Sea change for commodities as Arctic melt transforms trade routes; Intergovernmental Panel on Climate Change expected to reveal that warmer sea temperatures by 2050 could open up new channels across the Arctic Northern Sea Route

Sea change for commodities as Arctic melt transforms trade routes

Intergovernmental Panel on Climate Change expected to reveal that warmer sea temperatures by 2050 could open up new channels across the Arctic Northern Sea Route

Global warming could mean that at current rates the NSR will remain open to shipping for around 125 days per year, up from an average of about 50 days at the moment. Photo: Alamy

By Andrew Critchlow

6:30PM BST 30 Mar 2014

For centuries, explorers have searched for fabled new trade routes through the frozen waters of the Arctic that would speed up commerce across the globe.

Climate change, which has thawed more of the Arctic’s ice cap for longer periods during the summer months, could be about to slash the time it takes for cargoes to reach their destinations and transform trade patterns.

The UN’s Intergovernmental Panel on Climate Change (IPCC) is expected to reveal in a closely watched report this week that warmer sea temperatures by 2050 could open up new channels across the Arctic Northern Sea Route (NSR). According to the report, global warming could mean that at current rates the NSR will remain open to shipping for around 125 days per year, up from an average of about 50 days at the moment.

“Increased shipping associated with the opening of the NSR will lead to increased resource extraction on land and in the sea, and with two-way commodity flows between the Atlantic and Pacific,” said the IPCC report, which leaked out on environmental blogs over the weekend.

The majority of traded goods and raw materials are still transported globally by ship through the Suez and Panama canals, which link east with west. Since 1970, seaborne trade has increased by an average of 4pc each year, according to official US data.

The NSR is one of two main channels which currently exist through the Arctic, which have the potential to cut the distance those large freight vessels and tankers have to sale from European ports through the Suez Canal and on to China by up to 40pc. At the end of the Cold War in the early 90s the former Soviet Union allowed international shipping to use the NSR, which is increasingly being looked at as a viable sea route to Asia.

The other major route across the Arctic seas and the more difficult to navigate is the North West Passage, which meanders through ice packed north of Canada. The frozen channel separates the Atlantic with the northern Pacific Ocean. Sir Francis Drake tried and failed to find the entrance in 1579 but it wasn’t until 1903 when the Norwegian Roald Amundsen made it through entirely by sea that the NWP was entirely conquered by ship.

Beyond having the potential to speed up the delivery of large cargos of raw commodities such as coal, iron ore and grain these Arctic routes are now seriously being considered by energy companies seeking faster ways to deliver liquefied natural gas (LNG).

Gas is transforming global energy markets but the major challenge still remains of how best to transport the fuel produced in remote regions to densely populated markets. Pipelines running across borders are the cheapest option but as Russia’s recent row with the West over Crimea proves such conduits are vulnerable to political turmoil.

Shipping gas that is first frozen to liquid form on-board giant tankers is strategically the most flexible solution and the least vulnerable to political risk.

According to a BG Group report “shipping LNG through the NSR or, less likely, the NWP has the potential to significantly reduce times and transportation costs for some suppliers.”

The first LNG shipment to sail through the NSR delivered its cargo loaded in Norway to a power company in Japan in 2012. According to BG Group, the journey reduced the normal sailing time by 10 days and saved $1m in charter day rates. However, LNG tankers still require special icebreaking escorts to make the Arctic journeys and although gas carriers have been designed with stronger hulls none have so far been commissioned.

According to BG Group significant challenges remain despite the thawing ice: “While some believe that the Arctic waters will slowly open up as climate change increases the availability of ice-free waters, in the medium term specialised shipping will be necessary along with crews experienced in transiting these waters.”

Credit Suisse turns bullish on crude oil as Iran and Libya fail to deliver

Credit Suisse has revised up its outlook for oil prices after initial expectations at the beginning of the year for a rapid increase in production from Libya and Iran failed to materialise.

The broker has reset its target for Brent crude to between $100 (£60) a barrel and $120 after predicting that oil would average lower prices this year.

“We expect to see tight oil markets extend through this year; as such, our new oil price forecast looks similar to last year’s trajectory,” said the broker in a recent note to investors. “Market sentiment has already shifted from profoundly bearish to neutral, but we think that sentiment could swing to outright bullish.”

A lack of progress in the lifting of sanctions on Iran, which could lead to a rapid rise in production, was a major factor in the broker’s analysis. Libya’s continued problems were also cited as a factor with political unrest continuing to disrupt Tripoli’s export potential.

“We no longer count on large increases in exports from Libya and Iran,” said Credit Suisse in its report.

However, the broker’s forecast could still be challenged by Iraq’s continued increases in production. The second-largest producer in the Organisation of Petroleum Exporting Countries officially opened its giant West Qurna-2 field over the weekend.

Shipping weighed down

Alliances and consolidation could be on the way among global freight shipping companies amid overcapacity in the industry, according to Fitch. The ratings agency says around 80pc of orders for ships at the end of 2013 were for larger vessels, which it estimates to be up to 25pc more cost efficient. Mega ships are largely limited to Asia-Europe trading lanes and demand was soft in 2013 and this year is unlikely to deliver a big rebound in trading volumes by sea.

“We believe the formation of alliances has been largely driven by the continuing tonnage oversupply and we do not expect them to address the fundamental supply-demand imbalance,” said the ratings agency.