Only a few short months ago, ocean shipping was overflowing with optimism on the prospects of 2020. Instead, the year is shaping up to be a disaster.
Stock prices are collapsing, losses are piling up and some segments are flirting with all-time lows. The outbreak has made an already weak shipping period exponentially worse.
According to Jon Chappell, the shipping analyst at Evercore ISI, “The impact on physical trade flows and, potentially more importantly, the uncertainty of this virus is resulting in unprecedented measures and precipitous declines in rates across all shipping segments.
“China is the incremental buyer of nearly every major commodity, with outsized impacts on the iron ore and, increasingly, the crude oil and LNG [liquefied natural gas] markets,” said Chappell.
“By shutting down industrial production and limiting refinery runs, commodity demand is slumping, while a state-owned oil company has even attempted to declare force majeure on contractual LNG imports [under force majeure, a party declares that it cannot perform].
“The impact on commodity prices, shipping rates and equity values has been immense,” he emphasized.
Frode Mørkedal, managing director of research at Clarksons Platou Securities, said, “Seasonality issues have been compounded by coronavirus uncertainty and the resultant impact on GDP growth, energy consumption and overall industrial production.
“Activity levels across the tanker, dry bulk, LNG and LPG [liquefied petroleum gas] segments have been very limited as Chinese and other charterers have slowed down on the back of authorities extending the Chinese New Year holiday. As a result, we are starting this week with spot rates at lower levels.
“Shipping equities finished last week down materially again, bringing the U.S. and European-listed equities to year-to-date losses of 22% on average,” said Mørkedal.
The shipping index compiled by investment bank Jefferies is down 30% year to date, while the Capital Link Maritime Index is down 24% year to date.
According to J. Mintzmyer, shipping analyst at Seeking Alpha’s Value Investor’s Edge, “We’ve seen lots of huge swings in sentiment and pricing before; however, this is the worst slide in shipping stocks I’ve ever witnessed, worse than anything of the past 10 years.”
Recovery prospects
When shipping stocks take the kind of beating they have in early 2020, the response is often to tout the buying opportunity.
The “it’s so bad it’s good” shipping-stock pitch has been rolled out repeatedly since the global financial crisis, and the strategy has generally not worked because stocks have languished at low levels for too long.
Recent negatives “are likely to reverse, and potentially even overshoot to the upside depending on China’s policy response,” said Chappell. “But at this time, nobody can accurately predict that important inflection point, and therefore stocks are more likely to be dictated by virus headlines than any sustainable fundamental shifts.”
Randy Giveans, the shipping analyst at Jefferies, commented, “Last week, many shipyards in China declared force majeure related to the coronavirus outbreak.
“We believe that the labor shortage is causing delays for both newbuildings and scrubber installations, which should help improve the supply outlook across tankers, dry bulk, LPG and container ships. Although the economic slowdown in China will more than offset slowing deliveries in the short run, the demand rebound should outpace supply growth in subsequent quarters,” Giveans maintained.
According to Mintzmyer, “Thus far, the average tanker stock decline has wiped out between 2-3 years of implied average profits … the market is saying that the current conditions have essentially destroyed the entire bull cycle. Does this make sense? I think we’ve already massively overshot any rational fundamental impact, but if the coronavirus does inspire an economic collapse in China, which triggers a global recession, then obviously things will come down far faster.”
Tanker fallout
Looking at the rapidly developing coronavirus situation on a sector-by-sector basis, crude-tanker rates are being driven more so by seasonality than the outbreak, at least so far.
Clarksons estimated that rates for very large crude carriers (VLCCs, tankers that carry 2 million barrels of crude oil) were at $21,900 per day on Friday, down 78% month-on-month. There were only eight VLCCs loaded in the Middle East Gulf last week; usually at this time of year there are around 30 per week.
Clarksons noted that “coronavirus uncertainty remains a wild card … [and is] weighing on sentiment.”
OPEC announced on Monday that its Joint Technical Committee had advised the group to extend production cuts through the end of this year in response to the coronavirus and to further reduce production through the second quarter of this year.
Ongoing production cuts by OPEC and participating nonmembers are a negative for tanker demand. The further oil falls, the more likely cuts become. Brent crude oil has fallen to $53 per barrel, down 18% year to date.
Container shipping fallout
According to Peter Sand, chief analyst at shipping association BIMCO, “Advanced economies’ imports of manufactured goods from China remain the main driver of container shipping, with seven out of the 10 largest container ports located in China. The intra-Asian container shipping market, the largest in the world, will be the first trade to feel the fallout from the coronavirus if intra-Asian supply chains are disrupted. Secondly, the long-haul trades to North America and Europe will be affected.”
Sea-Intelligence, the Copenhagen-based container shipping consultancy, released a special edition of its Sunday Spotlight two days early, on Friday, in light of the rapidly unfolding situation.
Sea-Intelligence CEO Alan Murphy wrote that “within a short span of time, carriers have blanked [canceled] an additional 31 sailings” – 21 in the trans-Pacific and 10 in the Asia-Europe trade. “This is a sharp and severe indication of the disruption in demand flows from the coronavirus,” he said.
At current levels, he believes cancellations add up to “a revenue shortfall for the carriers of $300 million-$350 million per week.”
He also warned shippers to “brace for a backhaul rate spike,” explaining that “the raft of new blank sailings is likely to cause capacity issues for backhaul shippers in Europe and North America in March and April. They need to start preparing for this situation as well as for a possible spike in freight rates.”
Dry bulk fallout
Dry bulk rates are coming very close to all-time lows, even before the coronavirus curbs demand, which may happen soon.
Clarksons estimated that rates for Capesize bulkers (vessels with capacity of about 180,000 deadweight tons) were down to $2,700 per day on Friday; the record low of around $2,000 per day was recorded in February 2016. To put dry bulk owners’ current losses into perspective, the breakeven rate for a Capesize is over $10,000 per day.
Rates are being weighed by seasonal weakness, heavy rain in Brazil and a typhoon in Australia. Mørkedal said that the coronavirus poses a “major upcoming test for dry bulk.” The key question ahead is whether China’s steel-producing hubs will come back on line and how that will be reflected in spot steel and iron-ore prices.
Adding insult to injury, dry bulk operators are also suffering highly negative effects from the IMO 2020 regulation, which forces ships without scrubbers to consume more expensive low-sulfur fuel. Clarksons estimated that a non-scrubber Capesize is paying an extra $5,000 per day for IMO 2020-compliant fuel – almost double the amount the ship is earning from cargo transport.
LNG shipping fallout
The declaration of force majeure by Chinese natural-gas importer CNOOC for cargoes contracted from Shell and Total sent shockwaves through the LNG shipping sector.
Coronavirus has come at an extremely inopportune time for the sector. The LNG commodity price in Asia is now at a historically low level, making it uneconomical to ship U.S. LNG to the Pacific Basin. This reduces average voyage distance and, consequently, vessel demand. Stifel analyst Ben Nolan noted that typical demand growth is 6% per year, but LNG vessel supply is set to rise 8% this year and 10% next year. “So a challenging situation has become even more challenging,” he said.
Clarksons Platou Securities estimated that LNG spot shipping rates were $49,500 per day on Friday, down 42% month-on-month. Mørkedal believes rates “could potentially drop to around $35,000 per day.” More FreightWaves/American Shipper articles by Greg Miller