Infrastructure Talk with Oleksandr Shchokin, President of Container Lines Association of Ukraine

Infrastructure Talks are led by Dmytro Pavlenko, Tax & Legal Partner, Leader of Infrastructure Industry Group at Deloitte Ukraine.

Dmytro Pavlenko talked to Oleksandr Shchokin, President of Container Lines Association of Ukraine, CEO of the Ukrainian Representative Office of CMA CGM, one of the world’s leaders in the container shipping market.

Dmytro Pavlenko: What does the Ukrainian container business look like today? What are the main decisions that have been made since the full-scale invasion?

Oleksandr Shchokin: With the closure of ports in the first days of the war, the container business came to a complete standstill. Many market players shifted their focus on ensuring the employee’s safety and trying to recover the equipment that was located in different parts of Ukraine.

The first and foremost decision was to continue the business. In the first 2-3 months, there were several companies that were ready to continue operating in Ukraine during the war: to complete the shipments that had started earlier and even accept new ones; to address the issue of container flow that had accumulated along all the lines; and to look for new cargo shipping solutions. Unblocking container traffic was an important milestone. At that time, many lines had taken a rather tough stance on the provision and movement of empty containers through Ukraine, resulting in congestion of equipment.

It is worth noting that the top five container market leaders – Maersk, MSC, COSCO, CMA CGM, Hapag-Lloyd and others – almost immediately decided that they would continue to operate amid the war and started to develop new shipping routes through the ports closest to Ukraine. This made it possible to clear out or completely remove export cargo, as well as to complete the delivery of import cargo that was located in the ports at that time.

You have probably heard that one of the container ships of our Ocean Alliance (CMA CGM, COSCO/OOCL and Evergreen Marine Corporation) was in the Port of Odesa at the time the full-scale invasion broke out. As there was not enough time to leave, the ship ended up being stranded in the port for almost a year and a half. It was only in August 2023 that the ship was able to leave. It was the first vessel to sail through the new alternative corridor unilaterally announced by Ukraine to unblock the ports of Greater Odesa.

Speaking about the search for new routes, we worked in several directions. As early as April-August 2022, the container routes between Kyiv and Gdansk, Ternopil and Gdansk, and the container route to Romania were launched.

We started cooperation with the European railway operator METRANS (Editor’s Note: one of the leading companies in the intermodal shipment market). One of the first train services was between the Port of Odesa and Trieste.

CMA CGM participated in the development of new routes. We actively worked on the development of the Romanian shipping route. The majority of our cargo went through the Port of Constanta, where it was delivered mostly by road, as it was difficult, expensive, and time-consuming to transport it by rail.

Dmytro: How does the grain corridor works now after Ukraine’s unilateral announcement has been made?

Oleksandr: It is operating quite successfully. As far as I can tell, it is already beginning to exceed export volumes of the grain corridor that was launched under the auspices of the UN and operated until mid-July 2023. The range of cargoes that move through this corridor has also expanded to ore and metal products, including an occasional import flow.

I hope that over time, container traffic between the ports will gradually resume. Obviously, we are not talking about the pre-war solutions, but at least the containers with export cargo could start to be shipped through the ports of Greater Odesa. This will reduce the logistics costs for exporters and increase the attractiveness of our export for the target markets.

The return of Ukrainian ports to the global map of container shipments is one of the dearest wishes of many container operators.

Dmytro: How realistic is this today?

Oleksandr: In fact, the first step in this direction has already been taken. Back in November-December 2022, Maersk paved the way between the ports of Reni and Constanta. Gradually, CMA CGM, MSC and Hapag-Lloyd started to use this feeder connection. A logical continuation would be to return to deepwater Ukrainian ports.

