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IMO 2023 – Shipping Industry Sailing towards a Greener Future but Unsure of the Route

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The shipping industry plays a vital role in global trade. The majority of goods are transported by sea, and most shipping vessels currently rely on marine fuels such as Marine Diesel Oil (MDO), Marine Gas Oil (MGO), and Heavy Fuel Oil (HFO). One of the main reasons is that these fuels are cheaper and readily available, however, they are not environmentally friendly. The shipping industry discharges a significant amount of carbon emissions, therefore, decarbonization and eventually reaching zero carbon emissions in this sector has become imperative. The United Nations agency responsible for regulating shipping, the International Maritime Organization (IMO), aims to reduce ocean-vessel emissions to half by 2050. To meet the target, the shipping sector is looking to switch to alternative fuels, however, the feasibility of this change still remains to be assessed.

The shipping industry accounts for a vast proportion of global trade as a result of rapid growth in cargo transportation due to increased globalization and e-commerce. According to the International Chamber of Shipping, 90% of global trade is transported by sea, hence perpetuating carbon emissions in the shipping industry. According to a study published by the European Parliament, the shipping industry could be responsible for up to 17% of global carbon emissions by 2050. In comparison, in 2021, the sector contributed to about 3% of worldwide greenhouse gases. This significant increase in carbon emissions by the sector is resulting in increased pressure on the shipping industry to reduce its carbon footprint.

In an attempt to reduce emissions, IMO has adopted the Energy Efficiency Existing Ship Index (EEXI) and the Carbon Intensity Indicator (CII) rating regulations. While the EEXI is a rating system that assesses the energy performance of existing ships based on speed, power, and engine size, the CII rating uses a ranking system to monitor the efficiency of individual ships. Under the CII rating system, each vessel will receive a ranking from A (good) to E (poor) starting in 2023. Ships receiving grade D for three years or Grade E for one year will have to put a corrective action plan in place. These new sets of regulations have been in effect since January 2023 and are a part of IMO’s Greenhouse Gas Strategy (GHG) that aims to reduce the carbon emissions from international shipping by 40% by 2030 and 70% by 2050 compared with 2008 levels.

Shipping is a highly capital-intensive industry with a great dependence on fossil fuels. Most vessels are still dependent on traditional marine fuels and would require significant investment in infrastructure to transition to zero-carbon emission fuels. A 2020 study by the University of Massachusetts estimated the total cost of decarbonization efforts would be about US$1.65 trillion by 2050 to create apt infrastructure to support zero carbon emission fuels. With shipping being the backbone of international trade, trade volumes are expected to grow continuously, resulting in an increase in carbon emission, which will further push industry players to invest in alternative carbon-efficient fuel.

IMO 2023 – Shipping Industry Sailing towards a Greener Future but Unsure of the Route by EOS Intelligence

Alternative fuels have limited availability and cost restrictions

Currently, there are three primary fuels that are used in ships – MDO, MGO, and HFO. All three fuels are made from crude oil and emit carbon when burnt. Hence, the sector is actively looking for alternative fuels to replace these fuels with the introduction of IMO 2023 regulations.

Methanol could be a suitable alternative, but availability could be a challenge

In pursuit of sustainable and greener fuel, the shipping industry is moving towards using other fuels – one of which is methanol. As per a Finland-based technology company Wärtsilä, methanol usage in ships, when compared to HFO, dramatically reduces carbon emissions and is easy to store. Considering this, the shipping giant AP Moller-Maersk, headquartered in Denmark, has ordered 19 methanol-powered vessels. The company estimated that they would require about one million tons of green methanol per year to run these vessels, which will generate annual carbon emission savings of about 2.3 million tons. Another shipping company based in Beijing, China Ocean Shipping Company (COSCO), has ordered 12 container ships worth US$2.87 billion, which use methanol as a fuel.

However, the availability of methanol is also to be considered while assessing it as an alternative fuel. As per the world’s largest methanol producer, Methanex, the shipping industry would require about three million tons of methanol annually to fuel vessels. Therefore, it is not enough to build vessels that run on methanol but also ensure its availability to fuel the vessels.

