In 1845, the renowned British explorer John Franklin embarked on another expedition to the Arctic. Leading a team of over a hundred soldiers, he set sail from England on the HMS Erebus and HMS Terror, heading towards Greenland. Franklin's objective was to traverse the Northwest Passage, finding a new route connecting the Atlantic and Pacific, via the northern parts of North America. However, after a whaling ship last spotted the Erebus and Terror in Baffin Bay, the expedition team vanished without a trace. It was not until 2014 that researchers discovered the wreckage of the two ships in the Canadian Arctic.

Today, more than a century later, the effects of global warming are causing the gradual melting of the once formidable Arctic sea ice. If this trend continues unabated, it could lead to the emergence of new shipping routes in the future. For Asian countries like China and Japan, the melting of the sea ice opens up new possibility of cargo ships bound for the East Coast of North America: instead of taking the longer route around the Panama Canal, they can  traverse  the Northwest Passage through northern Canada. This route could significantly reduce the distance traveled by thousands of kilometers and greatly enhance shipping efficiency. In this edition of Poseidon Market Foresight, we will delve into the current trends and future developments in the ocean shipping industry, examine the potential impacts of global warming on the sector, and explore the new opportunities and challenges arising from the melting of the Arctic ice for neighboring countries.

Overview of theOcean Shipping Industry

The shipping industry serves as a vital pillar supporting today's international trade and globalization. According to statistics from the Organization for Economic Co-operation and Development (OECD), up to 90% of traded goods are transported via ocean shipping. The key driving force behind this is the low-cost advantage of maritime transportation. Taking the China-to-United States route as an example, the average freight cost for a standard 20-foot container is approximately $2,000. Considering that a 20-foot container can hold around 3,500 shoeboxes, the average transportation cost per shoebox is only $0.6. Due to the cost-effectiveness of shipping, multinational companies are incentivized to locate their production lines in developing countries with cheaper labor costs, such as Southeast Asia. By leveraging the low transportation costs of ocean shipping, companies can efficiently transport goods on a large scale to destinations across the globe, thereby maximizing profits.

Within the vast network of the global shipping industry, the Asia-to-US route is particularly busy. In 2023, the container volume on this route reached 17.5 million TEUs, ranking first globally. Its prominent position can be attributed to the large market share held by Asian countries, such as China, the Association of Southeast Asian Nations (ASEAN), Japan, and South Korea, in the U.S. import market. These countries export vast quantities of goods to the US through maritime container transportation. Meanwhile, the Asia-to-Europe route also exhibits strong growth momentum, with container exports reaching 16.5 million TEUs in 2023. Notably, the Suez Canal, as a crucial waterway connecting Asia and Europe, plays a pivotal role in this route. For instance, a cargo ship traveling from Shanghai to Rotterdam can save approximately 6,000 kilometers and nearly 10 days of sailing time by choosing to traverse the Suez Canal instead of navigating around the Cape of Good Hope.

As the primary transportation medium for global trade, any challenges faced by the ocean shipping industry can cause ripple effects across various segments of the global supply chain. Take the COVID-19 pandemic as an example, where infected port workers were forced to undergo quarantine, resulting in labor shortages that severely hamper the normal operations of ports. This led to significant delays in unloading or loading cargo, with many ships having to queue outside ports for extended periods, exacerbating the strain on the global supply chain. The congestion was particularly severe at the two busiest ports in the United States, Port of Los Angeles and Long Beach. During the peak congestion period, more than one hundred cargo ships were queuing in the waterways, whereas under normal circumstances, the number of waiting ships would usually be in the single digits. Additionally, some major exporting countries, such as China, also experienced temporary port closures due to the pandemic, with ports like Yantian and Zhoushan, two of the largest ports in China, shutting down for days.

