FreightWaves is providing a forum – Market Voices – for a number of market experts.
Brian Laung Aoaeh writes about the reinvention of global supply chains, from the perspective of an early-stage technology venture capitalist. He is the co-founder of REFASHIOND Ventures, an early-stage venture capital fund that is being built from the ground up to invest in startups creating innovations to refashion global supply chain networks. He is also the co-founder of The Worldwide Supply Chain Federation (The New York Supply Chain Meetup). His background covers the gamut from scientific research, data and statistical analysis, corporate development and investing for a single-family office, and then building an early-stage venture fund from scratch – immediately prior to REFASHIOND. He also is a charter holding member of CFA Institute.
My passion for supply chain goes back to my days growing up in West Africa where supply chains were – and still are – notoriously broken. The importance of supply chains was reinforced during my operations course in business school at New York University. I am fascinated by the complexities of the process, particularly in maritime, one of the supply chain industry’s best kept secrets, for the critical role it plays in transportation.
The maritime freight shipping industry holds a critical key to the functioning of the modern world. Maritime has historically been kept out of the spotlight, despite the fact that global maritime freight shipping is responsible for transporting nearly 90 percent of the world’s trade, according to the World Shipping Council (WSC).
Shipping plays a central role in globalization. It provides an incredibly efficient mode of transporting merchandise manufactured in relatively low-wage countries to customers in relatively high-wage countries. It also facilitates a highly cost-effective trade in non-manufactured goods.
For example, Wiskerke Onions, which is based in The Netherlands, reportedly grows about 185,000 metric tons (more than 400 million pounds) of onions, shallots and garlic and exports about 90 percent of its products to 125 countries around the world. This is made possible by containerized shipping.
Shipping is a capital-intensive industry. It’s also a business characterized by low profit margins, and frequent boom and bust cycles.
Impact of new regulation taking place in 2020
The International Maritime Organization (IMO) has ruled that as of January 1, 2020, marine sector emissions of sulfur oxides in international waters need to be significantly reduced. IMO 2020 regulations will see the largest reduction in the sulfur content of a transportation fuel undertaken at one time. These changes will have a huge impact on the industry – expect costs to rise – and it’s only just begun.
The IMO is the specialized agency of the United Nations responsible for the safety and security of shipping, as well as prevention of marine and atmospheric pollution by ships. It has 174 Member States and three Associate Members. On January 1, 2020 the IMO will begin implementing a 0.5 percent cap on the sulfur content of marine fuel, replacing the existing cap of 3.5 percent. This change is in addition to a 0.1 percent cap on sulfur content that is already imposed on ships in emission control areas (ECAs).
Why is the IMO introducing the new sulfur cap?
This measure is the culmination of concerns among the IMO’s members about the impact that the international shipping industry has on atmospheric pollution, global warming and climate change. The industry’s emissions lead to about 400,000 premature deaths from lung cancer and cardiovascular disease, and about 14 million childhood asthma cases annually (Jalkanan, Corbett et al., 2018).
IMO 2020 does not address nitrogen oxides, carbon dioxide and particulate matter – each of which is present in emissions resulting from shipping. The sulfur cap is the first of a number of regulations that will need to be implemented if the IMO’s member states remain committed to minimizing the industry’s negative impact on climate change.
Global climate change
Whether you believe in it or not, we cannot escape the facts. The data below from NASA’s Global Climate Change portal puts things in context.
The first graph shows NASA’s Global Land-Ocean Temperature Index, which measures the change in global surface temperature relative to 1951-1980 average temperatures. The index has been on an increasing trend since 1910 when it attained its lowest value, meaning that the warmest years on record have been the most recent.
The second graph shows atmospheric carbon dioxide (CO2) levels measured at Mauna Loa Observatory, Hawaii, in recent years, with average seasonal cycles removed. Measuring atmospheric CO2 is important because carbon dioxide traps the heat generated by human activity and natural processes in the earth’s atmosphere. Again, the trend is unmistakable.
The third graph shows changes in sea level since 1993. Sea level changes due to melting ice sheets and expanding seawater as the world’s oceans and seas become warmer.
The new rules – and new ones sure to follow – will make shipping more expensive. According to a 2017 Wood Mackenzie study, global marine fuel costs could increase by up to $60 billion annually in a full compliance scenario. Shipping companies will also be confronted by new capital expenditures for equipment to retrofit existing fleets and an increase in ongoing operating costs. The most certain outcome of these developments is that ocean freight rates will increase, and eventually these increases will be passed-through to the individual consumer. In other words, we should expect price increases for 90 percent of the things we consume.
There’s intense discussion within the industry about the future. For example, Maersk, the world’s largest container shipping line, has stated that it is taking steps to become carbon neutral by 2050.
This discussion takes on increased urgency as the stark realities of global warming and climate change become more pronounced. The traditional solutions to the challenge of greatly reducing emissions from the shipping industry are interesting and we should keep pursuing them.
However, I am most excited about the opportunity this presents to consider radically new approaches to solving the problem; new materials for ship construction, new methods of powering ships, 3D printing and localized manufacturing, automation and optimization, and better use of data for predictive analytics, among others.
The business of moving the world’s freight across the oceans and seas is an awesome and critical responsibility. Difficult problems are gathering on the horizon. Difficult problems always offer an opportunity to think differently, to think boldly, to refashion existing systems, and to champion the innovators among us who we may have ignored in the past.