Profitability of the Northern Sea Route for liquid bulk shipping under post 2020 sulphur regulations

Purpose: The purpose of this study is to evaluate the profitability of the Northern Sea Route (NSR) as a shipping lane from the financial perspective of shipping companies under post 2020 sulphur regulations. Design/methodology/approach: This study develops profit estimation model, and the profitability of the NSR is assessed for a Handymax Medium Range (MR) tanker vessel using scenarios in combination with spot market earning levels, the regulation compliance method and destination ports. The required freight rates are calculated to justify the decision of shipowners to transit a tanker from the Baltic spot market to the NSR navigation. Findings: Results suggest that the required freight rates from the Arctic trade to justify the transit to the NSR are higher than the actual agreed rates in the past, which implies low viability of the NSR as a regular shipping lane. It was also found that the required freight rates are affected by the spot market earning levels, compliance method and duration of the voyage. Research limitations/implications: This study takes a new approach on assessing the NSR viability by comprehensively assessing the annual profitability and including the spot market trade as an opportunity cost for the NSR shipping. Despite various scenarios used in this study, a sensitivity analysis would be useful for future research. Practical implications: This study suggests how much freight rates a shipping company would need to charge if it were to offer tanker shipping services to four major Asian ports while simultaneously operating at the Baltic Sea during the remainder of the year. Originality/value: This study adopts a market-oriented approach by incorporating both earnings and costs (including opportunity costs) in the profitability model rather than merely analyzing the total cost of shipping via the NSR. This study also analyzes impact of IMO 2020 Sulphur regulation on the NSR profitability.