Due to the full-scale invasion, Ukrainian exporters started to use overland logistics routes. The geography of ports through which the Ukrainian exports are shipped is very wide – from Klaipeda to Hamburg, Constanta, Varna, Burgas, Istanbul, Trieste, Koper, Rijeka and many others. The cost of transportation by land is several times higher than by sea freight. In terms of figures, to deliver cargo from the south of Ukraine, for example, to Constanta, the cost of transportation by land per container ranges from 1.5 thousand to 3 thousand US dollars. There were times when the cost reached 4-5 thousand US dollars. Needless to say, all these factors affect the cost of Ukrainian products. At the same time, safety remains a key factor in all decision-making today. I am confident that if the situation in the southern region does not deteriorate any further, there is a chance to see the revival of container traffic through the ports of Greater Odesa in 2024.

Dmytro: Is the current level of safety sufficient to resume container shipping to a reasonable extent? What is the impact of the Black Sea Demining Agreement recently signed by Romania, Bulgaria and Turkey?

Oleksandr: It is certainly an important agreement with our Black Sea neighbors, and it should come into force in the spring. I don’t know exactly what geography they plan to cover. For obvious reasons, I expect that they will concentrate on international trade routes that pass through the territorial and adjacent waters of these states – the Bosporus, the Black Sea coast of Turkey, Bulgaria and Romania. I hope that eventually they will also start operating along our coast (where the alternative corridor is now), but this will probably require a significant change in the military situation in the region in general.

Dmytro: What role does insurance play in the resumption of port operations? What does insurance look like today, and can it be a contributing factor to the increase in ship traffic?

Oleksandr: Ship traffic is impossible without insurance. As far as I know, for example, when shipping was launched through the alternative sea corridor to the ports of Greater Odesa, insurance premiums initially reached 3%. Now they are well below 1.5%, and sometimes even reach 1%-1.2%. It is a reasonable level of insurance for our region, and it will not have a major impact on the charterers and ship owners’ decision-making (“to go or not to go”). Moreover, guarantees from the state help to reduce the level of risk for the insurers.

Dmytro: Do you mean the measures announced by the government to ensure the financial security of ships transporting Ukrainian agricultural products? Was it reinsurance or additional guarantees?

Oleksandr: Additional guarantees. As far as I know, this is not a pure insurance instrument, but an alternative mechanism for covering losses. At present, the banks, including the state-owned ones, are joining this program. This mechanism is generally similar to insurance. An insurance company based in London, for example, assesses the level of risk coverage in Shipowner’s P&I (Editor’s Note: protection and indemnity insurance is a policy purchased by ship owners to protect them against liability claims from the crew members, passengers, and third parties), whether it is exposed to war risks, what coverage it has, etc. If previously only these factors were considered, now it will be possible to factor in additional guarantees from the state when an insurance club decides on risk coverage. I have not seen any statistics on the percentage increase in the number of vessel calls due to this decision. However, I know that this program has been positively received by major insurance clubs, including the British ones.

Dmytro: In 2023, cargo turnover through our Danube ports exceeded 29 million tonnes, representing a 6-fold increase compared to the pre-war period. The key factor is cooperation with Romania. It is the Sulina Sea Canal, which is one of the corridors connecting Ukrainian seaports on the Danube with the Black Sea, as well as the Port of Constanta. How does it work now?

Oleksandr: There are two routes for servicing the Danube ports. The first one is by the river, i.e. you enter the canal in Constanta to Cernavoda, which is located between the Black Sea and the Danube River, and through it you enter the Danube. On the Danube you go through Reni, Izmail, Kiliya and further. This is the classic route for barges – they are flat, low, and designed to navigate rivers. The second route is through the Black Sea, the Sulina Canal or the Bystre Estuary. The millions of tonnes you mentioned is a truly significant achievement for the Danube ports, which were certainly not in their best shape before the outbreak of the full-scale war. To achieve such a significant result in a year or two is truly impressive. Let’s give a standing ovation to all the participants – port workers, businessmen, investors. They were not afraid to invest in infrastructure development, both in the ports and in the surrounding area, increasing throughput not only by using the existing facilities but also by equipping the ports with all kinds of storage facilities, mostly for agricultural products intended for export. The cargo flows were often diverted to these ports, especially when there was no decision made on the grain corridor or when the Russian side created obstacles.

