A Post-Covid Future?

We are probably all considering the reality of our lockdown lives now that the novelty has worn off and, for those of us in COVID hot spots like the UK, we face up to ‘the new normal’, whatever that may be.

In the background of our own personal experiences is our professional one for shipping. What will actually change in the long-term to become the ‘new normal’ for the global economy and its demand for the seaborne shipment of carbon-based fuels, such as coal and oil?

Among the plethora of COVID-related research was a recent article regarding what shipping can expect in 2H 2020 and beyond, in which the author stated (seemingly without irony) that dry bulk shipping will have had 14 bad years in a row by 2022. It is hard to see how a run of 14 years is anything but the norm! These so-called bad years (which for most of us would be considered normal really) would have been a whole lot worse were it not for the insatiable rise in production, trade and consumption from CO2-emitting industries.

Graphics and figures are aligned that in 100 years global CO2 emissions have grown from 3.8bn tonnes per year to 36.1bn tonnes a year in 2019 (various sources). Not exactly great and nothing here for shipping to be proud of as the majority of this growth is attributed to coal and oil, mainstays of the shipping trade. The figures that are most concerning are that global temperatures (that rose 1 centigrade since the mid-1850s) will rise 3-4 centigrade by 2100. OK, so that’s the doomsday news on climate change. Here comes the doomsday news for COVID!

Major financial crashes and epidemics don’t bring any good news for global trade and are demonstrably awful for shipping demand, at least in the short-term. The financial crash of 2008-09 was a big one, but carbon emissions (according to IEA data) only fell 450m tonnes year-on-year, which is less than after World War II, where emissions dropped 800m tonnes, and a far greater percentage. The 1980s recession and the oil crises of the 1970s dropped emissions by around 1bn tonnes each. So a short-term crash has historically not meant any long-term change in demand or consumption. However, two things about the Corona pandemic mark it out as different: the scale and the backdrop.

 

Unprecedented Scale....

In terms of scale, IEA estimates for oil demand show around a 6% drop (corroborated by other research); that’s the size of a major economy’s worth of demand lost. This has happened in under three months. The knock on effect is a reduction of around 2.5bn tonnes of emissions. The tanker markets are toasting high rates, but their fleets are filling up storing a commodity with loss-making value that has lost 60% of its demand. Is that sustainable?

Traffic in the UK is down to levels last seen in the 1950s. There are no traffic jams in Los Angeles. NOX clouds (‘smog’) have cleared over numerous major global cities. Electricity consumption is down 20% year on year at present. Falls in demand are akin to the Great Depression of 1930s. Things most definitely ain’t what they used to be.

Despite the images of belching chimneys from coal-fired power stations (incidentally coal trade is likely to be down 8-10% year on year in 2020 according to our own figures), it is not coal that is the key factor. Despite its size, figures and research have become bar room reality that coal is on an inexorable decline. We’ll come back to that shortly, but air and road travel demand (note that the popular press are not highlighting shipping just yet), or lack of, has been the major contributor to CO2 emission reductions. 

 

..against a changing Backdrop

The different backdrop is the level of commitment, governmental and non-governmental as well as consumer will, to permanently reduce consumption, change the means of production and actively address climate change and sustainability. In 1945 it was virtually zero, today in a poll of shipping leaders by Tradewinds, every single one mentioned climate change in some way or another.

When it comes to oil, this appears to be an area that the public understands well and want to affect change immediately. Quoted in a recent BBC article, a spokesman from Rystad Energy, an independent research company, quoted a drop of 10m bpd in oil consumption over 2020 compared to 1.3m bpd in 2009. Shipping in terms of bunker consumption is right at the heart of this drop, although to quote global numbers and apply them to regions is somewhat misleading. Those regions where power is mostly provided by renewables, nuclear and gas are showing the highest impact on CO2 emissions, while those relying on thermal coal are showing reductions of emissions in line with the 8-10% reduction in coal trade.

In terms of the coal sector and its inexorable decline, the example of Europe from 2008 onwards is a reasonable one to compare today’s issues with. The decline in power demand in 2009 was reversed within two years, but the increasing demand was met by renewables in the form of wind and solar. European peak coal-fired power appears to have been around 2005, with the US also at least a couple of years past its peak already. The current global trends could in theory imply that global coal demand (and oil demand too) are past their peaks. However, in each of the last five global economic crises there was a sharp bounce to follow. Not an impossible scenario at all.

To meet targets for emissions and climate change, cuts like the current one would have to come every year until 2050 to meet targets. We need the equivalent of the current crisis for another 30 years! Lockdown can make drastic temporary changes as can be seen today, but is miles off the answer. It will take huge policy changes that will destroy the carbon-based business model for the future. To put it simply, if you are in the coal or oil business you won’t be for much longer if climate control and emissions policies are to be respected. Oil States better prepare to be warm or broke, or reinvent their economies in a painfully short time-span.

 

How will Shipping adapt?

There are some obvious takeaways from the current crisis and how it will change the future for shipping, let’s assume that everybody is interested in securing the planet’s future, so the current situation gives all of us an insight into our lives over the next 30 years where cheap cars, coal-fired power, airline tickets for USD 30 are all going to be going or gone. A friend informed me that the true cost of a fully organic carbon neutral Christmas turkey is around USD 90. Food of the Gods in the future! Investments in infrastructure projects will have to be reviewed quickly (a third runway for Heathrow anyone?) as USD 100bn spent on improving access to broadband will be valued far higher post-lockdown and seemingly very acceptable rather than projects facilitating pollution. Down goes steel demand too then.

Even if (and that seems such a big ‘if’) everything in the global economy can be put back the way it was before this crisis, why would that be desirable? It would seem unwise to rebuild a house that got washed away by a flood in the same spot to the same design. Despite protests from those of us that value proper grammar, a ‘build back better’ campaign is taking shape. A favourite criticism of global emissions targets is that it is not possible to stop the developing World from using the path that the developed World took to get to where they are today. This ode to gloom is now being tested, based on why exactly would the developing World be wanting to build economies that are being shown to pollute, cannot reverse the use of out of date and unwanted technologies, use unsustainable measures for growth, over-consume, produce vast excesses of waste and have a system that the people work to maintain rather than one that serves the people. Considering that it is generally acknowledged that the biggest losers in climate change scenarios is the developing World then the ground to try to build something better there is proving fertile.

 

Conclusions?

Dry bulk seems very unlikely to come back to how it was pre-crisis, ie 14 bad years! They might turn out to be the golden years if current emissions targets are to be met by 2050. And if that is the case, then it would appear that the changes that will be enforced on the industry will leave little of today’s structure behind. In order to even have a vague attempt at meeting these targets then shipping will never be the same again. And that’s just emissions. Sustainability is a whole other, far more aggressive, ball game.

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Published on 20 May 2020

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