and restructure their businesses to address the large volume of debt which has been accumulated. To assume that the number of winners from this process will be balanced out against those that need to consolidate or downsize is both rather too wholesale, and fails to consider how uneven the processes and outcomes will be, particularly as governments will doubtless fail to comprehend, let alone anticipate the consequences of their actions, which will be a complex challenge even if they did.
Transport and logistics, above all anything related to shipping, has been problematic throughout the pandemic, for a broad array of reasons. The industry has always had to deal with often sharp fluctuations in global trade, but the impact of the pandemic was eminently unprecedented in scale, above all the need to deal with production displacement, along with rapid and geographically very uneven swings in demand, which are set to continue for a protracted period, and the consequence that above all, ships and containers are all too often in the wrong place to meet these demand fluctuations. Increasing capacity is neither simple in the face of such violent swings in demand, nor practical for an industry that still has the memory of a ‘big bust’ post GFC, is also still dealing with IMO2020 requirements, and faces considerable uncertainty about how it will be required to meet climate change goals. It will also be wary of bulking up capacity to meet spikes in demand that will inevitably prove largely transitory, and then be left holding the proverbial baby once growth patterns stabilize, this was above all visible in recent US logistics managers’ surveys. It can then evaluate it and respond to what emerges, and meanwhile it will welcome the opportunity to profit from what will likely be a period of better margins (as will many other sectors). Given that retail, wholesale and producer inventories remain at very low levels, and that these will take time (certainly into Q1 2022), logistics and transport demand should remain robust. The risk of substantial ‘pass through’ of rising raw materials and transport costs to consumer goods prices looks to be increasingly high, and it may well take time to dissipate, above all where the scope to absorb input cost increases has been severely impaired by the pandemic.
The final point relates to the oil sector, and again to the apparent primacy of linear, goal oriented thinking, and a considerable absence of systemic and practical considerations. Leaving aside the likelihood that the recovery in global demand will be uneven geographically, above all subject to interruptions due to local spikes in infection rates with associated
activity restrictions, as has been witnessed in South and East Asia recently, the hydrocarbon sector faces the challenge of meeting climate change goals. It has been assumed by many that even if OPEC+ proves to be cautious in restoring output, above all to continue supporting prices, any unexpectedly sharp rise in demand would be met with increased US shale sector output. But with banks and funds under pressure to withdraw funding for the sector, and US banks already reticent to lend due to the high levels of debt in the shale oil sector, and the fact that upstream investment in the oil sector since the 2014/2015 price collapse has been well below longer-term averages, the risk that demand outstrips supply over the longer run is rising.
Indeed, with many western oil majors likely to reduce investment, the risk is that there will be ever greater dependency on investment by NOCs (national oil companies) from OPEC, Russia and China. The pace of reduction in output that would be ideal to accelerate efforts to meet transport and power generation related climate change goals is an ideal goal, which does not take into account the time and investment that will be required to achieve a secure and sustainable level of output from alternative energy sources in practice. There are also the further considerations: a) it remains unclear when the auto sector will be in a position to mass produce affordable non-hydrocarbon powered vehicles; b) demand for petrochemicals and plastics will remain high; and c) most importantly, who will finance energy transition in the developing world, given that many of those economies, even in the relatively well advanced economies of central and eastern Europe, let alone Africa or Central and South America will struggle to overcome their dependency on coal, let alone hydrocarbon and gas? If the transition is not managed practically and co-operatively, the risk of a sustained oil price spike looks to be quite high.
Supply chain disruptions are therefore likely to remain a key consideration for a protracted period, and it should be added that it will take a considerable period of time before some visibility is established on how much productive capacity has been permanently lost. This will also have a considerable bearing on the global recovery, and doubtless lead to further bottlenecks.
Marc Ostwald E:
marc.ostwald@admisi.com T: +44(0) 20 7716 8534
WITH MANY WESTERN OIL MAJORS LIKELY TO REDUCE INVESTMENT, THE RISK IS THAT THERE WILL BE EVER GREATER
DEPENDENCY ON
INVESTMENT BY NOCS (NATIONAL OIL COMPANIES) FROM OPEC, RUSSIA AND CHINA.
15 | ADMISI - The Ghost In The Machine | Q2 Edition 2021
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