Therefore, the role of the Danube ports, I am mainly referring to Izmail, Reni and Kiliya, is extremely important. Even in these challenging times, Ukraine continues to be a significant exporter of agricultural products, and this was achieved not only due to the grain corridor. If I’m not mistaken, a total of more than 32 million tonnes of cargo were transported through the grain corridor from the end of July 2022 to mid-July 2023. The Danube ports transshipped 29 million tonnes (a comparable figure) over the year.

Dmytro: I want to understand the role of the Constanta Port, but first, the cargo route – does the cargo go directly from our Danube ports to the intended destination or through Constanta?

Oleksandr: The economic feasibility and the region to which the ship is heading are determined by the size of the ship. For example, you will not go to China on a ten-thousand-tonne ship. First, many of these vessels simply do not have such an open region of navigation, and second, it is economically unprofitable. In order to go for a long distance, you need at least a twenty-five thousand-tonne vessel, or better yet, a fifty thousand-tonne vessel.

That is why some cargo goes directly to the Mediterranean ports, for example, without transshipment in Romania. However, if we are talking about Southeast Asia, the Far East and the Middle East, you need a 20-24 thousand-tonne ship.

In Danube ports, barges carrying 3-5 thousand tonnes are the ones loaded most often. Then they go to Constanta or Galati, where they are unloaded, followed by accumulation of cargo, and loaded onto a large ocean ship for long-distance routes. And that is the role of Romanian ports, particularly Constanta. They serve as transshipment ports for both bulk cargo and a share of containers that are shipped from the Danube ports.

In fact, this approach was used even before the full-scale war, for example, by agricultural producers. It was much more profitable and faster for them to deliver cargo to Constanta via Reni or Izmail than to transport it by road.

Over the past year, Constanta’s cargo turnover has grown significantly – by 46%, and this is largely due to Ukrainian cargo.

Dmytro: Constanta acts as a savior port now, whereas during peacetime it is a competitor port. The topic of port competition in the Black Sea deserves a separate discussion. As a person who sees in practice the port’s operation from the inside, as well as the operation of Romanian and Bulgarian ports in general, what advice would you give so we could compete with them after the war?

Oleksandr: In the pre-war past, I don’t think we competed with them in any way, especially in terms of container shipping. I don’t consider small cargo flows from Moldova that went to the Romanian ports as competition. At that time, the container market of Moldova was estimated at 40-50 thousand TEU per year, compared to our almost 1 million TEU per year. We have great respect for our neighbors, but the numbers are incomparable.

Likewise, the mentioned flywheel of the Danube ports, which spun up during a full-scale war, will not stop instantly. It may be that our region and infrastructure do not need this. The Danube ports will be our alternative corridor. In other words, the coasters can continue to use this route at least from the south of Ukraine.

When the hostilities are over, we will have to fight for the return of at least part of the cargo flows from the nearby ports. We are talking not only about Constanta, but also about Gdynia, Gdansk, Klaipeda and other ports where the Ukrainian import and export cargo went.

It is mostly import cargo, as it is less sensitive to the additional costs during transportation. We need to understand that importers and exporters will not rush to us immediately after the war ends. They will be interested in reducing risks, which means preserving the alternative routes.

We have to find and offer attractive solutions. The price will be important. During the war in Ukraine, logistics costs have increased significantly. Who pays in the end? In the case of exports, sad though it may be, it is an ordinary Ukrainian farmer. The price and terms of delivery will affect our competitiveness. This must be understood by all participants in the logistics chain: road carriers, railway operators, sea carriers, customs, tax authorities, regulators, etc. Cargo is like water – it flows where there is less resistance, i.e. where it is easier and cheaper.

