It’s getting really weird out there in the ocean shipping markets. Global oil demand collapses yet oil tanker rates spike. Tanker profits soar yet stock investors flee. Unemployment surges and businesses fold yet imports flood into ports and container rates skyrocket.
The COVID-19 pandemic has made the ever-confounding task of forecasting shipping markets more confounding still.
For insight on what’s next, FreightWaves interviewed Peter Sand, chief shipping analyst at BIMCO. Sand, based in Copenhagen, is one of the industry’s most respected prognosticators. BIMCO is the world’s largest association of shipowners, charterers, shipbrokers and agents.
The following is an edited version of that conversation:
Export lockdowns
FreightWaves: Let’s break down COVID-19 effects on shipping into five parts: exporter lockdowns, importer lockdowns, economic knock-on effects, geopolitical fallout and vessel supply.
Starting with exporter lockdowns, Chinese outbound flows ground to a halt in February after the Wuhan outbreak. Does the exporter-lockdown risk primarily affect containers, and do you think it’s less likely going forward even for containers?
Peter Sand: “We’ll never know what China did right and wrong in the early days of COVID-19. But I’m positive there were lessons learned. And should they face more outbreaks in the near-term future, I see a political structure in China that will be more on top of handling this from a containment perspective than in more democratic countries where people say, ‘I want my freedom and if anything disrupts that, I will sue you.’
“Other than the container sector, we haven’t seen any shipping disruptions from the production side.
“In the Middle East, when the pandemic was spreading, it did not affect oil production or exports. In South America, we now see soybeans booming out of Brazil and Argentina. They’ve made sure that whatever containment measures they have in place have not disrupted the export of grains. So, that’s extraordinarily positive.”
Permanent changes ahead
The disruption to the global container supply chain after the Wuhan outbreak was extreme. Do you see permanent changes for the supply chains as a result?
“With the U.S.-Sino trade war, we had already seen a strong trend of some large BCOs [beneficial cargo owners] looking to de-risk supply chains and bring some production from China to neighboring countries like Cambodia, Vietnam, the Philippines and Malaysia. Post-pandemic, that trend will get even stronger.
“Companies will also reconsider exposure to just-in-time logistics.
“We saw a lot of car manufacturers relying heavily on just-in-time deliveries for many of their assembly lines. Those assembly lines came to a complete stop much faster than anyone expected. So, we think there will be big changes.”
That implies importers will offset supply-chain risks by taking on more inventory costs and pre-shipping more volume to warehouses and distribution centers. Looking at today’s U.S. box import levels, this may already be happening. But when it comes to shifting the countries where containerized goods are produced, I’d think that would be very hard to do smack in the middle of a pandemic.
“I agree. Right now, most companies are in crisis mode. There will be more decisions on the new map of trade lanes when the haze in the crystal ball starts to evaporate. Unless you’re really on top of your game, like Amazon, then for now, you’re focused on managing the crisis on a daily basis.”
Importer lockdowns
Turning to importer lockdowns, we had the social distancing and shelter-in-place orders, first in Europe, then in America. That immediately curtailed purchases of containerized goods as well as vehicle fuel. If there are more lockdowns to come in the fall, do you see that playing out differently than in the spring?
“I don’t think we’re likely to see full lockdowns again in Europe and the U.S. going forward. We also believe there were some lessons learned that will limit some of the negative impact [on shipping] from future lockdowns.
“I think the handling of COVID-19 [through the spring lockdowns] was harsher in Europe than in the U.S. And I tend to think it was more effective in Europe. With the outbreak still raging in the U.S., the effects are likely to drag on there for longer.”
Economic fallout
There is an unprecedented amount of government support, but stimulus checks will come to an end. Some already are. Unemployment is extremely high and could go higher. What is the threat to seaborne volumes from these economic knock-on effects?
“Most governments, in particular in the Northern Hemisphere, are intervening in a positive way by delivering stimulus not only to businesses but also to private consumers.
