Trends in Supply Chain Risks: Why Container Ship Fires are Here to Stay

Trends in Supply Chain Risks: Why Container Ship Fires are Here to Stay

Executive Summary

  • In early 2019, two of the world’s largest container vessels caught fire, highlighting an accelerating trend and the growing need for companies to manage this new type of supply chain disruption
  • Insurance companies estimate that major fire on a cargo vessel at sea occurs every 60 days
  • Containerization of seaborne trade, larger vessels, and wrongly declared dangerous goods are key factors contributing to the increase in ship fires
  • Out of the 38 recorded fires on container vessels since 2000, Maersk Line has been most affected with 5 fires
  • Fires aboard container vessels can cause material damages, long delays of shipments, and higher costs for salvage efforts, disrupting supply chains relying on sea freight
  • To mitigate the risk, customers should monitor their vessels in real-time, evaluate the safety record of partners, and opt for proper insurance of their goods 

Background

Since the beginning of the year, a number of fires have broken out on some of the world’s largest container ships, underscoring an accelerating trend over the past decade and the growing need for companies to manage this new type of supply chain disruption. While the risk of container fires is low compared to the thousands of journeys that take place each year, it is the third greatest cause of total cargo loss at sea since 2010 behind ship sinkings and groundings, according to the 2019 Allianz Safety and Shipping Review.

Figure A: Largest container ships affected by fires since 2000; red bars indicate fires that have occurred between 2018 and 2019; Source: Everstream Analytics; publicly available information

At the beginning of 2019, the Hapag-Lloyd-operated Yantian Express and the CMA CGM-owned APL Vancouver, two of the largest ships in the world as shown in Figure A, were both hit by fires on board which took weeks to be brought under control. In the case of the Yantian Express, as shown in Figure B, Everstream Analytics incident data revealed that following the fire outbreak on January 4, it took almost five months for unaffected containers on the vessel to reach their original port of destination in Halifax on May 21. Both ship incidents came about a year after the ultra-large container vessel Maersk Honam, the world’s third biggest container ship, caught fire in the Arabian Sea, drifting at sea for months and causing losses of more than USD 100 million. 

Figure B: Timeline of the fire on the container ship Yantian Express, based on selected Everstream Analytics incidents; Source: Everstream Analytics

As container vessels become ever-larger and while goods worth millions of dollars are being stored on them for weeks, onboard fires can have devastating impacts on supply chains ranging from cargo loss and insurance claims to unfulfilled customer deliveries and even insolvencies for medium-sized companies. Insurance company Allianz SE estimates that losing a large container ship in an environmentally sensitive area could cause USD 2-4 billion in damages, liability, environmental impact, and salvage costs.

As supply chain managers have limited options once a fire breaks out on a container ship, it is even more critical to understand the risks involved in container ship fires and the options that exist to protect cargo.

Factors Contributing to the Increase in Container Ship Fires

Container ship fires 2000-2019. Source: Everstream Analytics; publicly available information 

A fire on a large container ship is still rare relative to the overall number of currently operated vessels. However, Everstream Analytics data and publicly available information on container ship fires since the year 2000 highlight that such incidents are becoming increasingly common. In a recent report, logistics insurer TT Club suggested that a major fire on a cargo vessel at sea may occur every 60 days. While there has only been one reported fire on a container vessel between 2000 and 2005, 19 such incidents have been reported already between 2016 and 2019. The largest ship to have suffered a fire incident to date was the then United Arab Shipping Company (UASC)-operated MV Barzan in 2015, which can store up to 18,800 TEU containers.  

Several reasons have contributed to the dramatic increase of container ship fires in the past 10 years. First, due to its low costs and the ability to carry large volumes, seaborne vessels now account for about 90 percent of world trade, with a large part of it being transported in containers. The potential damage from a fire incident has grown as carriers have moved to stack more containers on a smaller number of ships. 

Infobox: Dangerous Goods
Dangerous goods (DG) are materials or items with hazardous properties which present a potential danger to their means of transport. The International Cargo Handling Coordination Association estimated in 2016 that 5.4 million containers are packed with DG every year.

Second, to further improve efficiency and economies of scale, container ships on major trade lanes between Asia and Europe and Asia and North America have become larger, with some achieving loads of 20,000 twenty-foot containers. The corresponding firefighting equipment, however, has often not been upgraded and is insufficient to contain a major fire. In its 2019 Safety and Shipping Review, Allianz SE noted that the need for considerable outside assistance to control a fire is likely to exacerbate the extent of the damages due to the time required to get firefighting vessels to the scene.