Our ports were quite expensive even before the full-scale war. For example, the same towing services in Ukraine have always been unreasonably more expensive than in Turkey or Spain. At the same time, we did not offer better solutions. For example, mechanization, which would significantly increase the efficiency of loading and unloading operations. Moreover, we had high port charges even before the full-scale invasion. Speaking of infrastructure, there have been no noticeable upgrades or development of ports. The state, as the owner of hydraulic structures, did not invest or made limited investments in the development and deepening of ports, etc.

Speaking of our competitiveness after the war, the issue of reducing port charges to attract cargo will be acute. Ship calls to Constanta are much cheaper. It costs several thousand dollars to haul the ship in Constanta, while in Ukraine the same operation costs tens of thousands of dollars. There is a logic – they will pay anyway, so let’s raise the port charges even more. After all, the logistics chain has already been built and the ships will still be entering the port. But how far-sighted is this? You cannot apply such logic without making improvements. We will need to think about making our port charges competitive with other ports in the Black Sea region. At the same time, I understand that in the post-war period we will need funds to rebuild the infrastructure, and there can be no quick reduction in fees and charges.

Dmytro: How does the situation on the sea routes between Israel and Yemen affect the work of container operators?

Oleksandr: Certainly, this situation has a huge impact on global trade. The vast majority of container carriers have diverted their ships around the Cape of Good Hope and continue to do so. The attacks do not stop, they happen almost every day. And the “list of targets” has expanded. If at the beginning they only attacked ships associated with Israel, now they are also attacking ships with American and British flags. And, as you can imagine, nowadays it is not easy to find ships not associated with these countries. The efforts made by the joint forces in the Red Sea certainly improve the safety of ship passage, but they do not solve the problem completely. It will be difficult to solve it in this way in the near future. I suspect that the danger will remain high and most players, not only container players, will be increasingly favoring the route around the Cape of Good Hope.

Dmytro: Today, the alternative overland routes are being developed, such as the route from Dubai via Saudi Arabia to the ports of Egypt and Israel. How promising is this for the container lines?

Oleksandr: Indeed, the alternative routes started to be developed almost immediately. Overland routes, for example, from Saudi Arabia and the United Arab Emirates to neighboring countries, were launched. It was possible to enter the Persian Gulf, unload the cargo where it was closer and more convenient, for example, in Dammam, and transport it by land, let’s say to Jeddah or further. However, in my opinion, we can hardly say that this is a systemic alternative, because it is too expensive. To get to the Red Sea from the north, for example, you need to make a big loop around Africa and enter the Mediterranean. Some carriers address this issue in a different way: they unload containers going to that region at the entrance to the Mediterranean, for example, near Gibraltar, Morocco, etc. From there, other vessels ship cargo to the Red Sea or to the Mediterranean ports. Still, I do not see all these solutions as a promising alternative to the Suez Canal. The loss of the Suez Canal has in some way disrupted the entire long-haul network. In the past, let’s say on the way out of the Suez Canal, you would call at Port Said, unload some of the cargo on the Mediterranean Sea, and then continue the journey through Gibraltar to Western Europe. Bypassing Africa is too expensive in the long run. Therefore, I think that a new network of routes will be developed to serve this region. Meanwhile, the solution to the situation with the Suez Canal lies in the geopolitical plane.

Dmytro: There is news that CMA CGM has acquired GEFCO and transformed the brand into CEVA Logistics, which is now a global leader in automotive logistics. Are there plans for cooperation between CMA and CEVA on intermodal transportation in Ukraine?

Oleksandr: The integration of GEFCO into the global CMA CGM under CEVA brand certainly brings a major change to the portfolio of our group of companies in terms of logistics, especially in the automotive segment (logistics of finished vehicles and automotive parts). CMA CGM is now paying special attention to this area. The group has ordered and already received the first vessels specifically designed to transport finished vehicles, the so-called car carriers, and it is developing this area with the understanding that there is a lack of capacity in the sector.

