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Sunk Costs: COVID-19 And The Maritime Industry – Analysis

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The dependence on China’s demand and exports has driven the shipping industry for too long and has increased risks for the entire supply chain.

By Gayathri Iyer

The rapid spread of the covid-19 worldwide has had a major impact on global markets. The World Trade Organisation predicts that “world trade is expected to fall by between 13% and 32% in 2020 as the COVID-19 pandemic disrupts normal economic activity and life around the world”.

The shipping industry, at the forefront on international trade enabling 90% of world trade at roughly USD 12 trillion, is facing large scale disruptions the likes of which hasn’t been seen in decades. Due to the nature of the shipping industry being heavily dependent on travel and human interaction, it has been impacted materially both directly and indirectly from the outbreak of COVID-19 pandemic.

China has long occupied a central position in the global movement of goods as the world’s largest exporter. A major trade partner for numerous countries and a key leader in shipbuilding, prosperity within the shipping sector has been strongly tied to China for the past two decades. As the virus originated in Wuhan, China and the country has seen the earliest and the worst impact which, in turn, set into motion the slowdown of international trade worldwide. The rapid internal spread of COVID-19 from the beginning of 2020 was met with a record decline in ships calling on Chinese ports. As the country went into lockdown, China saw a sharp fall in its manufacturing Purchasing Manager’s Index (PMI) from 51.1 in January to 37.5 in March, its lowest since 2004 and its economy shrank 6.8% causing ripple effects worldwide.

With about 20 percent of global trade in manufacturing intermediate products originate from China and foreign manufacturing companies dependent on China as the main supplier of intermediate products felt direct economic impact even before the virus spread worldwide. The drop in trade volumes to and from China has and will lead to substantial financial losses for months to come.

In this time of global crisis, the importance of keeping supply chains open and allowing maritime trade and cross-border transport to continue cannot be stressed enough. Most international organisations like the IMO, ITF, UNCTAD have urged nations to support the flow of sea trade as restrictions will cripple not only seafarers but countries that rely heavily on overseas supplies.

However, the possibilities of carrier operations running business-as-usual are bleak. Shipping Operations, terminals, ports, etc., have been heavily affected due to personnel advised to refrain from traveling or reporting to work to prevent the spread of the virus. With container ship crew reporting COVID-19 cases, most ports have started quarantining vessels for fourteen days before they enter the ports. This has also significantly fed into the increasingly negative impact on global trade due to the delays in exchanging containers and indicating decline of economic activity.

Ship building has reached an all-time low as many shipyards issue force majeure declarations seeking to extend delivery deadlines. Demand for raw material and commodities has dropped, pushing freight rates lower. The global shift towards larger container ships for trade has been an important factor at play as missed port calls and reduction in cargo has a more pronounced impact.

Crude oil carriers seem to be the less affected through the crisis as oil importing nations and traders rush to purchase large amounts of oil to furnish strategic reserves at record low prices. However, with China being a significant importer of crude oil, the reduction in Chinese economic activity has started negatively effecting crude oil tankers. The oncoming recession in the global economy also predicts a sharp reduction in energy demand for the next few quarters. The indications of stress in the sector are already visible in the downstream sector of the oil value chain.

UNCTAD’s collation of real time shipping data collected using Automated Identification System (AIS) has shown a change in the operational behaviour of container vessels and in the amount of oil products on the water by tracking vessel positions and cargo aboard ships. The volume of the crude, especially diesel, in floating storage or aboard idle or not moving ships has soared. The indication of idle diesel in storage is especially significant as it is used to measure industrial activity due to its extensive use as transportation fuel for small ships, power trucks and heat factory furnaces. The slow-down in the its use sheds light on the scale of disruption in the supply chain globally.

However, while the predictions for the recovery and future stability of the shipping industry seem rather slow and bleak, experts believe that the disruption due to the pandemic will prove to be a catalyst for the radical reshaping of the shipping industry. The pandemic has exposed the glaring defects of the global supply chain network.

The dependence on China’s demand and exports has driven the shipping industry for too long and has increased risks for the entire supply chain. Protection from such shocks in the future will be designed around increased regionalisation of trade and shortening of supply lines to help increase resilience. Digitisation and technology innovation will play a key role in resetting the distribution network. Greater investment in intelligent freight technologies will enable better tracking, monitoring, facilitation, integration and information sharing. This will help in providing data analysis and increase the end-to-end supply chain management by connecting the different stakeholders and players of the maritime industry to optimise operations and industry resilience. The crisis will see an accelerated push for growth in autonomous transportation paving the way for a cheaper, more efficient and resilient industry.

The views expressed above belong to the author(s).


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Observer Research Foundation

Observer Research Foundation

ORF was established on 5 September 1990 as a private, not for profit, ’think tank’ to influence public policy formulation. The Foundation brought together, for the first time, leading Indian economists and policymakers to present An Agenda for Economic Reforms in India. The idea was to help develop a consensus in favour of economic reforms.

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