Reducing emissions in the supply chain through digitalization and collaboration

SPEAKER A

Okay, ladies and gentlemen, let me introduce our next session. Delighted to welcome and to introduce Thomas Dansgard, head of Americas at BIMco. And Thomas is going to be talking about reducing emissions in the supply chain. Thomas, thank you for your input. We are looking forward to a great session. Over to you.

SPEAKER B

Thank you so much. Appreciate it. So thank you for having me here today. I was here last year and there we talked about electronic documentation, electronic bills, or ladies, to help de-risk our industry. This year we're going to dive a little bit deeper into collaboration within our industry and solve some inherent challenges with the way that we actually do global trade. Very quickly, BIMCO is the world's largest maritime organization. We represent about 62-63% of the world's maritime fleet, and with a team of about 72 team members in eight countries around the world, our core activities center around developing the commercial contracts and clauses that are being utilized in global maritime trade on a day-to-day basis. This includes charter parties for cargo moves, sales and purchase agreements for vessels, decarbonization clauses, and so forth. We also represent the maritime industry at the IMO in London, at the UN in New York around sanctions, and we work very closely with the European Union, which has become increasingly relevant after they came out with a new emissions trading system earlier this year. Finally, we support the industry with training, information, support and advice, and general communication within the industry.

I am truly excited to be with you here today to give you a glimpse into what we at BIMCO see as an opportunity for significant improvements within the global supply chain. When I say global supply chain, I'm not just talking about maritime here. I think that is really important because as we are moving ahead and as we are actually exiting out of the pandemic, where we found out that no shipping means no shopping, global supply chains are becoming increasingly important and the maritime's role within that. I've been in the industry for more than 30 years, and maritime has often been perceived as a sunk cost and a necessary evil within global trade. That is not the case anymore. The pandemic is a brilliant example of that.

However, also on the cost side, we used to see the cost of freight being about 5 to 6% of commodity pricing in the marketplace. Today, it's sneaking its way up to 9 to 10%. So it is actually also becoming a critical financial competitive differentiator as well. Global supply chains are faced with a slew of optimization and de-risking challenges, and it is definitely more evident than before. I mentioned the pandemic. We had a ship sitting across the Suez Canal, the Ever Given, right after the pandemic. Most recently, we had the Dali hitting the bridge in Baltimore. We have seen draft restrictions in the Panama Canal because of a lack of rain and environmental concerns there. We are having sanctions imposed on Russia as well. And we're not even talking about decarbonization regulations and stuff. Again, this is a very complex environment we operate in. It is getting more complex, not less. These challenges have and will continue to deteriorate the efficiency within our global supply chains. It puts pressure on the assets, it puts pressure on the people, and it's driving up costs. That includes also the freight rates. These are the things that keep our members, the ship owners and the maritime industry, up at night.

While many of these factors are a natural part of global trade as a whole and really beyond our control, several are indeed an expression of inherent inefficiencies within the way that we are doing business. Maritime is a highly conservative industry. We highlighted the fact that we are still using paper bills of lading that have to be sent around the world to release cargo. We are having shipping contracts within our space where they are still talking about steamers and boilers. We have not had boilers for over 100 years on board ships. It's a highly conservative industry. However, on the topic today, I'm particularly going to focus on a new business dimension, supporting energy efficiency and the corresponding reduction in greenhouse gas emissions. This is, of course, in order to meet some of the really pressing environmental goals that we have globally. To kick that off, if you will just bear with me for two minutes. BIMCO has created a little video that kind of supports this transition we are going through. So here goes.

SPEAKER C

It's time for change. Change that will be seen and felt for generations. It's time for the shipping industry to accelerate our work towards a sustainable future. A future that keeps the world supplied with everyday goods and trade still global, but our emissions fewer. It's time for our industry to focus our efforts on cleaner energy, where harmful methods are permanently substituted for greener ones. And while the development of alternative methods has already begun, there's still much more that must be done. We will be defined by our actions, not by our words. Solutions must be our priority. Instead of just an afterthought. Decarbonizing our industry must come first as second nature, because we have a responsibility to make global trade greener, our industry cleaner. And they say the change starts at home. But the time has come to think about change on a much greater scale. Now is the time to use new technology and increase the use of greener fuels. And we accept it's taken a climate crisis to make us realize how important the ice is and understand the scale of what is needed. There is no turning back and small steps are no longer enough. Our industry's transformation cannot happen overnight. And as consumers, we need to learn that cheaper isn't always right, the greener comes at a price. So it's time to see industries working closer together and recognize that the scale of the challenges of mind-blowing proportions if we are to succeed. As we explore the science, we need to triumph for the good of our planet and its people. It's a case of when, not if. Now is the time to pool our resources, understand that this won't just be sorted, and act on the unprecedented shift to decarbonize and realize that we cannot turn our backs because there is no turning back.