Keeping such requirements in mind, Maersk has partnered with six companies across the globe to source at least 730,000 tons of methanol annually by the end of 2025. The six companies are CIMC ENRIC (China), European Energy (Denmark), Green Technology Bank (China), Orsted (Denmark), Proman (Switzerland), and WasteFuel (USA). Additionally, in 2018, COSCO partnered with the US-based IGP Methanol and China-based and Jinguotou (Dalian) Development to construct two methanol plants in IGP Methanol’s Gulf Coast Methanol Park. The plants are planned to have a capacity of 1.8 million tons of methanol per year each. COSCO is ensured to fuel its 12 newly ordered vessels through these two partners

Most methanol produced today is derived from fossil fuels. There are primarily three kinds of methanol – grey or brown methanol derived from natural gas, green methanol made from biomass gasification, and blue methanol derived from natural gas combined with carbon capture and storage technology (CCS). With the help of CCS technology, the carbon emitted is captured and later transported and stored deep underground permanently, hence reducing carbon emissions.

Both green and blue methanol are considered to be the most environmentally friendly. However, most methanol available and used currently is either grey or brown. The availability of blue and green methanol is estimated to be less than 0.5 million tons annually in 2022, which is considered to be severely inadequate to power the current fleet of vessels. While Washington-based Methanol Institute estimated that renewable methanol production might increase to over 8 million tons annually by 2027, it is still unlikely to be sufficient to replace diesel as the go-to fuel.

Methanol as a fuel also has its challenges in terms of cost. Depending on the type of methanol consumed, traditional bunker fuels can be up to 15 times more expensive. Assuming the limited availability of methanol, the cost is likely to increase. Further, industry players need to ensure methanol availability and feasibility before switching away from traditional marine fuel.

LNG – most likely a transitional fuel

While some players are looking at methanol as an alternative fuel, other players are considering LNG. LNG is 20-25% less carbon intensive than HFO and emits fewer nitrogen oxides and sulfur oxides.

Rio Tinto, a mining company based in London, announced plans to add nine LNG dual-fueled Newcastlemax vessels in their fleet that transport bulk cargo, such as coal, iron ore, and grain, in 2023. The company started a one-year trial and is already seeing a reduction of about 25% in carbon emissions.

The main driver to convert to LNG fuel is the reduction in fuel costs. According to S&P Global, an energy company based in the UK, LNG prices vary from US$213-$353 as compared with MGO prices, which vary from US$550-$640. While LNG is cheaper, bunkering LNG to the vessel could be a challenging operation as there is a lack of LNG bunkering infrastructure. Another significant drawback in the usage of LNG is methane slip, which is the discharge of unburned methane from an engine that could poison aquatic life.

As per the World Bank, LNG as a marine fuel is most likely to play a limited role, given its drawbacks. However, a combination of lower prices and the increasing number of LNG dual-fueled vessels might support bunkering demand in the future.

Ammonia at the nascent stage of adoption

Unlike LNG, ammonia is turning out to be a viable option as infrastructure is already taking shape. As per a 2020 report by Siemens, a German industrial manufacturing company, 120 ports are already dealing with the import and export of ammonia worldwide. However, even with the infrastructure, only green ammonia is a zero-carbon fuel and it is not produced anywhere at the moment.

Looking at the fuel as an alternative option, Grieg Maritime and Wärtsilä (Norwegian and Finnish shipping companies, respectively) are jointly running a project to launch an ammonia-fueled tanker producing no greenhouse gas emissions by 2024. The project is also being supported by the Norwegian government with a funding of US$46.3 million. The partnership aims to build the world’s first green ammonia-fueled tanker. The partners plan to distribute green ammonia from a factory based in Norway to various locations and end-users along the coast.

There is a wide range of alternative fuels that are yet to be examined from the point of sustainability. Hydrogen is also one of the fuels that is considered an option for shipping vessels.


Read our related Perspective:
 Hydrogen: Future of Shipping Industry?

Other synthetic fuels combining hydrogen and carbon monoxide are also present and are already used extensively in other industries such as agriculture. However, their viability is yet to be tested in the shipping industry. Moreover, transitioning to alternative fuels is not easy. Several factors need to be considered before switching. To be a practical replacement for diesel, it needs to be readily available and price-competitive with traditional fuels.

EOS Perspective

The global shipping sector was already on its toes since the IMO’s 2020 sulfur regulation that limited sulfur content in a ship’s fuel oil to a maximum of 0.5% (from the previous 3.5%). After the IMO’s sulfur regulation, players started to gradually switch to other fuels and phased out high-sulfur fuel oil from their operations. The new 2023 regulation again brings the shipping industry to heel. The key challenge the marine industry faces in decarbonization is the limited availability and high cost of alternative fuels. Additionally, infrastructural changes are also required while adapting to these new fuels. Ship modifications require major capital investments, while construction of new vessels takes several years.

