By Brian Dunn
A resurgence in global trade will benefit Canada’s shipping industry, with export growth expected to continue, according to a leading Canadian economist. And he expects trade tensions between the United States and China will be resolved. “Canadian exporters are worried that NAFTA may be cancelled, but I believe cooler heads will prevail,” Stephen Tapp, Deputy Chief Economist, Export Development Canada, said at the annual conference of the Shipping Federation of Canada in Montreal on May 23. Labour markets in Canada and the U.S. are improving, economic slack is being absorbed, while historically low interest rates and inflation are rising, both positive signs for the economy, he added.
“According to the World Trade Organization, global container shipping had increased by 5.1 per cent in March, 2018 relative to March 2017. Relative to its longer-run trend, this component was doing the best.”
Since 2014, three major strategies have been pursued by Canadian manufacturers as a hedge against any trade disruptions. About six per cent of those surveyed by EDC are considering moving their operations to the U.S., another five per cent are looking to diversify beyond the U.S., a plus for the shipping industry, noted Mr. Tapp, while another three per cent are delaying planned investments and hiring.
Advanced economies are expected to grow an average of 2.5 per cent over the next two years, while emerging economies are predicted to grow at twice that rate. China and India combined accounted for half of all global growth in 2017, noted Mr. Tapp.
Canadian export growth is expected to average five per cent over the next two years, compared to an average of 2.6 percent between 2002-2016, said Mr. Tapp. Exports to the U.S. will only increase by 1.3 per cent, compared to 5.4 per cent for non-U.S. exports.
More of Canada’s trade has shifted from road and rail transportation, to marine and air, with marine growing from 14 to 20 percent of the total since 2000. Part of the shift is the result of an increase of exports to non-U.S. ports during the period, noted Mr. Tapp. Canadian exports to emerging markets have also climbed from five to 13 per cent since 2000.
There are still challenges facing the shipping industry, including low shipping rates due to excess capacity, industry concentration and new emission standards, which may affect the amount of cargo some vessels can transport.
While Canada has signed trade deals with the EU and Asia-Pacific and infrastructure spending is continuing (all positive signs for the shipping industry), some growth potential may be hampered by inland transportation bottlenecks. But overall, trade diversification is benefitting Canadian shippers, Mr. Tapp concluded.
All the shipping industry is talking about is January 1, 2020, when sulphur levels in bunker fuel have to drop from 3.5 per cent to .05 per cent, noted Jason Silber, Global Head, Platts Ocean Intelligence, a New York-based independent maritime credit analysis company. There are about 54,000 vessels of over 1,000 DWT globally that burn 300 million tonnes of mostly high sulphur fuel oil (HSFO) annually, he noted. The IMO expects 3,800 scrubbers to be installed by Jan. 1, 2020, but there are only 380 scrubbers installed today, making IMO’s target almost impossible to meet, Mr. Silber added. “Bunker will be replaced by blends, distillates, LNG and other assorted cocktails that could be harmful to ship engines.” The price of distillates versus HSFO could jump from between $150-$200 a tonne to $450, or roughly $3,700 extra per ship per day, Mr. Silber calculated. “If (South Korean shipping company) Hanjin can go bankrupt in a low-cost bunker environment, what will happen when prices spike?”
“More importantly”, he asked, “how will bunker suppliers cope”? They will be more selective in who they deal with and choose margin over volume, said Mr. Silber. They might also move from 30 to 20 day terms or use their own revolving credit line. In addition, they could diversify their business or keep costs down by laying off employees or by closing satellite offices.
Suppliers could diversify their business by marketing fuel to other sectors such as aviation or trucking, sell other products like lubes or by looking for business in new niche ports or under-served ports which may have lower volume, but offer higher margins, offered Mr. Silber.
And what will customers do? They could ask suppliers for extended terms, which could lead to more disputes, suggested Mr. Silber. They could also dispute fuel quality potentially made from questionable blends. Or companies could merge, be bought out or close.
Ship operators also face challenges as 2020 approaches and they have several options to consider, according to Mr. Silber. They can focus on profit rather than market share, operate fuel efficient vessels by adding scrubbers if necessary and be familiar with what kind of fuel is being loaded. “Keep voyages as short as possible and spend less time in port. One to four hours less time in port can reduce fuel costs by eight per cent. Hire knowledgeable crew (familiar with fuels being loaded) and keep tabs on spare parts and supplies. And shipowners and charterers need to do their due diligence.”
