Raw materials redundancy

As if the shipping industry isn’t already facing enough disruption from new technologies, the dry bulk segment in particular is at further risk from a decline in primary raw materials due to a rise in a circular economy, if Jessica Alsford, managing director and head of Morgan Stanley’s sustainable and responsible investment team, is to be believed.   

The rise in a circular economy has macro implications because it boils down to using finite resources, she says in Morgan Stanley’s report The Shift to a Circular Economy. Having access to refurbished products means more spending power for the individual, which would boost domestic product, according to a McKinsey study cited in the report.

The potential losers here are the exporters of primary metals and other finite resources, says Ms Alsford, adding that they tend to be developing rather than developed countries.

She continues: “The net effect would largely depend on a country’s ability to embrace new business models to offset any decline from primary raw materials.”

Reduce, reuse, recycle

Households and companies alike have been recycling rubbish for the good of the environment for decades. Now, however, there’s an added incentive: it’s also good for the bottom line.

Morgan Stanley’s report suggests that new technology and increasing climate-based legislation around the world is creating new business opportunities based on the circular economy.

A circular economy uses products, materials and resources for as long as possible by refurbishing, sharing, leasing or recycling. Ultimately, the goal is to extend the life of all the things that people accumulate while at the same time generating environmental and economic benefits.

Some forward-thinking companies in a number of sectors are already shifting in that direction as ”the advantages for companies are numerous, and centre on increasing the amount of value they create and retain”, says Ms Alsford.

While the circular economy is unlikely to be a key fundamental value driver for many stocks at this stage, the move to a more circular economy could be a disruptive trend in the next five years. Those companies that move first to innovate and adapt should be well placed for future growth. 

Waste not, want not

UNCTAD’s report The Circular Economy in International Trade, written by Guillermo Valles, in its division on international trade in goods and services, also comments on the rise of a circular economy and its subsequent effect on the consumption of raw materials.

According to the report, between 2002 and 2012, the combined markets for waste glass (€2.6bn), paper (€56.2bn) and plastics (€26.4bn) in the EU alone amounted to €85.2bn in current prices, with a lot of potential still untapped.

The report also reveals that electronic goods have a large untapped circularity potential, and cites a study from the United Nations University and UNCTAD which estimated as much as €48bn in savings in metals and plastics present in e-waste alone.

“While their recovery raises a set of safety and health issues, new technologies are being quickly introduced which allows materials to be safely handled and recycled,” says Mr Valles. “This brings out value in materials which were once seen as only fit for energy production or landfilling.”

Rising environmental concerns are only bolstering this shift to a more circular economy. The global economy, driven by the consumer frenzy to have the latest, faster, best new model, must now contend with climate change, water scarcity and damage to the physical environment, says Ms Alsford.

A ‘sharing economy’ mentality has flourished, she continues, with people sharing car rides and renting out spaces in homes rather than booking into hotels. Legislation in Europe, Asia and certain states in the US has also breathed new life into the age-old motto, ‘waste not, want not’.

Longer life expectancy

While extending the life of existing products might seem counterintuitive for businesses, it does make sense, according to Ms Alsford. Not only does remanufacturing and reselling products save on the cost of raw materials, it can also expand market reach to include consumers who are unable to afford the latest new models of electronics like mobile phones and LED lighting.

Expensive health care machinery like magnetic resonance imaging (MRI) scanners are targets for manufacturing to cut both production costs and to expand revenues through resales of refurbished units, says Ms Alsford. 

“Remanufacturing retains much of the material and value included in the original product,” she adds. “This saves costs for the manufacturer with the potential for higher profit margins and returns on capital. It also potentially creates new customer opportunities by making expensive products more affordable.”

Of course, new innovations and technologies also support the shift towards a circular economy. In textiles, for example, chemical processes are being developed to separate blended fibres and recycle the raw materials into new clothes. Meanwhile, in the batteries market, economical recycling of lithium batteries is key as demand for hybrid and electric vehicles accelerates. 

“This rising economic model can unlock vast economic opportunities, especially in developing countries, and ultimately decouple global economic development from finite resource consumption,” concludes Mr Valles. But to what end?

Certainly, the rise in a circular economy will be better for the environment as well as the inclusion of new customers. For exporters, however, the pickup in remanufacturing and reselling products and subsequent decline in demand for primary raw materials could spell more trouble ahead for the dry bulk sector.