Third, wrongly declared Dangerous Cargo (DG), including incorrect labeling and packaging of goods, is believed to be the root cause of a number of fires. Around 10 percent of all containers contain DG (see Infobox: Dangerous Goods) which are often stored in inaccessible parts of the ship due to incorrect declaration. This leaves the crew with limited ability to quickly intervene and put out a fire, which they could on the main deck. Some shippers are allegedly motivated to deliberately wrongly declare DG in order to save costs.

Source: Everstream Analytics; publicly available information 

Last but not least, a culture of safety may have an impact on the likelihood of fires breaking out onboard of a shipping line’s fleet. Out of the 38 recorded fires on container vessels since 2000, Maersk Line has been most affected with 5 fires. Following the high-profile fire on its ship Maersk Honam, the company started to randomly conduct physical inspections of containers to remove some of the risk from wrongly declared or incorrectly loaded containers. It will also no longer store dangerous goods cargo near crew quarters or engine rooms, while cargo classified as fire-resistant will always be placed above deck. Other companies such as MSC and Hapag-Lloyd, which have each been hit by 4 fires, have so far not announced similar inspection or safety measures. 

It is, however, important to put the number of container ship fires per shipping line into the context of each company’s fleet size. Both Maersk and MSC own or operate by far the most container ships, whereas CMA CGM, the third largest container line in terms of fleet size, has only been affected by 2 fires, despite owning more than twice as many ships as Hapag-Lloyd-UASC. COSCO, the fourth largest shipping line, has yet to be hit by a major ship fire after it bought China Shipping Container Lines, which was affected by one fire.

Why Fires on Container Vessels Pose a Threat to Supply Chains 

There are a number of reasons why container ship fires are particularly damaging and should be factored into supply chain risk management efforts. 

First, when they occur, they can cause widespread material damages not only to containers in the vicinity of the fire, but also to ones that are initially unaffected. Damages can, for example, result from smoke, heat, firefighting water, and power cuts of refrigerated containers.

Infobox: General Average
General Average (GA) is a principle of maritime law which stipulates that damage and salvage costs are to be shared among cargo owners in proportion to the cargo value. However, as most containers are not insured, customers could have their goods auctioned to pay GA expenses. 

Second, if the fire breaks out while the ship is on an intercontinental journey, it can take several weeks or even months before the fire is fully extinguished and the ship arrives at a port of refuge for safety inspection and unloading. This means that in some cases, more than 10,000 containers storing valuable material intended for production processes or for final customer delivery will be unavailable for weeks, potentially causing stock-outs of key components and production outages in manufacturing industries. Companies are then forced to turn to costly air freight for emergency shipments, with smaller and medium-sized companies potentially at risk of financial difficulties or even insolvency. 

Last but not least, even customers with containers that remain unaffected by the fire may be obliged to pay to recover their cargo if it was stored on the affected ship. This is regulated by the General Average rules, a principle of maritime law where damages and salvage costs are shared among the cargo owners in proportion to the cargo value (see Infobox: General Average). Customers with cargo worth USD 100,000 on the Maersk Honam faced total costs of USD 54,000 to have their cargo released. 

What Customers Can Do to Protect Their Cargo

  • Monitor vessel movements in near real-time: Supply chain visibility tools allow customers to track their ocean freight cargo in real-time, pulling data from AIS sources and calculating ETAs to maximize supply chain and planning visibility. Should a vessel reduce speed dramatically or stop moving altogether, customers can receive alerts, contact carriers for confirmation, and activate business continuity plans which may involve using emergency air freight.
  • Select shipping lines and freight forwarders with a culture of safety: Customers should gather information on which carriers are actively trying to reduce the risk of container ship fires by improving their culture of safety. When selecting container lines and freight forwarders, shippers should pay attention to those which regularly inspect containers and have a track-record of declaring cargo correctly. 
  • Ensure that high-value cargo is properly insured: All shipping carriers are obliged to offer a minimum amount of insurance, albeit with limited coverage. In addition to covering any loss or damage to the cargo itself, most marine insurance policies also cover the cargo owners’ liability to the ship owner for general average. In the case of APL Austria which caught fire in 2017, cargo owners without insurance were required to provide a cash deposit of 28 percent of the invoice value of the cargo as contribution to the general average, demonstrating that being left without appropriate coverage can add to the financial impact of container ship fires.
  • Consider legal action if carrier failed to correctly stow cargo: According to law firm Norton Rose Fulbright, cargo owners are also likely to be successful in claims against a ship owner if it can be demonstrated that the ship owner or carrier failed to correctly store dangerous or hazardous cargo, provided that such cargo was correctly declared. Hence, taking legal action may be a possible, though lengthy, means to recover some of the costs incurred. 

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