Shifting sands stand to disrupt future seaborne trade, as changing demographics and the emergence of the fourth industrial revolution continue to define the global economy
The global population continues to rise, but major demographic shifts are altering the underlying forces of the global economy, presenting fewer opportunities to boost growth – not least in seaborne trade. Accordingly, Danish Ship Finance has said it expects seaborne trade to increase by little more than 1% per annum between 2015 and 2030 in its May 2016 Shipping Market Review.
In the same period, the Denmark-based finance institute believes that the emerging economies that are still supported by lower fertility and mortality rates, and the subsequent change in the age structure of its population, will catch up with developed economies and China. In particular, India, Indonesia, Mexico and Africa will grow their seaborne import volumes by approximately 3% per annum between 2015 and 2030.
In comparison, North America, Europe, Japan and China will suffer due to shrinking workforces within the next 15 years, which Danish Ship Finance expects to structurally reduce their potential for seaborne imports. Consequently, it says: “From a demographic perspective, these economies are expected to witness a decline in seaborne import volumes of about 12% in the period from 2015 to 2030.”
The emergence of the what Danish Ship Finance describes as the fourth industrial revolution in the world economy, meanwhile, will only increase the downside risk to long-term growth forecasts for seaborne trade volumes.
“The transformation of these workers from farmers to future consumers is a necessity if the global urbanisation process is to generate substantial global economic growth and seaborne demand. In its absence, the long-term demand outlook for large parts of the shipping industry could be at risk.”
Bucking the trend
While there seems to be a wide agreement that the changing demographics of the peak earning and spending years will likely slow down global economic growth over the next two to three decades, there is far less consensus on how lower economic growth will impact seaborne trade volumes. Most long-term forecasts present an outlook that mirrors the market fundamentals of the past and, accordingly, many predict that seaborne trade volumes will grow between 3% and 4% per annum for the next two to three decades. Danish Ship Finance, however, see little indication of this happening due to a multitude of factors.
First, highly productive technology such as 3D printers will do little to employ the millions of low-skilled workers that are about to enter the global labour pool in the period leading up to 2030, and fewer jobs translates into less demand for transportation. “The transformation of these workers from farmers to future consumers is a necessity if the global urbanisation process is to generate substantial global economic growth and seaborne demand,” explains Danish Ship Finance. “In its absence, the long-term demand outlook for large parts of the shipping industry could be at risk.”
Second, for domestic import volumes to remain constant one year to the next, construction activity, for example, needs to be maintained at the same level as the year before. “If construction activity comes down for some reason, import volumes will decline accordingly. Some may view this as trivial, but it is not,” says Danish Ship Finance. “Consider all the industries in which units are imported to support production of a certain product or to construct a certain facility. If similar projects do not recur each subsequent year, import volumes will decline.”
And the negative spiral does not stop there, it adds: “All the industries that have been supporting the primary activity may also face lower demand and hence lower import requirements. This does not necessarily reflect an economy in recession; it may just as well mean that an emerging economy is reaching a new level of maturity… But when the economy has reached a new phase of normality, in which it is rebalancing towards a less import-intensive version, seaborne import volumes may decline.” This applies not only to containerised goods and to a certain extent petrochemical demand, but also iron ore, steel, cement and diesel.
Third, Danish Ship Finance warns that trade volumes may decline even if the economy expands, as it has done in the past.
By far the most important factors for economic growth in Europe, Japan and potentially North America in the years to come, however, are unfavourable demographics and legacies from global financial crisis, Danish Ship Finance concludes: “Put simply, this means that future economic growth will be driven by fewer working age consumers and that theses consumers will spend less because they will be repaying the government debt raised to stimulate growth in the aftermath of the finance crises.”
The fourth industrial revolution
Further, a so-called fourth industrial revolution could be a real game changer for the shipping industry, according to Danish Ship Finance. It is characterised by a fusion of technologies that are blurring the lines between the physical and digital spheres, allowing consumers to increasingly gain access to products through sharing services rather than physical ownership.
“It has the potential to redefine the way we live our lives, run our businesses and understand the world,” says Danish Ship Finance. “We do not yet know exactly how it will unfold, but one thing is clear: it is developing at an exponential rather than a linear pace.” Danish Ship Finance adds that the fourth industrial revolution has the potential to disrupt almost every industry in every country, not least shipping.
Today, machines are substituting human labour profitably in more industries than ever before, and as intelligent machines become cheaper and ever more capable, they will increasingly replace human labour, predicts Danish Ship Finance. “The growing capabilities of automation threaten one of the most reliable strategies that poor countries have used to attract outside investment in the past: offering low wages to compensate for low productivity and skill levels.
“In more and more domains, the most cost-effective source of ‘labour’ is intelligent and flexible machines as opposed to low-wage humans in other countries. In a world where businesses stop chasing cheap labour, production will gravitate towards wherever the end market is because that will add value by shortening delivery times, reducing inventory costs and the like.”
At the heart of the fourth industrial revolution is the productivity of materials and recourses, concludes Danish Ship Finance. “New technologies will lead to significant increases in the utilisation and productivity of materials and resources,” it says. “In a circular economy, the goal is for durable components is to enable them to be reused or upgraded for other productive applications through as many cycles as possible.
“The benefits for the environment and global consumers seem obvious, but the potential negative impact on global trade volumes could be significant, not least when combined with the prospect of robotics, artificial intelligent, the Internet of Things, autonomous vehicles, additive manufacturing, nanotechnology, bio-technology, material science, renewable energy and energy storage.”