MGO is shipping’s primary fuel today and is hard to match in terms of existing scale and commercial attractiveness as it already is a well-established fuel and has been in use for decades. Other viable fuels, such as methanol, LNG, hydrogen, and ammonia, although present themselves to be better options for achieving IMO’s 2050 target, are likely to be costly and would require a much higher supply to meet the demand to power the vessels. Future fuel scenarios are likely to be determined by both supply and demand side dynamics.

For now, the key question for the players remains the availability of cleaner fuels at a cost that is acceptable and has the potential to replace traditional fuels. This further opens up the scope for partnerships between the players and fuel producers to jointly build a roadmap to ascertain fuel availability and bunkering infrastructure. With the players already moving towards adopting cleaner fuels, it is safe to infer that more partnerships between the fuel producers and the players are likely to be seen in the sector in the years leading towards meeting IMO’s 2050 target.

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Hydrogen: Fuel of the Future for Shipping?

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Just like many other carbon-emitting sectors, the shipping industry is also working to reduce its contribution to greenhouse gases and get closer to carbon neutrality. For this, the sector is pinning its hopes on hydrogen-based fuel. Being one of the most polluting industries in the world, the shipping sector is also one of the most difficult ones to introduce such a profound change. This is owing to the massive size of commercial vessels, long distances, hydrogen storage issues, and commercial costs. Although small-level adoption of hydrogen fuel has already begun, it remains unknown whether it will be functional in large commercial vessels as well.

As per the International Maritime Organization (IMO), the shipping industry was responsible for 2.9% of the total anthropogenic emissions in 2018, up by almost 10% between 2012 and 2018. It is expected that the sector’s contribution towards global greenhouse emissions will significantly increase by 2050 if proper efforts are not made towards decarbonization. To counter the situation, the IMO has set a global target to cut annual shipping emissions by 50% by 2050 (based on 2008 levels). In response to this, shipping corporations and other stakeholders across the shipping industry have been exploring different ways to reduce their impact on the environment. One of the most critical aspects in this is replacing fossil fuel with a greener fuel. This is where hydrogen fuel might find its place.

As we discussed in one of our previous articles (China Accelerates on the Fuel Cell Technology Front), hydrogen fuel is considered to be the fuel of the future for the transportation sector, as it produces zero emissions. Moreover, with regards to shipping, it is one of the only conceivable options at the moment.

That being said, using hydrogen fuel alone cannot solve the issue of reducing the sector’s carbon footprint, as it depends on how the hydrogen fuel is produced. Currently most of the hydrogen that is produced (and used in other industries), is produced using fossil fuels, while only a small portion of it is produced using renewable energy. Hydrogen produced through renewable energy is much more expensive, which keeps the production levels low. If ships run on hydrogen fuel produced using mainly fossil fuels, while the fuel itself would produce zero emissions, the whole process will not carbon efficient. However, with the shipping industry making real efforts to consider a change in fuel, it is expected that production of hydrogen through renewable sources will ramp up, which in turn may reduce costs (to some extent) owing to economies of scale.

Hydrogen Fuel of the Future for Shipping by EOS Intelligence

 

At the moment, several leading players have pledged to develop new or modify existing vessels so that they can run on hydrogen fuel, however, these are currently either prototypes or short-distance small vessels. Antwerp-based Compagnie Maritime Belge (CMB) Group, which is one of the leading maritime groups in the world, commissioned the world’s first hydrogen-powered ferry in 2017, named Hydroville. It is currently operational between Kruibeke and Antwerp. It runs on a hybrid engine, with options of both hydrogen and diesel. CMB, which has been a pioneer and advocator of clean fuel for the shipping industry, also partnered with Japanese shipbuilder, Tsuneishi Group, to develop and build Japan’s first hydrogen-powered ferry (in 2019) and tugboat (in 2021). Moreover, it launched a joint venture with the Japanese firm to develop hydrogen-based internal combustion engine (H2ICE) technology for Japan’s industrial and marine markets. In another move to find a strong foothold with the shipping fuel of the future, CMB Group acquired UK-based Revolve Technologies Limited (RTL) in 2019, which specializes in engineering, developing, designing, and testing hydrogen combustion engines for automotive and marine engines. Moreover, CMB is building its own maritime refueling station for hydrogen automobiles and ships at the Antwerp port, which will produce its own hydrogen through electrolysis.