The known unknowns include U.S. sanctions, a trade war with China, territorial disputes which could add extra shipping costs to circumvent disputed territories such as the South China Sea, a spike in interest rates and shifting preferences in fuel choices, Mr. Silber pointed out. “While we know that in the short run, ship operators are going to distillates, we still don’t know what direction shipping will go in the long run. Will it be towards blends? The problem is there are no standards. For example, Chevron has one blend and BP may have another and some unknown supplier in the Far East may have a third, but your engine can’t use all three, never mind all 30 blends that might be available. Some could even harm the engine. “But a real intriguing known unknown is a black swan event. I’m referring to the sudden boycotting of diesel fuel from many German (and other European) cities, which seems to be spreading. What if this becomes a major issue which leads to a real decline in diesel use which would have a massive effect on the tanker business?”
The third and final presentation of the day looked at port automation and the rise in popularity of blockchain, a shared ledger for recording all transactions that cannot be altered. Today, several transactions take place from orders, payments, accounting and tracking of products with each process traditionally using a separate ledger, which could lead to errors, inefficiencies and potential fraud. Blockchain’s shared ledger is designed to reduce those errors.
“Port automation impacts the whole supply chain which may be more efficient for shipping. But there may be less demand for shipping as labour becomes less and less important (in the manufacturing process), which allows manufacturers to set up their businesses closer to their markets,” suggested Jean-Paul Rodrigue, professor of Geography and Global Studies, Hofstra University, New York.
There is such a thing as an automation ceiling and Mr. Rodrigue wondered in which context further automation make sense, whether in yard management, gate operations, tracking, horizontal transport or dockyard cranes.
There are four unexpected consequences of automation for maritime shipping, namely a segmentation and rationalization of shipping networks, fewer multiterminal ports, new types of container terminals and new entrants into the industry. And as automation equipment becomes more affordable, it can be applied to smaller and more numerous terminals.
In addition to automation changing processes, it’s also changing locations of businesses, noted Mr. Rodrigue. Sectors offering the most automation potential are manufacturing, food services and hotels, retail and distribution. Less attractive sectors include education, healthcare and management.
“Thousands of manufacturers globally are looking at their cost structures, since labour is no longer a major part of their costs. This puts downward pressure on global shipping if you end up with more efficient terminals which may convince manufacturers to change the location of their operations.”
More and more shippers are hoping to up their game by incorporating blockchain in their operations, noted Mr. Rodrigue, although it does not perform anything new for the industry. “Blockchain does not change the cost structure, but increases the velocity of freight with less friction in transactions (documentation). It won’t have much impact on existing trade structures, although developing countries could benefit. Nor is it expected to be a generator of value.”
The expected benefits of blockchains on supply chains, which Mr. Rodrigue challenges, include faster transactions, the ability to track shipments along an intermodal transport chain and identify issues causing delays, while counterfeiting and the use of sub-par materials will be easier to detect and proof that cargo was handled by specific modes, carriers and distribution centres. Blockchains can also accurately calculate energy use and environmental footprint.
“However, there is no proof blockchain will improve supply chains, but it will help calculate a company’s carbon footprint,” suggested Mr. Rodrigue. “There are a lot of test beds and pilot projects taking place and duplications of platforms. Why not simply use a centralized system? At this point, shipping lines are in the experimentation phase and do not see blockchains as effective value generators.”
Political commentator Chantal Hébert was the luncheon speaker who said that the period between now and the next federal election in 2019 will be one of the rockiest in years, with four provincial elections being decided before then.
“When Prime Minister Trudeau was elected in 2015, there were mostly Liberal premiers around the table. But Rachel Notley, (Alberta), Kathleen Wynn (Ontario) and Philippe Couillard (Quebec) are facing uphill battles.
“Trudeau’s biggest challenges have been dealing with President Trump and NAFTA and he brought a lot of people in from labour and the Conservatives to help. Unfortunately, those challenges have sucked a lot of political energy out of Liberal policies. The more problematic files are the environment and pipelines. The next ballot box question could well be on federal-provincial relations.”