We enhance the expertise and capabilities of CEVA Logistics (with already integrated GEFCO) with the approaches and understanding of the shipping industry specifics that the group has as part of CMA CGM’s core business. For example, we are trying to expand the breadth of offerings for CEVA customers. We are working on the synergy between CEVA and shippers in terms of intermodal transportation, documentation services, customs and brokerage services. We are also helping them to enhance their container shipment capacity. However, all of this is done at the global level.

As for Ukraine, we maintain contact with our colleagues at CEVA Logistics, but for now it remains just a contact. The global integration process took place in challenging times for us. The group’s business in Ukraine is in survival mode. First of all, we are not thinking about the development, but about how to maintain our presence in the market and continue to provide services to our customers. That is why we have not started any integration processes with CEVA in Ukraine yet, but it is a matter of time.

Dmytro: You have been the head of Container Lines Association of Ukraine since 2016. How do you assess the work of the Association, does the government “hear” you? What urgent tasks do you tackle?

Oleksandr: During the full-scale war, the Association’s activities have significantly reduced. We mainly worked in dialogue with the Ministry of Infrastructure and the Ukrainian Sea Ports Authority (USPA). Since the infrastructure is not being actively involved at this stage, the Association members did not have any issues.

Before the full-scale invasion, we were quite successful in combating discrepancies in port charges, for example, in the Port of Odesa, and actively discussed regulations for the container shipping market. In many cases, we managed to convey the position of the Association members. The last topic we dealt with before the war was the permanent establishments (Editor’s Note: starting from 2021, non-residents are required to register with the tax authorities if they operate in Ukraine, in particular, through permanent establishments. The Tax Code of Ukraine does not provide any exceptions for the container shipping business and does not factor in the specifics of shipping business taxation under the double tax treaties). We are expecting some unpleasant surprises from the tax authorities in this regard. We did not manage to prove our position due to the outbreak of the war.

I would set myself the task of resuming the Association’s activity after the war is over. As we discussed today, many carriers have significantly reduced their presence in Ukraine. Everyone has focused on their own businesses and there is no way to speak as one voice now. We will put everything together later.

Dmytro: At the beginning of last year, CMA CGM experimentally introduced a windshield technology on one of the container ships to help reduce greenhouse gas emissions and fuel costs. What are the results of the experiment? Continuing the topic of sustainability, how does the EU Emissions Trading System for Shipping Industry apply to Ukraine and how relevant is it for the lines?

Oleksandr: It is relevant right now, as it started operating on 1 January. By the way, this is another reason why the route around the Cape of Good Hope is very costly. The vessel spends an additional 20 days or more on its rotation between Asia and Europe, which, of course, increases emissions. As a result, there are higher fees to be paid for emissions. In addition, we already have to pay greenhouse gas emission fees for cargoes that go to or from European ports. At the same time, a vessel leaving the Port of Odesa or another Ukrainian port without entering European ports is not subject to the said regulatory act.

Container carriers are now putting significant efforts into reducing their carbon footprint. There are plans to cut emissions by 50%. This requires huge investments in both the existing technologies and the development of new ones.

CMA CGM was one of the first companies to launch a series of LNG-powered ships. Now there are vessels adapted for both LNG and methanol. Each company has its own extensive program aimed to reduce greenhouse gas emissions. In addition, the major carriers are joining efforts (CMA CGM, Maersk and Hapag-Lloyd) in the field of sustainability, for example, in terms of alternative fuels, development of new engine types, etc. This is a huge challenge that needs to be addressed jointly to reduce both the industry’s environmental impact and the financial burden on our customers.

Dmytro: Here, in 2024, our conversation would be incomplete without talking about AI. What is the role of AI in the international maritime logistics today and tomorrow?

Oleksandr: It is becoming increasingly important. Certain elements of artificial intelligence are becoming more widely used in analytics, in solutions related to customer data processing, etc. Based on my observations, AI is increasingly being used for the company’s internal systems, which I cannot talk about. It includes analysis, forecasting, and many other things. We are talking not about ChatGPT, but about solutions that allow us to get an additional dimension for a huge amount of information we work with every day. And the impact of AI will continue to grow.