Similarly, in November 2019, Norwegian ship building and design company, Ulstein, developed a hydrogen-fueled vessel, called ULSTEIN SX190. The vessel is the company’s first hydrogen-powered offshore vessel providing clean shipping operations to reduce the carbon footprint of offshore projects. The vessel, which uses fuel-cell technology, can operate for four days in emission-free mode at the moment. However, with constant development and investment in the hydrogen fuel space, it is expected that it will be able to run emission-free for up to two weeks, post which it will have to fall back on its diesel engine. Ulstein also launched another hydrogen-powered vessel in October 2020, called ULSTEIN J102, which can operate at zero-emission mode for 75% of the time. Since Ulstein used readily available technology in developing the J102, the additional cost of adding the hydrogen-powered mode was limited to less than 5% of its total CAPEX. This vessel design is expected to cater to the offshore wind industry.

A leading oil corporation, Shell, also announced that it is looking at hydrogen as the key fuel for its fleet of tanker ships in the coming future as the company aims to become carbon neutral by 2050. In April 2021, the company commenced trials for the use of hydrogen fuel cells for its ships in Singapore. The trial encompasses the development and installation of a fuel cell unit on an existing roll-on/roll-off vessel that transports wheeled cargo such as vehicles between Singapore and Shell’s manufacturing site in Pulau Bukom. Shell has chartered the vessel, which is owned by Penguin International Ltd, however, Shell will provide the hydrogen fuel.

In addition to this, several other companies across Europe and Japan are undertaking feasibility studies to understand and assess the use of hydrogen fuel to power ferries and also the production of hydrogen fuel from renewable sources for the same purpose. For instance, in 2020, Finland-based power company, Flexens conducted a feasibility study to generate green hydrogen through wind farms in order to fuel ferries in the Aland group of islands. Similarly, Japan-based companies, Kansai Electric Power, Iwatani, Namura Shipbuilding, the Development Bank of Japan, and Tokyo University of Marine Science and Technology, are collaborating on a feasibility study to develop and operate a 100-foot long ferry with hydrogen fuel. The ferry is expected to be in operation by 2025.

Apart from small ferries, hydrogen fuel is also making a slight headway with commercial vessels. In April 2020, a global electronic manufacturer, ABB, signed an MoU with Hydrogène de France, a French hydrogen technologies specialist to manufacture megawatt-scale hydrogen fuel cells that can be used to power long-haul, ocean-going vessels. While most of the currently operational hydrogen technology is used in small-scale and short-distance vessels, this partnership, which builds on an already existing 2018 collaboration between ABB and Ballard Power Systems, is expected to bring this technology for larger vessels (which in turn are responsible for most of the carbon emissions).

In April 2021, French inland ship owner, Compagnie Fluviale de Transport (CFT), in partnership with the Flagships Project (which is a consortium of 12 European shipping players), launched the first hydrogen-powered commercial cargo vessel, which will ply the Sevine river in Paris. The vessel is scheduled for delivery in September 2021. In 2018, the Flagships project was awarded EUR 5 million of funding from the EU’s Research and Innovation Program Horizon 2020.

While several companies are bullish about hydrogen fuel being the answer to the industry’s carbon woes, others are skeptical to what extent hydrogen fuel can replace the current traditional fuel, especially given the challenges with regards to large commercial vessels. For instance, Maersk, global player in the shipping industry, does not feel that hydrogen fuel is suitable for container ships as the fuel takes up a lot of physical space in comparison with traditional bunker oil.

As per estimates, hydrogen fuel takes up almost eight times as much space as gas oil would take to power the same distance. The more space is occupied by the fuel, the less space is left for carrying containers, and this negatively impacts its container-carrying capacity and revenue per trip/ship. Moreover, container vessels travel extremely long distances across oceans, and carrying that much hydrogen fuel in either liquid or compressed form at this moment is not physically and commercially viable. To be stored as a liquid, hydrogen needs to be frozen using cryogenic temperatures of -253˚C, which makes it expensive to store. Currently about 80-85% of the sector’s emissions come from large commercial vessels such as cargo ships, container ships, etc., and considering that hydrogen can play only a limited role in these vessels, its adaptability and effectiveness as a tool to reduce carbon emissions may be restricted.

However, that being said, the industry is open to alternative fuels and one such fuel is ammonia, which in turn is also produced from hydrogen. Thus using green hydrogen to create green ammonia is another option to explore. Ammonia can be used either as a combustion fuel or in a fuel cell. Moreover, it is much easier and cheaper to store since it does not need cryogenic temperatures and takes up about 50% less space compared with hydrogen fuel, since it is much denser. Thus ammonia seems to fit the needs of commercial vessels in a better manner, however, at present most of ammonia being produced (mainly for the fertilizer industry) uses hydrogen obtained from fossil fuels. Moreover, it further uses fossil fuels to convert hydrogen into ammonia. Thus, to create green ammonia, additional renewable energy will be required, which adds to further costs.

