Wednesday, April 29, 2020

Stopford - Covid and Climate Change: Two big challenges to the Shipping Industry



Yesterday listening to Martin Stopford's interesting presentation in a Capital Link event and lengthy Q&A session, it seemed to me that the two major drivers of events shaping the shipping industry today are Covid and Climate change.  They have a number of similarities. They have far ranging effects on world trade and ship technology that will affect the future.

Covid crisis and climate change start with natural phenomena that have morphed into highly contentious political issues due human response to them and the ensuing politics involved, particularly in the EU and US. 

Viruses and microorganisms are as old as life on the planet.  New viruses appear all the time.  Coronaviruses are well known and this is a new strain of this existing family.  We have had virus outbreaks from China repeatedly in the past years like SARS and H7N9.  Nobody panicked  and eventually these new strains took their course through natural means with human immunity and some efforts for vaccine,  Vaccines are simply an artificial means reinforcement of human immunity systems that would otherwise develop antibodies in reaction to exposure to the virus.  Ultimately there is no other way to deal with viruses.  The human race would have long ago become extinct from viruses if there were not biological immunity systems.

What is startling in the case of Covid is the political response to it that was first initiated in China by mass lockdowns/ social distancing of the healthy population and economic shutdown of production. Historically quarantines in reaction to infectious diseases were done by isolating sick people from the general population and holding travelers from infected areas for a certain period before entry into national territory.  

The Chinese government shutdown had an immediate effort on the shipping industry with a reduction of port cargo movement of 20% on the average, affecting the container industry negatively, forced to blank sailings and facing box build ups in Europe from the imbalances produced by the factory shutdowns in China.

Then there was an even more damaging and recessionary impact on the shipping industry with Western Governments collectively adopting the Chinese lockdowns and imposing them on their populations, quarantining large segments of their healthy population in fear of exposure to the virus, something never done before in human history.  

This has caused a great deal of instability for global shipping. There are projections of significant reduction in world trade this year,  Ship operations have become challenged due difficulties to carry out surveys and repairs. Normal crew changes have become a major problem to carry out .  Economic impact varies by sector.  
  • Container shipping was looking to recover with Chinese reopening of factories and increase in port cargo volumes in March, when it got slammed by the recessionary impact of the lockdowns in Western economies that created even deeper losses of revenues and blank sailing. Major container lines have been plagued by poor earnings margins for years.  Some were just beginning to turn profits in 2019.  Now all these major liner companies are likely this year to go back into operating losses.  Stopford feels they will eventually muddle through this, depending on the speed that Western government reopen after lockdown and the severity of the global recession.  Stopford feels that large containerships were always a problematical response to the structural problems of the industry.  Globalization is over after Covid and trade is likely to evolve more regionally.  The use of these units will be restricted and the transport needs will be more for regional distribution.
  •  Conversely the tanker sector has been enjoying a bull market with record rates.  This in related to failure of OPEC to extend production cuts and a new price war, when at the same time Western mass lockdowns have provoked a significant drop in oil demand.  The system is flush with oil from overproduction.  This has resulted in a surge of demand for tankers both for transport and storage, even backing into product carriers from refinery overproduction.  Ironically this situation will eventually result in obligatory and severe cuts in oil production and a dead tanker market with fewer hydrocarbon cargoes ahead.  Stopford pointed to the inherent weakness of the tanker sector in his presentation.  For now the tanker companies are the darlings of investors and flush with cash and profits.
  •  Dry bulk is more mixed and nuanced here.  This sector has not been very profitable for at least 10 years, except for short rate spurts in certain segments.  The large bulk carriers depends on the steel industry,  coal and iron ore cargoes.  This segment had an awful first quarter with BDI indexes going into negative territory. Stopford does not see a very bright future here for these units with a maturing Chinese economy and the likelihood of stimulus spending to be more focused on technology rather than further infrastructure projects.  The smaller units will fare somewhat better. Panamax units carry more diverse cargoes like grain that are driven by other factors than the steel industry. The smaller sizes carry a much wider range of cargoes, including minor bulk trades.  More of this is related to foodstuff and general population needs. These segments will muddle through the crisis but present rates are low.
Stopford sees a secular trend towards regional trading zones with production closer to consuming areas.  He outlined three recovery scenarios.  All this is related to Western governments and how they manage the reopening of their economies.

This is entirely a political issue and it will have big effects on the depth of any recession. The drop in world trade will be milder than drop in GPD, but the effect on the shipping industry will be far reaching.

