Are We Living Through Peak Population?
Friends at Vesselbot posted on LinkedIn this week a request for views on what lies ahead for shipping as electric vehicles and renewable energy update increase over the next decade.
I think about these issues every day now, not least because I write about them and host a podcast on them for Ship.Energy, but because any investment horizon that goes beyond 2030 has to take these things into account, as well as all the related ESG issues.
For instance, as Mark Campanale of the Carbon Tracker Initiative told a webinar recently, ship owners have to come up with a good rationale now for how they are managing the risk of their markets shrinking in the future as forty per cent of the global market cap decarbonises by mid-century.
There is however a bigger, underlying challenge to the global shipping industry which is not publicised very much. Somehow it seems rather poor taste to broach the subject. Somehow it seems better to wish it away and hope it will not come in our lifetime.
It is not the energy transition, though that will change demand for shipping. The first LH2 carrier, the Susio Frontier, arrived in Japan from Australia on 14 January, signalling the beginning of the global hydrogen economy.
It is not that commercial reality means that we have almost certainly reached peak oil and coal consumption. Industry and investors are moving faster than governments and regulators to cut their dependence on and investment in fossil fuels.
It's not even the potential split between supply chains to China and supply chains to the liberal democracies, though that split is showing itself already even in companies that supply both markets.
The big challenge over the same time frame as global decarbonisation – the next 20 to 30 years – is peak population.
Global population growth was slowing even before Covid-19 triggered a baby bust. Professor of Sociology, Philip Cohen of the University of Maryland in the US says, “People make long term decisions when they have confidence about the future, and if there’s anything about the future that undermines confidence it’s this massive pandemic.” US births are down between 5% and 8% in 2020, according to preliminary data. The ongoing pandemic suggests that births will fall in 2021 as well.
Falling birth rates in a recession are normal but, as nations develop, women everywhere spend less of their lives raising offspring. As a consequence of that trend, population models have brough peak humanity forward from the year 2100 to 2060 and now 2050 and maybe even sooner, depending on how fast the effects of climate change are felt, and when or whether we go back to normal from Covid.
Even pre-Coronavirus, Europe's population was forecast to peak before 2030. The US birth rate in 2019 fell to its lowest level in 35 years, well below the requisite 2.1 babies per woman required to sustain the population. Japan's population fell by around two million in the decade to 2019. China's population is predicted to start falling in the current decade.
South Asia and Africa provide most population growth now and will drive global immigration trends for decades to come as their youth make up the global pool of employees for the jobs that don’t get terminated by automation or digitalisation.
A few years ago, economists were suggesting that the big problem of the 21st Century would be what to do with the surplus billion people. At the same time, environmentalists were warning that the big challenge of the 21st Century would be for governments to deliver prosperity without growth, because growth implies consumption of energy and the emission of greenhouse gases.
Growth is counted in units of GDP and is based on a growing population consuming more stuff. That’s why developing countries with young, fast-growing populations enjoy higher GDP growth rates than mature economies with ageing populations. As the world gets richer (let’s put aside increasing inequality for now), population growth is slowing.
GDP growth will eventually stall unless some form of productivity revolution replaces population growth. But one unexplainable conundrum for economists is slowing productivity in most developed economies. The world is growing more slowly and going more slowly – every ship owner running ships below their design speed knows that.
GDP growth is the key driver of shipping demand. Model shipping demand any way you want, input thousands of variables into a freight rate prediction, and you will get the biggest movement by turning your expected GDP dial up or down.
It is accepted wisdom that shipping is a supply-led market. But, as I have written many times in the past, actually the shipping market depends on the supply response to a given level of demand. For instance, trace the history of VLCC orders against GDP growth and you will find that two good quarters of GDP growth always lead to a spike in orders for ships that won’t deliver until two years later...when GDP stands a 50:50 chance of being higher or lower.
When (not if) population growth stops and then reverses, demand for energy, homes, cars, white goods, textiles, furniture, and the commodities that are used to make them, will fall. The challenge for governments will be to create the conditions in which businesses can deliver prosperity without growth. The challenge for ship owners will be to gauge the optimum level of supply to respond to flat or falling demand. But supply of what? Hydrogen and ammonia tankers perhaps. Floating Power-to-X plants probably. Automated scrap steel carriers maybe as the steel cycle encourages more re-use and virgin steel production falls. But probably not more Capesizes or VLCCs.
The good news for many readers is that, like the Greek ship owner I spoke with recently, we won’t be around to see all this. We may have witnessed peak population but we will check out before the party ends.