SPEAKER B

Okay, thank you. A picture is worth 1000 words. So there you go. There's a need for collaboration. Maximizing the energy efficiency across the global supply chain is going to require this form of collaboration and cooperation amongst all our stakeholders. It's one of the reasons why I'm so excited to be here with the commodity side, the cargo side of the industry. Reducing emissions from shipping by improving energy efficiency is an integral part of the global drive for a more sustainable shipping industry. As an industry, we are currently transporting close to 90% of cargo and we're doing it at about 3% of the global CO2 emissions. If we don't do anything to decarbonize or reduce greenhouse gas emissions by 2040, we will be closer to 7%. So we need to act as an industry in the context of the global supply chain.

Large corporates will increasingly come under policy and shareholder pressure to reduce their scope three emissions. We have already had the European Union announce their new ESG requirements coming into the end of this decade. It is not just for European-based companies, it's for any organization that will be doing business in and out of Europe. We believe that within this whole decarbonization journey we are on, the world is working based on the salami method. Eventually, they'll get to the slice called shipping. We will be imposed with these regulations as well. To put that in context, the European emissions trading systems that just came into place January 1 this year for maritime, for the transportation of goods in and out of Europe, they've had this for more than ten years in place, but applied to other industries. They've generated over $60 billion off in the last ten years. Needless to say, that has not passed the attention of countries like the US, Brazil, and the UK. They, of course, see a potential source of revenue here. We are all going to have to operate under these new schemes. They may manifest themselves in new efficiency-centric business models that will be imposed on our industries, which we recognize may be to the potential detriment of small to medium-sized companies. New business models will almost certainly embrace the utilization of existing processes.

We just heard the inspirational presentation before on AI and operations to improve these efficiencies, increase transparency, and predictability. The increased predictability may have the consequence of reducing volatility. While this may attract new business and new types of investors into our businesses, it may also undermine existing business models. We see ourselves, BIMCO, being a maritime organization, having an important role to play in engaging on behalf of the industry to make the voices heard in any discussion on possible new business models. We need to collaborate with those who use shipping and transportation services to ensure that a level playing field in the face of an evolving industry faces potential radical change. Optimally, the global supply chain needs to operate as a continuous and uninterrupted pipeline, servicing the customers by moving goods seamlessly from origin to destination efficiently. From a cargo owner's perspective, delays at origin and destination are disappointingly more costly than delays to ships waiting in ports. This situation is compounded by the shipping industry's and actually the global trade industry's tendency to use standard charter party contracts that were created for a business model that was not designed to reward energy efficiency.

A prime example of this is within our free-in and out terms that are being utilized by the commodity industry. There is a long-established principle within the free-in and out terms of something called the utmost dispatch, which provides the cargo interest or the charters with commercial certainty that a chartered vessel is always proceeding at full speed, giving certainty to the arrival at the ports. Even if berthing delay is expected, the charter party terms legally oblige the ship owner to proceed as

fast as it's safely possible to tender notice of readiness at the port, have time, lay time, start counting, and eventually demurrage or dispatch incur. While it is essential to maintain the commercial certainty that the utmost dispatch principle provides, the consequence has really been a sail-fast-and-then-wait, hurry-up-and-wait culture. Primarily, we see this in the commodity trade, which inhibits a more widespread adoption of energy efficiency operational measures such as just-in-time arrivals. The shipping industry widely considers sail-fast-and-then-wait, and when I talk about the shipping industry, I'm talking about the maritime side, to be a suboptimal practice in the context of reducing emissions and increasing efficiency. It's a paradox that cargo owners focused on the security of supply and vulnerability in the logistics chain consider it an optimized model.