Meanwhile, the $1.9 trillion stimulus package in the US led to increased consumer spending, with a surge in e-commerce, further driving up the demand for imported goods. Since most of these goods are transported to the US by ships, this surge in consumption resulted in soaring shipping demand and costs. In the second half of 2021, the freight rate for a 40-foot container from Asia to the U.S. West Coast surged to $26,000, nearly 330% higher than a year earlier. Furthermore, transportation times also increased significantly with the shipping time from China to the US doubling from around 40 days to nearly 80 days during the pandemic. The turbulence in the shipping industry not only adversely impacted shipping efficiency but also caused significant disruptions to the supply chain of critical goods such as computer chips and automotive parts. Due to supply shortages, price of goods increased rapidly, further contributing to intensified global inflation in 2022.

The Impact ofGlobal Warming on the Shipping Industry

As climate change exacerbates, sea ice in the Arctic region is melting at an unprecedented rate. According to a report by the World Wildlife Fund (WWF), the Arctic ice is rapidly disappearing at a rate of nearly 13% per decade. Over the past 30 years, the oldest and thickest ice layers in the Arctic have decreased by 95%. If greenhouse gas emissions continue to increase at the current level, it is projected that the Arctic ice could completely vanish by 2040.

For the countries surrounding the Arctic, Climate change will lead to profound implications. In Canada's case, the retreat of the Arctic ice means that the most formidable barrier faced by early adventurers while traversing the Northwest Passage—sea ice—will no longer impede the passage of ships. Sea ice, a defining feature of Canada's northern waters, typically melts during the summer and fall months and re-forms during winter. In the past, even during summer, the Canadian arctic was always covered by thick sea ice. However, in the past 50 years, the sea ice in Northern Canadian Waters has been disappearing rapidly. From 1968 to 2022, summer sea ice area in the Northern Canadian Waters decreased at a rate of 7.1% per decade. In September 2007, the Northwest Passage became completely ice-free during summer for the first time in history.

As the Arctic sea ice gradually retreats, the shipping industry is presented with new opportunities. In 2014, the Nunavik cargo ship departed from Quebec, Canada, and successfully traversed the Northwest Passage to reach China, becoming the first cargo vessel to successfully navigate the northern Canadian waters without an icebreaker’s escort. This journey took only 26 days, reducing the distance by approximately 6,000 kilometers and saving over two weeks of travel time, compared to the traditional route via the Panama Canal. If the sea ice in Canada's northern waters continues to melt at its current rate, the Northwest Passage will not only offer shipping companies significant reductions in travel time, fuel consumption, and canal tolls, but also serve as a feasible route for oversized oil tankers and container ships that are unable to traverse the Panama Canal due to their size.

The increasingly favorable shipping conditions have presented new opportunities for the economic development of Canada's northern regions. Despite occupying nearly 40% of the country's landmass, this vast territory is sparsely populated with only 120,000 residents. Its economy is highly dependent on the extraction and export of natural resources, including oil, gas, mining, and forestry. If the Northwest Passage becomes a viable shipping route in the future, the northern regions of Canada will have the opportunity to export their abundant natural resources to East Asian countries at lower costs and higher efficiency. This will foster economic growth in the region and attract increased investments and business development.

On the other side of the Arctic, Russia, with the world's longest Arctic coastline, also stands to benefit from the melting of the Arctic ice. In the Arctic region north of Siberia, Russia is home to the 5,600-kilometer-long Northern Sea Route. Compared to the Canadian Arctic waters, the sea ice in the Northern Sea Route is relatively sparse. During the summer, two-thirds of the area in the Northern Sea Route is ice-free, providing cargo ships with increased navigation options.

In 2017, a Russian oil tanker successfully traversed the Northern Sea Route without an icebreaker’s escort, arriving in South Korea in just 19 days, which was 30% faster than the time required for the traditional route via the Suez Canal. In 2021, the northern passage became navigable without entering the ice zone on August 2nd and remained open for 88 days. It not only marked the earliest opening in history but also the longest open period. On the government’s front, Russian President Vladimir Putin is actively seeking cooperation with various parties to explore the possibility of large-scale container shipping on the Northern Sea Route. In 2023, Rosatom, a Russian state-owned company, and DP World, the third-largest container terminal operator globally, announced their joint venture to develop container shipping operation along the Northern Sea Route.

