Dealing with COVID-19 and The Long-lasting Impact on Shipping
A. The Pandemic
Even a year ago, it was hard to take seriously a pandemic clause under the “business risks” section in company prospectuses and regulatory filings, as the word seemed the epitome of legalese in providing a blanket coverage of things going medically wrong even under remote probabilities. Apparently, there have been a handful of studies warning of the potential of a pandemic disease, but they seemed to be in the purview of a close number of epidemiologists, policy makers and mostly professional scaremongers (“Chief Worry Officers”). Even in late January 2020, when the Chinese were cancelling their sacrosanct Chinese New Year pilgrimage to their hometowns, the rest of the world mostly yawned. As by now the COVID-19 pandemic that has engulfed the world, society and business are faced with a risk of unknown proportions, definitely a risk unparallel to any risk the world faced in the last century. COVID-19 is a historic event whose consequences will far outstrip the importance of 9/11 and the Great Recession.
The primary focus of this article is the impact of COVID-19 on the maritime industry and the supply chain, both internationally and also domestically, and primarily through the eyes of the financial and equipment finance community, as one would expect for this Journal. However, before endeavoring discussing the different market segments and the virus’ impact upon them, we first outline what it is known, and, more critically what is unknown of the virus, and the series of assumptions that are being made for future projections.
COVID-19 is a virus of the corona-virus family and related to the SARS virus that run amok in China and the Asia Pacific region almost ten years ago. A great deal of info on COVID-19 is still missing and accelerated scientific research is underway; so far, there seem to be a few attributes of COVID-19 that set it apart from other viruses, even coronaviruses, and these attributes can be of paramount importance, if proven true: it’s unknown whether humans can develop immunity against the virus as there have been cases of COVID-19 survivors with antibodies and yet were infected by the virus for a second time; also, besides speculation for the timing of developing a COVID-19 (currently estimated to 12-18 months), it’s unknown how effective the vaccine would be and whether it can be a lifelong or limited-duration immunity (that may require recurring vaccination every so often, sort of the “flu shots” recommended every year). Also, although it would appear that COVID-19’s fatality rate is very low for the general population, little is understood on the pathology of the virus, and possibly any concentrated impact on certain regional, ethnic, cultural groups, and the responses to contain the virus. Just these three variables can have a monumental impact on the projections and responses to the virus, making any effort to estimate social implications and financial costs a very uncertain exercise. Also, how societies and governments have decided to face the pandemic would have tremendous impact on social and financial costs and recovery, both in the short and the long term: most countries have opted for the costlier upfront lockdown approach and “flattening of the curve” vs. Sweden’s “herd immunity” approach with potentially costlier consequences in the long term; also, while countries with lower threshold to personal liberties may be more effective fighting the pandemic (for instance via smartphone tracking and surveillance vs societies with high preference for individuality and personal preferences).
B. Business & Corporate Leadership Approach
All medical and ethical considerations aside, from a managerial point of view, COVID-19 is considered a novel risk management challenge, a risk unsimilar to anything a business executive have learned to expect and deal with; there have been financial crises, there have been political crises, and there have been even geo-political crises in our life times, but also there have been managerial toolboxes and precedent on how to handle them. On preventable risks, companies set internal controls, boundary systems, internal audits, etc; on strategy execution risks, companies have risk identification with risk mapping and registers, and risk mitigation initiatives; on external risks, companies have contingency plans, insurance and hedging strategies. But, COVID-19 is a novel risk of a medical cause, with most modern similarity (and archival records) being of the Spanish Influenza in 1918, a century ago; previous “plagues” that affected a large proportion of the human race refer to even older times several centuries back, while polio, AIDS and SARS of the last decades were not widespread enough (as percentage of population and also geographically) to qualify as “pandemics”.
The U.S. Army War College utilizes the acronym VUCA (Violent – Uncertain – Complex – Ambiguous) to describe scenarios of “modern strategic environment” (mostly in a post-Cold War world) that call for a different playbook than anything else from previous experience. Harvard Business School Professor Amy Edmondson calls for “iterative, agile, problem solving” approach when having to face a novel risk, whereby leaders create conditions for successful, agile problem solving via facilitated deliberation, diversity, psychological safety for team inquiry and real time experimental problem solving; effectively, calling all hands on deck, in groups of people and in an inclusive across functions and disciplines, and in a trial-and-error manner, trying to find solutions experimentally to an evolving problem; in a sense, trying to learn flying while the airplane is on apparently dangerous trajectory.
In short, there is minimal precedent and we all are learning as we go; costs and repercussions may be exorbitant and there is immense time sensitivity (people – that is our friends, colleagues, fellow citizens die by the thousands every day), and we do our best to keep sane and keep society and business functioning with as little interruption as possible.
