets leads to a decreased value-to-weight ratio of transported goods and puts corresponding emphasis on “economies of scale”, making it more profitable to transport commodities on large vessels going through Suez or around the Cape of Good Hope. In addition, economic sanctions by both the US/EU against Russia starting in 2014, and the subsequent countersanctions from Russia, along with geopolitical tensions did likely not encourage European shipping companies to get involved in NSR ventures requiring long-term investments in new expensive ice-class vessels.

Management of the sea route

The Russian governed route has attracted international attention for quite some time. The combination of diminishing ice cover as well as Russian earlier promotion during 2010-2013 did created opportunities for foreign shipping companies.

In 2011 Vladimir Putin, then prime minister, stated that Russia wanted to turn the NSR into a key commercial route of global importance. Two years later new rules and regulations regarding the sea route became permanent. The state-owned nuclear icebreaker fleet operator, Atomflot, wanted to attract foreign shipowners, and provided shipping companies with favorable icebreaker tariff rates and additional discounts based on cargo volumes and for in-ballast voyages.

The overall cost savings of using the NSR instead of the Suez route depended on the type of cargo. A shorter shipping route for an expensive LNG carrier on a time-charter contract meant large savings. However, one limitation for international shipping during this period was the availability of ice-strengthened vessels of different segments and sizes for use in the Arctic. Despite Atomflot’s heavy early promotion of international shipping on the NSR, shipping companies remained lukewarm.

For international shipping companies it became clear that Russian natural resource projects would increasingly occupy the capacity of Russia`s nuclear icebreakers. Waiting time for icebreaker assistance, and the likeliness of higher escort fees, hardly helped to promote international transit shipping.

Determinations for the NSR

Obviously, having sufficient icebreaker capacity available to facilitate year-round navigation is essential, and Russia is intent on establishing such capacity. But the needs for users go beyond reliable icebreaker services. An affective and predictable administrative and management system serving international shipping is required, including improved sea-ice predictions, and acceptable fees. Also, emergency stations must be strategically placed in multiple places along the NSR. Modernization of ports and better navigational infrastructure and hydrography, ice-navigation and communication systems is necessary infrastructure improvements. Much is in the hands of Rosatom, the state atomic energy corporation.

Economic aspects impact ship owners’ choice of a route. When freight rates and bunker prices are low, any economic advantage of using the NSR compared to southern routes can be quickly lost, as occurred in 2014. If the price difference of commodities between European and Asian markets is evened out, the rationale for sending such commodities through the Arctic evens out. On the contrary, consistently high commodity prices will be drivers of international transit shipping on the NSR.

Russian policies must be a favorable option for shippers if they shall choose the NSR. Though exceptions were made for foreign-flagged vessels on long-term contracts established before 2018, the new Russian regulations set the tone for Russia’s increasing control of shipping on the NSR involving its natural resources, and it has major implications for development of the route. Expectations and perceptions of Russian policies and plans will matter for investments in new tonnage. Perceptions of increased militarization along Russia`s northern coast are also likely to hold back foreign investments.

For international transit shipping to develop, international market conditions and Russian policies must be conductive to such development. However, at the end of the day it is the global maritime industry – not only shipping companies – but also other stakeholders such as the marine insurance industry, ship classification societies, investors, and shipbuilders, that will decide about the future use of the NSR as an international transit route.

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