If the Northern Sea Route can offer favorable conditions for stable and reliable cargo shipping, it will play a significant strategic role in connecting trade between Asia and Europe. Currently, the Suez Canal route serves as the main corridor for maritime trade between the two continents, but it faces several bottlenecks, including Egypt's tight control over the canal and frequent pirate activities near the Strait of Bab el-Mandeb. For instance, in late 2023, the Houthi armed group in Yemen launched multiple attacks on cargo ships in the Red Sea, posing serious threats to the safety and stability of the existing route. However, the ongoing tensions between Russia and Western countries have raised concerns over the viability of the Northern Sea Route, sparking public discussions on the geopolitical landscape of the Arctic region.

Geopolitical Disputes Underneath the Arctic Ice

Global warming has not only brought new opportunities for the shipping industry but also escalated territorial disputes among nations neighboring the Arctic. Canada, the United States, Norway, Denmark, and Russia - the five countries bordering the Arctic - have all asserted territorial claims over the Arctic. Unlike Antarctica, which is governed by the Antarctic Treaty signed by multiple countries, the Arctic has yet to establish an internationally recognized legal framework. According to the United Nations Convention on the Law of the Sea (UNCLOS), the Arctic and the North Pole are not under the sovereignty of any single country. However, with accelerated climate change and longer ice-free periods, the Arctic region is gradually opening up to neighboring countries, underscoring its strategic importance and economic value. Beneath the Arctic ice lie abundant energy resources, including 9% of the world's potential coal reserves, 13% of oil reserves, and 30% of natural gas reserves. The existence of these natural resources has intensified the competition among neighboring countries for control over Arctic shipping routes and the rights for natural resource extraction.

On the issue of the Northern Sea Route, Russia firmly asserts its sovereignty based on the argument that the route mostly runs along the Siberian coastline, falling within its exclusive economic zone. Under Article 234 of the UNCLOS, Russia believes it has the right to regulate the transit of foreign vessels. This article grants coastal states “the right to adopt and enforce non-discriminatory laws and regulations for the prevention, reduction and control of marine pollution from vessels in ice-covered areas within the limits of the exclusive economic zone.” Therefore, any foreign cargo ships seeking to traverse the Northern Sea Route must apply for permission and approval from Russian authorities and pay the corresponding fees.  However, the United States and the European Union disagree with Russia’s position. As the US has not signed the UNCLOS, it maintains that the Northern Sea Route belongs to international waters and should not be subject to the legal jurisdiction of any single country.

Despite the extensive collaboration between Canada and the US across various domains, significant disagreements persist in their stances on the sovereignty of the Northwest Passage. Canada insists that the passage is part of its territory, while the US argues that it should be considered an international transit corridor, allowing free passage for vessels of all countries. In 2019, the Canadian government reiterated its sovereignty in the Arctic: “the Government of Canada is firmly asserting its presence in the North. Canada will continue to exercise the full extent of its rights and sovereignty over its land territory and its Arctic waters, including the Northwest Passage.” Meanwhile, the US government has also taken a firm stance, with former President George W. Bush emphasizing in the 2009 National Security Presidential Directive and Homeland Security Presidential Directive that freedom of the seas is a top priority for the United States: "the Northwest Passage is a strait used for international navigation, and the Northern Sea Route includes straits used for international navigation; the regime of transit passage applies to passage through those straits." As neither side is willing to concede in the dispute, it will be challenging to broker a mutually acceptable solution between the US and Canada in the near future.

Conclusion

The Arctic, as one of the few remaining uncharted territories on Earth, is slowly revealing itself to the world amidst the impact of global warming. Its unique strategic importance, new shipping routes made accessible by the melting of sea ice, and the immense economic potential of its vast natural resources have garnered significant global interest. Despite being situated on the fringes of the globe, the Arctic may potentially emerge as a focal point for competition among nations in the coming years.

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