Shipping in a time of coronavirus

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The coronavirus pandemic is having a negative impact on global shipping demand. The speed with which the virus has spread makes it difficult to assess the full consequences. Nevertheless, we see a need to update our 2020 forecast to make some sense of this massive uncertainty.

Geopolitical tensions that prompted the OPEC+ alliance to break down has caused the spot freight market for oil tankers to erupt. The events that ensued – and those that are likely to follow, as Saudi Arabia prepares to flood the global oil market – will benefit the crude oil tanker industry specifically, while driving fuel costs down more generally, at a time when oil demand generally drops.

In massive contrast to the benefits the oil tanker shipping industry enjoys from the brutal geopolitics of the oil market, there are widespread negative impacts from the coronavirus pandemic. Moreover, the “Phase One” agreement of the U.S.-China trade war is not delivering on its promises (Beijing and Washington had failed to boost trade volumes of specified goods even before cornovarus took hold). This situation is likely to set the tone for the rest of the year. The failure itself is no surprise, but the magnitude of it surely is.

Global economic activity, which slowed down significantly in 2019 will become even lower in 2020. Some nations will fall into recession. The trade-to-GDP multiplier does not deliver guidance under such extraordinary circumstances.

A call for stimulus

It remains of utmost importance that global political leaders take measures to secure health and safety right now, but also that they prepare for an eventual return to normal – hopefully no later than mid-2021.

Traditional fiscal and monetary stimulus will only speed things up a little once the virus is contained. What is needed on top of that are economic stimulus packages which aim to secure the purchasing power of consumers and corporates. Public debt will rise as such measures are costly – but you should worry even more about the future if widespread layoffs and bankruptcies result in a severe global recession. The service sector of any economy is surely hit hardest in the short-term. But manufacturing, which matters most to the shipping industry, is also hit hard.

Tanker shipping: two different realities

• Demand is positively impacted in the short term, as the breakdown of the OPEC+ alliance dramatically lifts Saudi Arabian exports.
• In the longer-term, the coronavirus pandemic has annihilated global oil demand for 2020: BIMCO expects world consumption will fall in 2020, compared with last year. Transportation demand is falling, especially for jet fuel, largely due to lower economic activity.
• Supply: new built deliveries from Chinese shipyards will be slightly lower than previously forecast.
• Freight rates for oil product tankers will be negatively affected by the fundamentally lower demand. Still, BIMCO expects average freight rates for the year to be above break-even levels.
• Freight rates for crude oil carriers are super strong; if/when the geopolitical support eases, the oversupplied market is likely to deliver freight rates below last year’s levels.

Dry bulk shipping

• Demand is negatively impacted for the full year, as China – the main buyer of all dry bulk commodities – makes limited purchases while the coronavirus outbreak is being contained. Still, we expect demand to grow for the full year, picking up from its current low-point when China returns to the commodities market.
• In the short term, demand from China will remain weak. The Capesize sector is feeling the most pain as significant iron ore demand fails to materialise. Other dry bulk sectors fare better. While still experiencing loss-making freight rate levels they are buoyed by demand from outside China.
• In the medium term, Chinese stimulus may benefit domestically more than externally. Demand from outside China will hit a soft patch as Europe is now at the epicentre of the pandemic; North America could be up next.
• In the longer term, a gradual return to normal is probable. No demand boost is expected to come around, as the events have not built up demand – merely destroyed it.
• Supply: new built deliveries from Chinese shipyards will be slightly lower than previously forecast.
• Freight rates for dry bulk ships will be negatively affected by fundamentally lower demand. Prior to the pandemic, BIMCO expected average freight rates for 2020 to fall from last year. They will now end up even lower.

Container shipping

• Demand is negatively impacted for the full year, which causes BIMCO to revise its estimate from a low global demand growth to a negative one. Given the nature of this crisis, we do not expect a contraction of demand in proportions similar to that of the 2008 financial crisis. This saw demand slip to 3.4% in 2008, and contract by 9.5% in 2009, from average demand growth of 9.7% in 1997-2007. The origin of this crisis is not financial; avoiding a huge increase in unemployment is a main objective for many stimulus plans.
• In the short term, China’s manufacturing sector will still be recovering from the lockdown. Reported productivity is around 60-75% of capacity, whereas the (equally supply-chain-critical) truck drivers are supposedly fully recovered.
• In the medium term, Chinese exports of backlogged orders will resume and lift volumes outside of Asia. The idle fleet will decline as the number of cancelled sailings are reduced. Only time will tell if new export orders will hold up while Europe and North America are in lockdown.
• In the longer term, the lockdown of Europe and North America will keep consumers at home and lift unemployment, hopefully just temporarily. As a result, demand will evaporate. BIMCO does not expect a demand boost to appear when normality returns. We will merely see a gradual recovery to normal freight volumes. For the regular network logistics, BIMCO expects 2020 to be massively disrupted due to these out-of-sync impacts to import and export centres across the globe.
• Supply: new built deliveries from Chinese yards will be slightly lower than previously forecast.
• Spot freight rates are artificially elevated on front-hauls out of Asia due to the positive effect of reduced capacity. Service contract negotiations, which are shortly due on the main trades, are likely to be settled as late as possible, as major retailers, as well as carriers, have very little solid ground to tread on in terms of upcoming demand.
• For the full year, BIMCO already expected average freight rates below last year’s level. But that level is now expected to be loss-making. Due to deteriorating demand-supply fundamentals and higher fuel costs arising from the IMO 2020 sulphur cap implementation – even though the fall in oil prices has lessened some of the negative economic impact.

When the dust settles

The drop in global trade may be even more pronounced than the slowdown we saw in the wake of the 2008 crisis. An increase in protectionist measures may also become more widespread as nations seek to fix vulnerabilities the health crisis exposed. Global and regional supply chains will be up for review. And while there will be changes, some of them will benefit shipping demand. Others won’t. This pandemic has exposed several unwanted vulnerabilities to supply chains as we know them today.

The trade-to-GDP multiplier may yet again provide guidance to the direction of shipping demand stemming from global economic activity. Coming down from an average multiplier of 1 (2002-2008) to an average of 0.85 (2011-2020F), BIMCO expects the multiplier to stay below 1.

Peter Sand is Chief Shipping Analyst at BIMCO

The views expressed in this article are not necessarily those of Windward.