To put it in another context that we are somewhat more familiar with, think about the way that we fly in our passenger planes, which actually operate on a just-in-time arrival basis. Just imagine for a second that a passenger plane, irrespective of if a gate is available, flies as fast as it can, reaches the end destination, and just sits on the tarmac and waits for the gate to open up. This is, in principle, the way we are operating these days. It is not optimal. Now, contrary to the commodity trade, the free-in and out terminology that we are utilizing, the carriers in our liner trade, the container carriers who actually manage their own terminal handling in load port and discharge port, are incentivized to arrive just in time and adjust the speed with a corresponding consumption saving and therefore also emission savings. Also, commodity carriers from time to time utilize this principle when they're proceeding to a canal, like for instance the Panama Canal or the Suez Canal, where they know what the scheduled booking time slot or transit slot is. So this just-in-time arrival principle is not unfamiliar to our industry. Let's try and explain this concept. Maybe again, a picture is worth 1000 words here.

So here we have a voyage of 30 days, and this is for a loading port. It could also be for a discharging port. The way things are operating on the free-in and out basis right now, where it's with utmost dispatch, the ship will speed up as fast as it can and it will arrive and then it will just sit and wait there for the terminal. The practice within the industry is not always first come, first serve. Many times it's also at terminals' convenience. You go to the Mississippi River. If the barges are not there ready with the cargo, the vessel will not be brought in until that point. It tenders its notice of readiness, you start having lay time counting, and then eventually demurrage or dispatch if they are able to turn it faster. The just-in-time arrival aspect, which is really about reducing emissions, dropping the consumption of the ship and thereby also reducing the emissions. Let me get that. The vessel will actually adjust the speed in order to arrive closer to when she can actually start, commence the cargo operation. Like I mentioned earlier, this is what we are seeing in the container trade, or whenever you're dealing with what we call liner terms, where the carrier, the ocean carrier, the ship owner, acts as in control of the loading or the discharging of the cargo. So here you will actually slow down the ship and you will spend less. The opportunities here, of course, because we still have our contractual terms about tendering notice of readiness and getting into the lineup. One of the proposals that we are bringing to market right now is the idea of a virtual notice of readiness. So you will actually extend the just-in-case or the just-in-time arrival zone several hundred miles outside from the port, beyond the commercial perimeters of a port, which is normally the legal term when you have to take a notice of readiness, and by that allow the ship owner to adjust the speed more based on the arrival of the ship to the load of the discharging port. The reality is that the current practice, as you can see for this hurry-up-and-wait, is really not optimal.

However, for our transformation to change, for transformation and change to actually happen, it is essential that we recognize that the shipping work is done on a derived demand basis, which means that it's essentially controlled by the external partners, by the cargo. This is the same conversation we had last year around electronic bills of lading. It is not the owners that decide that an electronic bill of lading is being issued, it's actually the trade that incorporates it into their sales contract and then gets the banks on board. Same thing here. Shipping's business model changes in response to changes in business practice by those who use our cargo transportation services. It's not really the other way around. It requires broad collaboration and cooperation among multiple stakeholders to develop and deliver a more holistic systemic change where shipping becomes a seamless component of the global supply chain pipeline, with a clear and recognized need to work more collaboratively and blend technological solutions with contractual provisions. We stand at the threshold of a new dimension in shipping, a new dimension with the development of alternative business models.

At BIMCO, we believe that the way forward may be new business models that take a holistic and incentivized approach focused on the entire supply chain. The key measures on the model will be our economic incentives, such as fuel efficiency rebates that roll down to the cargo. So when you have a ship that adjusts time for just-in-time arrival, that saving could then be shared with the cargo as well because they get a benefit, port fee discounts. We are actually already seeing that on the US west coast, especially Long Beach, which has been on the forefront with that, and performance-based contracts. Fuel efficiency rebates could also work in ports. Ports could start rewarding for slowing down the ship one or two days out, leveraging technological and digital solutions. We've already gotten some very inspirational presentations earlier here. When we look specifically at the ships' assets themselves, we talk about route optimization software. We talk about utilizing the sensor technology and the Internet of Things as well. Here we can look towards the airline industry for inspiration, where they are utilizing sensors a lot more widely to make smarter decisions on the asset. Of course, information sharing, creating necessary transparency for smarter decisions. Environmental, social, with decarbonization being front and center, we got our regulatory measures and speed limits at sea. It's kind of a crazy thought process, but it works on shore, so potentially also when the ships are sailing, emission reduction targets, we already have that in place. I mentioned this morning the new IMO regulation that came into effect last year, and then carbon pricing. We are seeing the first step of that with the EU allowances, the EU emissions trading system. We will be seeing that also coming out of the IMO with a new strategy from 2027. The hope is that when IMO gets it right, the EU will pull back. Seeing is believing on that.