I see this as complicated political issue, not directly related to the virus. Western governments have taken unprecedented actions imposing drastic restrictions on their populations and curtailing basic civil liberties like freedom of assembly and religious worship.  All this together with significant social and economic cost on their populations that has led to the specter of global recession.

Scientific studies are beginning to indicate that there is nothing novel about this virus.  Infection rates on general population are much higher than originally anticipated despite the lockdown measures.  Death rates are much lower than wildly inaccurate early studies from places like Imperial College.  There is no easy way for the political class to reopen quickly.  They are fearful of the future political cost of their actions.  How this unfolds in the US and EU depends on the boldness of the political leadership and their effectiveness to return to normalcy and limit damages by getting their populations back to work and reflating their economies with the stimulus programs.

Despite the three scenarios, Stopford closed with a hopeful note that by fall, most of this Covid crisis will be over.  We shall see!

Climate change and environment regulation has taken the back seat due Covid crisis but this is a similar case of politics overwhelming natural phenomena and creating considerable challenges.  The earth has underdone significant changes in climate for millions of years. Anthropogenic causes by burning hydrocarbon fuels are a very recent phenomenon.  Carbon is essential for life on the planet.  There is a natural recycling of carbon from plant life back to oxygen.  Science is even more divided over these matters than Covid and human immunity systems.  The climate depends on so many other unquantifiable factors such as solar radiation and tilt of the earth.

But the present political consensus like the massive Covid lockdowns is that carbon is bad and greenhouse gasses GHG must be reduced and eliminated.  IMO has adopted GHG targets for 2030/ 2050 for which there is presently no technological means to comply.  The EU dominated by Northern European Green parties wants even more drastic measure such as a carbon tax trading scheme imposed on the shipping industry.  Like the Covid lockdowns, these measures will have negative economic impact on their populations, particularly the poorer classes.  There have been mass protests like the Gillets Jaunes in France in reaction to government taxes on fuel, just as in the US there are increasing protests against the government lockdowns. But generally the political class stands firm on these matters and it is not easy for them to back down in terms of their positions for the political cost.

For the shipping industry, Stopford points out that diesel and fossil fuels are far more efficient technologically than alternative fuels.  There is much higher energy content in the fuel.  It can easily and safely be stored on vessels and it does not take much space.  For these reasons, Stopford feels that diesel propulsion is the only alternative for the next generation of ships with a lifespan of another 20 years. 

The innovations in shipping for less fuel consumption and GHG levels will come from 'smart' ships with messages via CPU modules replacing wires, as Stopford puts it.  I would add this would also dictate more use of digitalization and software maximization programs in the offices linked to the vessels that they manage.  Metis - a Greek software system -based on the internet of things is a good example and a number of leading Greek Shipping companies have adopted it.

Stopford then outlines a growing use of LNG and dual fuel vessels. New technologies like this are more easily implemented in short sea shipping in early stages. Already this is the case for use of LNG in the cruise industry and tanker feeder vessels in Europe, for example.  This will lead to a new generation of vessels that will start to replace the  'smart' diesel/ fuel oil vessels. 

Then rather far out, Stopford sees electric vessels with fuel cells powered by hydrogen, etc. None of this is close to reality today.  The fuel cells cannot produce sufficient power and the new fuels presently can  only be produced from processed that create GHG that must be sequestrated.  Many of alternative fuels are noxious and difficult to store on vessels.

It is very intriguing to note that the same political class that supports decarbonization and vigorous climate change regulation also support with passion the mass lockdowns in reaction to the Covid virus  Many are extolling the positive results from the mass lockdowns on the environment with the drop in air and land transportation and falling demand for hydrocarbon fuel. They are the ones most critical to attempts to reopen economies and get people back to work. They are advocating universal income guarantees and green new deals for stimulus as long term solutions. 

They are not keen to return to the status quo.  They are not particularly troubled by adoption of  restrictions of movement and civil liberties on the general population. They tend to be indifferent to empirical scientific method and how it may evolve over the particular ideology that they promote to support their policies and actions.  They are not especially concerned about the social cost and economic hardship on the general population from their decisions. They place more important on their longer term ideological political goals that they feel are good for society and their political careers.

We will see in the next few months how this political debate evolves and how soon we reopen. The political climate is looking toxic and divisive. Inevitably we are entering a new post globalization era for the shipping industry with far reaching consequences.  Stopford parallels the challenges as analogous to the transition from sail to steam in the 19th and early 20th century.  The political and economical ramifications are huge.











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