{"id":568075,"date":"2020-12-16T03:56:48","date_gmt":"2020-12-16T03:56:48","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/hardhats\/2020-in-review-the-year-of-supply-chain-disruptions-and-bouncing-back\/"},"modified":"2020-12-16T03:56:48","modified_gmt":"2020-12-16T03:56:48","slug":"2020-in-review-the-year-of-supply-chain-disruptions-and-bouncing-back","status":"publish","type":"hardhat","link":"https:\/\/enterpriseam.com\/egypt\/hardhats\/2020-in-review-the-year-of-supply-chain-disruptions-and-bouncing-back\/","title":{"rendered":"2020 in review: The year of supply chain disruptions and bouncing back"},"content":{"rendered":"

<\/a> 2020 in review: The year of supply chain disruptions and bouncing back:<\/strong> Covid-19 impacted many areas of infrastructure, but energy, construction, and shipping were the hardest-hit, thanks to supply chain disruptions and price volatility. Businesses reliant on physical proximity, like ride-hailing, saw service demand weaken.<\/p>\n

Renewable energy:<\/strong> Supply chain disruptions caused substantial <\/strong>operational delays<\/a><\/strong> to many solar, wind, and waste-to-energy companies from March-June.<\/strong> Companies heavily reliant on imports from China, the largest producer<\/a> of solar panels, were hit particularly hard by production slowdowns, a backlog of orders, and a two-week Egyptian customs quarantine period.<\/p>\n

Delays and scarcity also created uncertainty about the future price of imported components:<\/strong> Possible long-term reductions to Chinese production capacity, a weakened EGP, or global trade policy restrictions could all lead to higher prices, sources told us at the time, while an economic slowdown and reduced energy demand could result in surplus equipment, causing prices to fall.<\/p>\n

But anticipated price swings never really materialized: <\/strong>Transactions essentially came to a standstill between March and June, but with China\u2019s production rapidly recovering<\/a> and countries coming out of lockdown, supply chains bounced back.<\/p>\n

Lower gas prices slowed the renewables transition: <\/strong>When the price of natural gas for the entire industrial sector was lowered to USD 4.50 \/ mmBtu in March<\/a> to help businesses through covid, LNG became more competitive than renewables. The price point<\/a> for solar and wind energy competitiveness is USD 5 \/ mmBtu, while for waste-to-energy it\u2019s USD 6 \/ mmBtu, say industry experts. Some warned this<\/a> would disincentivize subsidy removals and Egypt\u2019s shift away from fossil fuel-based infrastructure.<\/p>\n

But the slowdown seems temporary: <\/strong>Overall investment in renewables is likely to slow<\/a> substantially in the next year. But an uptick is then expected as the underlying factors driving it remain in play: the LNG price dip was temporary and the government remains committed to subsidy reforms. Long-term, renewable energy prices are more competitive for industry, government, and consumers \u2014 and more stable. This actually strengthened the business case for renewables, say some energy leaders<\/a>. Financial institutions like the European Investment Bank also remain committed<\/a> to funding renewable energy infrastructure projects.<\/p>\n

Oil and gas: Market volatility and reduced energy demand brought a shock. <\/strong>As oil prices fell, Egypt\u2019s energy companies cut production and spending<\/a>. Our LNG exports collapsed, with only one shipment completed between March and October<\/a>, driven by weak global demand that saw a 9.4% y-o-y decrease as of July<\/a>. The sector had been expected to expand in 2020, after Egypt\u2019s LNG exports made up 1%<\/a> of the global market in 2019.<\/p>\n

Oil ricochet and a (slower) gas rebound: <\/strong>Egypt should see the largest petrochemicals investments of the MENA region between now and 2024, an Apicorp report (pdf) predicts<\/a>, while the CDC Group termed our oil refining sector \u201drelatively robust.\u201d<\/a> LNG export recovery will be slow<\/a>, with Apicorp predicting Egypt\u2019s facilities \u201cwill remain heavily underutilized\u201d and that we\u2019ll export only 35% of our LNG production capacity between now and 2022. Still, the Damietta LNG plant\u2019s planned reopening<\/a> in 1Q 2021 bodes well, as it could lead to the plant\u2019s first LNG exports<\/a> during that quarter.<\/p>\n