C. Long-term COVID-19 Considerations for the Shipping Industry
1. Trade and Supply Chain Management
The tariff wars of 2018-2019 had been a real-life experience of how interconnected the world supply chain had gotten in the last decade, and the validity of several principles that once were held inviolable (just-in-time inventory (JIT) and the speed and efficiency of shipment across the oceans) got to be questioned. Whatever the benefits of “Phase I” of the trade agreement with China and the updating of the NAFTA agreement, the greatest conclusion for logistics managers were dependence upon one country (namely China) was too dangerous of a strategy, and thus “China+1” (China plus production at another country) had been the main lesson. COVID-19 has been providing a more advanced lesson on logistics, and now the prevailing thought is for “China+3” or “China+4” by spreading the manufacturing and operational risk across countries and regions. Also, as it seems entire world regions (let’s say Asia) can be impacted by a disruption, having diversified manufacturing along countries in the same region would do little to eradicate the risk, and thus, bringing back some of the production, whether domestically or to neighboring countries, can act as a natural buffer to outsourcing in faraway destinations.
Besides near-shoring (as opposed to offshoring) as a manufacturing risk mitigator, one has to consider that at present, and we are not expressing an opinion here, China is considered, by some people, the culprit for COVID-19 whether for cultural reasons (allowing wet markets to operate) or more sinister reasons. Dependence on manufacturing on China will be put under a microscope going forward; further to it, there has been a growing number of voices advocating that the US (and other developed countries) are overdue for domestic manufacturing renaissance for reasons that have become abundantly clear, in their opinion, during COVID-19 response efforts to source surgical masks, ventilators, etc Whether because of anti-Sino sentiments or near-shoring, an anti-globalization trend that originally had emanated with the trade wars is expected now to strengthen and affect supply chains globally; for starters, one can see that commodity shipping and the containership liner companies are going to be affected, and since shipment distances likely to be shortened, the economics of certain shipping market segments will come into question. In any event, as international supply chains have been forced to evolve and redeployed, the Bullwhip Effect Risk (distorted and amplified supply chain information that can cause inefficiencies and higher costs) has the potential to create disruptions, with unpredictable impacts to shippers, supply chain managers and transport companies.
2. Structural Demand and Recovery
As of the end of April 2020, almost 30.3 mil Americans filed for unemployment benefits while the U.S. GDP shrank by 4.8% in the first quarter of 2020, with both statistics being of monumental proportions only seen at extreme crises. The Chinese economy shrank by 6.8% in the first quarter of 2020, for the first time since 1992, and likewise, EU GDP shrank by 3.8% in Q1 2020 for the first time since 1995; no-one can doubt the impact of COVID-19 in the short term, but probably a necessary evil when compare to the preciousness of human life and well-being. With such high un-employment in the short term as effectively every business and social activity having been shut down, such ugly numbers are to be expected, and, by most projection, 2021 will be the earliest when there will be some normalcy in the markets. Both fiscal (more than $1.4 trillion in stimulus in the US) and monetary ($1.5 trillion Fed’s balance sheet expansion) are expected to be of monumental proportions worldwide in order to minimize the impact of the recession (there will be a judgement date in the future for all deficits that are being created in front of our own eyes, but that’s another topic), and there have been debates whether the recovery will be V-shaped, U-shaped, W-shaped, or more likely an L-shaped, lackadaisical and limited. Given the uncertainties and medical considerations involved, likely to be a slow and prolonged recovery, likely staggered across industries and geographies, which implies anemic structural demand growth for the next year or more. Anemic demand would translate for weak demand for shipment of raw materials and also end products; as such, it’s hard to be enthusiastic in the short and intermediate term about the prospects of the marine and shipping industries, both nationally and domestically.
3. Lifestyle Changes
The days of COVID-19 have necessitated new lifestyles and have set us on a course of new habits and trends; for instance, while “tele-commuting” was a debatable office perk in the past, working remotely going forward may be more acceptable - its benefits already been tested during the crisis, which may affect commuting trends and costs (i.e. mass transport, driving, etc). And, if working remotely becomes a norm, do big cities and metropolitan areas still keep their appeal with high costs of living? There will be likely lifestyle changes post-COVID-19 and a race to see which industries may benefit most. But again, whether for shipping finance or equipment finance, it would be hard to foresee, at least for now, any major disruptors from projected new trends and lifestyles.
4. ESG and Emissions
January 1st, 2020 saw the implementation of IMO2020 mandating that ships had to lower their emissions via the use of exhaust scrubbers or better quality fuels. Environmental, Social and Governance (ESG) parameters slowly had started taking hold of the shipping industry. Some have been questioning whether these were just feel-good factors quickly to be forgotten under the urgency of COVID-19; we are inclined to opinionate that COVID-19 likely to act as a catalyst for accelerating the shipping industry’s shift to higher social and environmental standards; certain technologies and practices (i.e. remote surveying, IoT, etc) are becoming more easily acceptable practices under COVID-19’s new reality; we also tend to believe that the citizenry and consumers will evolve more demanding after COVID-19, taking the COVID-19 pandemic as an existential warning for global warming and environmental degradation and will demand, from shipping and other industries, more responsible business practices.
About the author: Basil M. Karatzas is the CEO of Karatzas Marine Advisors & Co., a shipping finance advisory and ship-brokerage firm based in the New York City. Basil has more than fifteen years of shipping market expertise, holds an MBA in International Business and Finance from Rice University in Houston, Texas, and has graduated from the Owner / President Program at
Harvard Business School. Email: firstname.lastname@example.org