EOS Perspective

Given the industry’s vision to reduce its carbon footprint and the ongoing efforts, investments, and feasibility studies, it is safe to say that hydrogen will definitely be the fuel of the future for the shipping industry, whether used directly or processed further into ammonia. However, how soon the industry can adapt to it is yet to be seen.

Moreover, the industry cannot bear the cost of the transition alone. To transition to a greener future, the shipping industry needs support in terms of on-ground infrastructure and investments in production of green hydrogen. Till the time production of green hydrogen reaches economies of scale, it will definitely be much more expensive compared with traditional fuel. This in turn, will make shipping expensive, which would possibly impact all industries that use this service. While the shipping industry may absorb a bit of the high costs during the transition phase, some of it will be passed down to the customers, which is likely to be met with resistance and in turn will impact the overall transition.

On the other hand, green hydrogen projects are expensive to set up and require significant investment and gestation period. Hydrogen companies do not want to rush into making this investment, unless they see global acceptability from the shipping sector. Thus while the transition to a more carbon-neutral fuel is inevitable, it may not be a short-term transition. Unless governments and regulatory bodies come up with strict regulations or a form of a carbon tax on the sector to expedite the transition, the change is likely to be slow and phased, especially when it comes to large commercial vessels.

by EOS Intelligence EOS Intelligence No Comments

Global Economy Bound to Suffer from Coronavirus Fever

Global economy has slowed down in response to coronavirus. Factories in China and many parts of Europe have been forced to halt production temporarily as some of the largest manufacturing hubs in the world battle with the virus. While the heaviest impact of the virus has been (so far) observed in China, global economy too is impacted as most industries’ global supply chains are highly dependent on China for small components and cheaper production rates.

China is considered to be the manufacturing and exporting hub of the world. Lower labor costs and advanced production capabilities make manufacturing in China attractive to international businesses. World Bank estimated China’s GDP in 2018 to be US$13.6 trillion, making it the second largest economy after the USA (US$20.58 trillion). Since 1952, China’s economy has grown 450 fold as compared with the growth rate of the USA economy. International trade and investment have been the primary reason for the economic growth of the country. This shows China’s strong position in the world and indicates that any disturbances in the country’s businesses could have a global effect.

On New Years’ Eve 2019, an outbreak of a virus known as coronavirus (COVID-19) was reported in Wuhan, China to the WHO. Coronavirus is known to cause respiratory illness that ranges from cough and cold to critical infections. As the virus spreads fast and has a relatively high mortality rate, the Chinese government responded by quarantining Wuhan city and its nearby areas on January 23, 2020. However, this did not contain the situation. In January 2020, WHO designated coronavirus a “public health emergency of international concern” (PHEIC), indicating that measures need to be taken to contain the outbreak. On March 11, 2020, WHO called coronavirus a pandemic with the outbreak spreading across about 164 countries, infecting more than 190,000 people and claiming 7,800+ lives (as of March 18, 2020).

Coronavirus threatening businesses in China and beyond

Businesses globally (and especially in China) are feeling the impact of coronavirus. Workers are stuck in their homes due to the outbreak. Factories and work places remain dormant or are running slower than usual. Also, the effects of coronavirus are spreading across the globe. Initially, all factory shutdowns happened in China, however, the ripple effects of the outbreak can now be seen in other parts of the world as well, especially Italy.

Automotive industry

Global automobile manufacturers, such as General Motors, Volkswagen, Toyota, Daimler, Renault, Honda, Hyundai, and Ford Motors, who have invested heavily in China (for instance, Ford Motor joined ventured with China’s state-owned Chongqing Changan Automobile Company, Ltd., one of China’s biggest auto manufacturers) have shut down their factories and production units in the country. According to a London-based global information provider IHS Markit, Chinese auto industry is likely to lose approximately 1.7 million units of production till March 2020, since Wuhan and the rest of Hubei province, where the outbreak originated, account for 9% of total Chinese auto production. While the factories are reopening slowly (at least outside the Wuhan city) and production is expected to ramp up again, it all depends on how well the outbreak is contained. If the situation drags on for few months, the auto manufacturers might face significant losses which in turn may result in limited supply and price hikes.

American, European, and Japanese automobile manufacturers, among others, are heavily dependent on components supplied from China. Low production of car parts and components in China are resulting in supply shortages for the automakers globally. UN estimates that China shipped close to US$35 billion worth of auto parts in 2018. Also, according to the US Commerce Department’s International Trade Administration, about US$20 billion of Chinese parts were exported to the USA alone in 2018. A large percentage of parts are used in assembly lines that are used to build cars while remaining are supplied to retail stores. Supply chain is crucial in a connected global economy.