Construction: Projects saw <\/strong>delivery delays<\/a><\/strong> from supply chain issues and essential <\/strong>social distancing<\/a><\/strong> measures taken on site to mitigate covid transmission.<\/strong> The sector relies on imported materials and skilled technicians, but covid challenged both procurement and labor. This slowdown led to an industry-wide contraction, of 9.1% in 1Q2020 alone<\/a>. Sectoral growth in the coming years will be weaker than previously anticipated, reports have predicted.<\/p>\n

But risks identified near the outset of the pandemic \u2014 like widespread unemployment \u2014 haven\u2019t materialized: <\/strong>Potential risks like unemployment, the likelihood of businesses going bust, and global supply chains undergoing fundamental changes were mitigated by government investment and megaprojects, helping to minimize unemployment and maintain liquidity. The sector lost only 288k jobs \u2014 less than half the 624k seen by the retail and wholesale sector. Egypt\u2019s construction growth was expected<\/a> to be a \u201cstill strong\u201d 7.5% in 2020<\/a>, down from a previous forecast of 9.7%, as of April \u2014 outpacing regional peers.<\/p>\n

Shipping: Egypt saw shipping losses aligned with global figures, though traffic at ports remained at full capacity to carry essential goods.<\/strong> Inbound container traffic fell<\/a> 20% y-o-y in April 2020. As of mid-January, it had already fallen 10-20% from where it was in December 2019. Globally, a 25% fall<\/a> in shipping was expected for 1H 2020, with a 10% drop for the year overall. Shipping companies saw losses from Egypt\u2019s ports ranging from 50-70% y-o-y in April alone. A steady stream of Egyptian agricultural produce, and a backlog of shipping from long-term contracts, somewhat mitigated losses \u2014 but companies that didn\u2019t ship essential goods missed out.<\/p>\n

But the industry seems on course for the rebound expected after lockdowns eased:<\/strong> Increased shipping, expected from mid-July, would be a crucial sign of recovery, said sources. A government announcement<\/a> that the Suez Canal saw some 165 more vessels y-o-y in 9M2020 suggests the sector is getting back on track.<\/p>\n

But ride-hailing apps and others reliant on physical proximity saw their business models fundamentally impacted:<\/strong> Ride-hailing startups<\/a> saw an immediate drop in demand. Uber was so keen to reduce costs and avoid losses, it closed down<\/a> food delivery wing Uber Eats in Egypt in May. Careem laid off 31% of its employees. Transportation platform Wasel<\/a> saw its weekly number of trips falling by 50% in the first two weeks of Egypt\u2019s covid-19 curfew. Mayday<\/a>, which provides roadside assistance through an app, had seen orders decrease from around 50 per day to 7 or 8, as of late-April<\/a>.<\/p>\n

They had to diversify to survive, often by introducing service delivery:<\/strong> Uber set up Uber Connect, a delivery tech solution to transport goods, and saw an 80% recovery rate. It\u2019s on track to fully recover next year, says its Egypt general manager. Halan<\/a> started offering consumers products sold on credit to mitigate losses from reduced demand in mobility services. And Wasel adjusted its financial models to make services more cost-effective. All substantially increased sanitization, say representatives.<\/p>\n

Gov\u2019t stimulus and rate cuts kept things moving: <\/strong>Across sectors, government economic stimulus \u2014 including lower rates and cuts to energy prices \u2014 drew praise from industry representatives, who termed it key to weathering the storm. The central bank\u2019s March interest rate cut<\/a> of 300 bps was its biggest on record, followed by a further 50 bps cut in September<\/a> that took place on the back of low inflation<\/a> and key economic indicators stabilizing in July and August. Government support was strong, led by the prime minister and the central bank, said one construction industry leader: \u201cBecause we use working capital facilities to support some of our projects and our cash flows, reducing the interest rates associated with these working capital facilities helped us reduce our costs significantly.\u201d Cuts to natural gas and electricity prices for factories, made early<\/a> in the pandemic, cost the state<\/a> at least EGP 10 bn this year.<\/p>\n

NEXT WEEK- <\/strong>How infrastructure businesses adapted to the pandemic \u2014 namely digitization and diversification \u2014 which we will cover in part 2 of our Year in Review.<\/p>\n

Your top infrastructure stories for the week:<\/strong><\/p>\n