All this is really built on collaboration and cooperation between all the stakeholders. When all of this is then pulled together, it will form the basis of an alternative business model that will complement our contracts and clauses. Let me just go through a few takeaways for you here as well. We believe that there is a fundamental need for change, changing our mindsets and cultures across the shipping and commodities industries. To achieve this optimal energy efficiency within the global supply chain, stakeholders need to get out of their lanes and beyond the current contractual scopes that we are so fixed in. It will require a transformation mindset where we are not changing what was, but actually looking more ahead and seeing where the ball needs to be. How should an optimal global supply chain really work? Where will this ball be? That also requires a leadership paradigm shift. We are not sailing totally in the dark here because we have other industries out there that might be a couple of steps ahead of us. I already mentioned the airline industry. Again, we can see a lot of efficiencies there, the way that they have been able to utilize information to create transparency and make smarter decisions on how they're moving their resources around. Also, we at BIMCO are trying to leverage our neutral position within the industry to facilitate this dialogue between stakeholders across the whole supply chain to satisfy this appetite for the development of new business models, built on the principle that rewarding energy efficiency can help propel the industry towards these decarbonization emission goals that we have for 2030, 2040, and hopefully zero emissions by 2050. In this respect, we encourage all stakeholders to join in this concerted effort to drive down the emissions in the short term through the adoption of practical energy-saving solutions, which will also reduce the reliance on expensive and scarce alternative fuels.

In closing, let me just say that while we are focusing and discussing just-in-time arrival, I think it's important that we don't miss the point that while we are reducing emissions, we should not forget that the knock-on effect from any efficiency improvement to the supply chain will also yield more than fuel and emission savings. The principle of doing more with less, sweating the assets, and that doesn't matter whether it's assets, whether it's ships or ports or terminals or whatever other equipment infrastructures, turning the equipment one more extra time is just plain good business practices that drop straight to the bottom line and make us more profitable. I think it's really important when we are having these decarbonization, reducing greenhouse gas emissions conversations, that this does not become a hate oil and gas conversation, but actually, how do we work within our whole space to make this really make us more efficient? So with that, I just want to invite the cargo side, the commodity side, to take part in this journey and come up with these new solutions, better ways of running what has been a bit archaic way of running global trade. Thank you so much.

SPEAKER A

Thomas, thank you very much indeed. Ladies and gentlemen, if there are

any questions, we've got a moment or two.

SPEAKER B

For the reduction of emissions, what data do you capture and how do you capture it at the cargo level, at the route level?

SPEAKER B

That's a great question. Shipping and maritime are heavily regulated, especially by the IMO, the International Maritime Organization, which is under the UN. The IMO came out with a concept called CII. I don't know if you guys are familiar with it. It has gotten a lot of press because it was not really fit for purpose of reducing emissions or making ships more efficient. But part of the CII framework that came out of the IMO is actually measurements on the vessel's efficiency. Both going to their design, they have a design index going back to 2014, but also what kind of fuel is being used. We know what the emission is from the fuel as it is being burned and how much quantity of it is used and so forth. That is one aspect of the measurement that we are working with right now. Then, when it comes to the EU ETS, they are now measuring based on the ship again and the consumption of the fuel, how much CO2 is emitted. Based on that, you go and acquire allowances. It just started this year. We are incurring the allowances right now. They will be reported in April next year, and the first surrender will then happen in September next year. Allowances are traded on an exchange, the European exchange. They've been doing this for ten years in Europe. I think they started maybe 2008 or so, but for other industries. They just added our part to it now.

SPEAKER A

Thomas, absolutely fantastic. Sounds like some fundamental changes ahead within the shipping industry. Really appreciate your input. Everybody, please do make sure you get a chance to speak with Thomas either at the break or over cocktails later.

SPEAKER B

And let me just say, I invite you to visit our website. We're doing live sessions every Wednesday morning, 08:00 New York time with Q and A from various industry experts. Just this morning we had ABS, American Bureau of Shipping, talking about the new fuels. Last week it was about diversity in maritime, where we cover numerous topics by subject matter experts, plus providing you an opportunity for Q and A. So please visit.

SPEAKER A

Fantastic. So as we break for a 30-minute coffee break, please join me in thanking Thomas once again.