Coronavirus outbreak poses a risk to the global automotive supply chain.

South Korea’s Hyundai held off operations at its Ulsan complex in Korea due to lack of parts that were supposed to be imported from China. The plant manufactures 1.4 million vehicles annually and the shutdown has cost approximately US$500 million within just five days of shutting down. However, Hyundai is not the only such case. Nissan’s plant in Kyushu, Japan adjusted its production due to shortage of Chinese parts. French automaker Renault also suspended its production at a plant in Busan, South Korea due to similar reasons. Fiat Chrysler predicts the company’s European plant could be at risk of shutting down due to lack of supply of Chinese parts.

However, very recently, automobile factories in China have started reopening as the virus is slowly getting contained in the region. While Volkswagen has slowly started producing in all its locations in China, Nissan has managed to restart three of its five plants in the country.

That being said, auto factories are facing shutdowns across the world as coronavirus becomes a pandemic. Ford Chrysler has temporarily shut down four of its plants in Italy as the country becomes the second largest affected nation after China.

Automobile supply chains are highly integrated and complex, and require significant investments as well as a long term commitment from automobile manufacturers. A sudden shift in suppliers is not easy. The virus is spreading uncontrollably across Europe now and if France and Germany are forced to follow Italy’s footsteps of shutting down factories to contain its spread, this will spell doom for the auto sector as the two countries are home to some of the biggest automobile manufacturers in the world.

Technology industry

China is the largest manufacturer of phones, television sets, and computers. Much of the consumer technologies from smartphones to LED televisions are manufactured in China. One of the important sectors in the technology industry is smartphones.

The outbreak of coronavirus is bad news for the technology sector, especially at the verge of the 5G technology roll-out. Consumers were eagerly waiting for smartphone launches supporting 5G but with the outbreak, the demand for smartphones has seen a decline. According to the China Academy of Information and Communications Technology, overall smartphone shipments in China fell 37% year over year in January 2020.

Foxconn, which is a China-based manufacturing partner of Apple, has iPhone assembling plants in Zhengzhou and Shenzhen. These plants, which make up a large part for the Apple’s global iPhone assembly line, are currently facing a shortage of workers that will ultimately affect the production levels of iPhone in these factories. According to Reuters, only 10% of workers resumed work after the Lunar New Year holiday in China. As per TrendForce, a Taiwanese technology forecasting firm, Apple’s iPhone production is expected to drop by 10% in the first quarter of 2020.

Moreover, Apple closed down all its retail stores and corporate offices in the first week of February 2020 in China in response to the outbreak. On March 13, 2020, it reopened all of its stores in China as the outbreak seems to be under control. However, while Apple seems to recover from the outbreak in China, it is equally affected by store shutdowns in other parts of the world (especially Europe). On March 11, Apple announced that all stores in Italy will be closed until further notice. Italy has been hit by the virus hard after China. The Italian government imposed a nationwide lockdown on the first week of March 2020.

On the other hand other multinational smartphone giants such as LG, Sony Mobile, Oppo, Motorola, Nokia, and many others have delayed their smartphone launches in the first quarter of 2020 due to the outbreak.

The coronavirus outbreak is more likely to be a disaster for smartphone manufacturers relying on China.

Other sectors such as LCD panels for TVs, laptops, and computer monitors are mostly manufactured in China. According to IHS Markit, there are five LCD factories located in the city of Wuhan and the capacity at these factories is likely to be affected due to the quarantine placed by the Chinese government. This is likely to force Chinese manufacturers to raise prices to deal with the shortage.

According to Upload VR, an American virtual reality-focused technology and media company, Facebook has stopped taking new orders for the standalone VR headset and also said the coronavirus will impact production of its Oculus Quest headset.

Shipping industry

In addition to these sectors, the new coronavirus has also hit shipping industry hard. All shipping segments from container lines to oil tanks have been affected by trade restrictions and factory shutdowns in China and other countries. Shipyards have been deserted and vessels are idle awaiting services since the outbreak.

According to a February 2020 survey conducted by Shanghai International Shipping Institute, a Beijing based think-tank, capacity utilization at major Chinese ports has been 20%-50% lower than normal and one-third of the storage facilities were more than 90% full since goods are not moving out. Terminal operations have also been slow since the outbreak in China. The outbreak is costing container shipping lines US$350 million per week, as per Sea-Intelligence, a Danish maritime data specialist.

According to Sea-Intelligence, by February 2020, 21 sailings between China and America and 10 sailings in the Asia-Europe trade loop had been cancelled since the outbreak. In terms of containers, these cancellations encompass 198,500 containers for the China-America route and 151,500 boxes for the Asia-Europe route.

Moreover, shutting down of factories in China has resulted in a manufacturing slowdown, which in turn is expected to impact the Asian shipping markets. European and American trade is also getting affected as the virus spreads to those continents. US retailers depend heavily on imports from China but the outbreak has caused the shipping volumes to diminish over the first quarter.

The USA is already in the middle of a trade war with China that has put a dent in the imports from China. National Retail Federation (world’s largest retail trade association) and Hackett Associates (US based consultancy and research firm) projects imported container volumes at US seaports is likely to be down by 9.5% in March 2020 from 2019. The outbreak is heavily impacting the supply chains globally and if factory shutdowns continue the impact is more likely to be grave.


Read our other Perspectives on US-China tensions: Sino-US Trade War to Cause Ripple Effect of Implications in Auto Industry and Decoding the USA-China 5G War


Other businesses

In addition to the auto, technology, and shipping industries, other sectors are also feeling the heat from the outbreak. Under Armour, an American sports clothing and accessories manufacturer, estimated that its revenues are likely to decline by US$50-60 million in 2020 owing to the outbreak.

Disney’s theme parks in California, Shanghai, Tokyo, and Hong Kong have been shut down due to the outbreak and this is expected to reduce its operating income by more than US$175 million by second quarter 2020.

Further, IMAX, a Canadian film company, has postponed the release of five films in January 2020, due to the outbreak.

Several fast food chains have been temporarily shut down across China and Italy, however, most of them have opened or are in the process of reopening in China as the outbreak is slowly coming under control there. While the global fast food and retail players have limited exposure in China, they are suffering huge losses in Europe, especially Italy. The restaurant sector is severely impacted there, where all restaurants, fast food chains, and bars have been shut down temporarily till April 3 in an attempt to contain the outbreak.

Another significantly affected industry is the American semiconductor industry as it is heavily connected to the Chinese market. Intel’s (a US-based semiconductor company) Chinese customers account for approximately US$20 billion in revenue in 2019. Another American multinational semiconductor and telecommunications equipment company, Qualcomm draws approximately 47% of its revenue from China sales annually. The outbreak is making its way through various industries and global manufacturers could now see how much they have become dependent on China. Although the virus seems to be getting under control as days pass, the businesses are not yet fully operational. Losses could ramp up if the virus is not contained soon.

Global Economy Bound to Suffer from Coronavirus Fever by EOS Intelligence

 

Housebound consumers dealing with coronavirus

Since the virus outbreak, people across many countries are increasingly housebound. Road traffic in China, Italy, Iran, and other severely affected countries has been minimized and public places have been isolated. People are scared to go out and mostly remain at home. This has led local businesses such as shopping malls, restaurants, cinemas, and department stores to witness a considerable slowdown, while in some countries being forced to shut down.

TV viewing and mobile internet consumption on various apps have increased after the outbreak. According to QuestMobile, a research and consultancy firm, daily time spent with mobile internet rose from 6.1 hours in early January 2020 to 6.8 hours during Lunar New Year (February 2020).

While retail outlets and other businesses are slower, people have turned to ordering products online. JD.com, a Chinese online retailer, reported that its online grocery sales grew 215% (year on year) to 15,000 tons between late January and early February 2020. Further, DingTalk, a communication platform developed by Alibaba in 2014, was recorded as the most downloaded app in China in early February 2020.

EOS Perspective

International businesses depend heavily on Chinese factories to make their products, from auto parts to computer and smartphone accessories. The country has emerged as an important part in the global supply chain, manufacturing components required by companies globally. The coronavirus outbreak has shaken the Chinese economy and global supply chains, which in turn has hurt the global economy, the extent of which is to be seen in the months to come. Oxford Economics, a global forecasting and analysis firm, projected China’s economic growth to slip down to 5.6% in 2020 from 6.1% in 2019, which might in turn reduce the global economic growth by 0.2% to an annual rate of 2.3%.

A similar kind of outbreak was seen in China in late 2002 and 2003, with SARS (Severe Acute Respiratory Syndrome) virus. China was just coming out of recession in 2003 and joined the World Trade Organization, attaining entrance to global markets with its low cost labor and production of cheaper goods. The Chinese market was at its infancy at that time. As per 2004 estimates by economists Jong-Wha Lee and Warwick J. McKibbin, SARS had cost the global economy a total of about US$40 billion. After SARS, China suffered several months of economic retrenchment.

The impact of coronavirus on Chinese as well as global economy seems to be much higher than the impact of SARS, since COVID-19 has spread globally, while China has also grown to be the hub for manufacturing parts for almost every industry since the SARS outbreak. In 2003, China accounted for only 4% of the global GDP, whereas in 2020, its share in the global GDP is close to 17%.

Currently, the key challenge for businesses would be to deal with and recover from the outbreak. On the one hand, they need to protect their workers safety and abide by their respective governments’ regulations, and on other hand they need to safeguard their operations under a strained supply chain and shrunken demand.

In the current landscape, many businesses in China have reopened operations but the outbreak is rapidly spreading to other parts of the world (especially Europe and the USA), where it is impacting several business as well as everyday lives. The best thing for manufacturing companies in this scenario is to re-evaluate their inventory levels vs revised demand levels (which may differ from industry to industry), and consider a short-term re-strategizing of their global supply chains to ensure that raw materials/components or their alternates are available and accessible – bearing in mind their existing production capability with less workers and customer needs during this pandemic period.

With the rapid spread of the virus, it seems that the outbreak is likely to cause considerable damage to the global economy (both in terms of production levels as well as psychological reaction on stock markets), at least in the short term, i.e. next 6 months. However, many experts believe that the situation should soon start coming under control at a global level. For instance, some experts at Goldman Sachs, one of the world’s largest financial services companies, believe that while this pandemic will bring the lowest growth rate of the global GDP in the last 30 years (expected at 2% in 2020), it does not pose any systematic risks to the world’s financial system (as was the case during the 2008 economic crisis).

Having said that, it is difficult to estimate what real impact the coronavirus will have on the global economy yet, and if opinions such as Goldman Sachs’ are just a way to downplay the situation to keep the investors calm. It is more likely to depend on how long the virus continues to spread and linger and how effectively do governments around the world are able to contain it.

by EOS Intelligence EOS Intelligence No Comments

Intermodal Transportation Picks Up Steam

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Intermodal transportation is emerging as a popular mode of transporting cargo owing to its economic and environmental benefits. While companies preferred over-the-road (OTR) transportation as it offered higher flexibility, a significant surge in freight rail infrastructure (especially across the USA and Europe) and a decline in availability of OTR drivers have led to several companies shifting to intermodal shipping. However, intermodal transportation has its own share of challenges, which, if not addressed effectively, can severely impact the entity’s operations.

As shippers are looking to cut costs as well their carbon footprint, they are steadily shifting towards intermodal transportation. This is further boosted by countries investing heavily to improve their intermodal infrastructure. However, growing popularity of intermodal transportation has resulted in shortages in chassis equipment and severe traffic jams at ports and terminals, among other challenges. Companies that manage to overcome these challenges by better planning and use of technology can definitely reap savings offered by this mode of transportation.

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EOS Perspective

The question regarding intermodality is not of a yes or no, but more of a ‘how much’. While intermodal transportation offers several benefits over OTR, it is very critical for companies to assess the extent to which intermodality can work for them. Moreover, given the improvements in infrastructure and technology, companies that currently feel that intermodal does not work them, should not dismiss it once and for all, but should continue to re-evaluate the situation every six-monthly to annually.

by EOS Intelligence EOS Intelligence No Comments

Container Shipping Industry – The Need Of The Hour

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Global container shipping industry has suffered through five unprofitable years and still does not seem to see much light. The industry is battling overcapacity, declining freight prices, and stiff undifferentiated competition, and with the new capacity expected to come online, these challenges are likely to persist. But the hurdles also present hidden opportunities for ship liners to improve performance across organizational, commercial, and operational activities. Moreover, extracting more from strategic alliances to include joint procurement and operational benefits can also help the industry in whole.

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As the industry suffers from a host of challenges, it is imperative for the carriers to step up and develop plans that could improve their profits. It is believed that several sound initiatives could potentially elevate these companies’ earnings by up to 15%, which could be enough to can steer them back to profitability.

To realize these benefits, companies need to bring about significant changes in their organizational structure, operational management, commercial management, and nature of alliances. Carriers that manage to introduce these changes will be in a better position to combat the current depression in the business and return to profitability.

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While these changes might be challenging to embrace, the industry has reached a stage where only drastic measures can keep them afloat and profitable. Carriers that can initiate a comprehensive transformation in their operations and organizational structure are likely to be to only ones able to steer ahead of competition.

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