“However, by doing so, they are simply postponing the real damage done. I’m not optimistic about the recovery in the U.S. When you look at the huge rise in unemployment, and the fact that people do not have the money to pay their rent, what kind of import demand will there be?
“When you consume by piling up debt, you’re bringing forward future demand. Obviously, the more you bring forward future demand, the bleaker what lies ahead becomes. And that gives us reason to believe that when all the credit cards are spent and when there are no more loans to get, we will see a contraction of demand. Potentially a meltdown of demand.”
Geopolitical tensions
Generally, if countries make money trading with each other, they’re less likely to start shooting at each other. With the coronavirus causing so much economic pain around the globe, do you see heightened risk of geopolitical conflicts?
“Without a doubt. The more negative the impact on economic growth, the more countries will point fingers at their neighbors and trading partners, increasing geopolitical tensions. National interests and protectionism are flourishing. As an economist, I believe that is irrational because countries are hurting themselves. But I also believe it’s inevitable due to political interests and emotions.
“What’s bad for globalization is bad for consumers and bad for seaborne transportation.
“Tankers are the only beneficiaries [of geopolitical unrest]. If you’re a tanker owner, you beg for geopolitical instability. Not only in the last year, but going back decades, geopolitical instability has built fortunes and pushed up freight rates out of nowhere. We saw this most recently with the OPEC+ alliance breakdown, when tankers made $200,000 a day at a time when demand for oil was evaporating.”
Geopolitical risk is generally bad for containers and can be good for tankers, but what about dry bulk?
“The only upside would be if you became a massive foe of a neighbor who you got all your [dry] commodities from, and the only other trading partner with an equal amount of those commodities was located on the other side of the globe.
“We haven’t seen that yet, but look at what’s going on with Aussie-Sino trade relations right now. China and Australia may be starting a trade war. Iron-ore exports from Australia to China are sky high for now. If China buys iron ore from Brazil to a much larger extent, that would be very positive [for dry bulk].”
Vessel supply: pros and cons
So far, we’ve talked about COVID issues related to cargo demand. But there are also vessel supply effects.
There was already a sharp drop-off in newbuild orders in 2019 due to uncertainty over future decarbonization regulations. This year, coronavirus-induced uncertainty has further dampened newbuild interest. On one hand, that’s good for future freight rates. But on the other hand, there are two risks: First, the virus could cause cargo demand to fall below reduced capacity levels. And second, yard orders could get so low that governments of Asian shipbuilding nations could intervene.
“The orderbook is at a 17-year low [in terms of percentage of ordered capacity versus on-the-water capacity]. However, if you look at it in absolute numbers, and if demand is falling, any increase in the fleet is negative. If fleet growth is only 1% and demand is falling 7%, you’ve still got 8% too much capacity.
“On the shipbuilding side, we have seen a very dynamic Chinese industry develop over the years. Deliveries peaked in 2010-12 and since then we have seen a massive yard consolidation forced by the government. Now China has several ‘national champions’ ready to support the idea of Chinese imports on Chinese-owned and Chinese-built ships.
“I am absolutely certain that China is not going to allow its yards to die. It has built the yard capacity and it might as well make good use of it.
“China is the giant in the shipping industry. It is pretty much running the dry bulk market. It is importing more crude oil than anyone else. It’s really incredible.
“We’ve already seen some Chinese imports on Chinese ships in the iron-ore trade with the Valemaxes. [Chinese leasing companies financed orders for mega-bulkers called Valemaxes backed by long-term contracts to transport iron ore from Brazil to China on behalf of Chinese cargo buyers.]
“We can see this trend even more so right now in the bauxite trade out of Guinea — that is really a fully deployed Chinese trade. China is building the mines, the port facilities and the ships to transport the cargo.”
Chinese cargo on Chinese ships
The nationalistic strategy of Chinese cargo on Chinese ships has been around for well over a decade. I’ve been told it’s driven by China’s intense desire to avoid having its hand forced by an outsider such as the U.S. I would think the shock of the coronavirus outbreak coming on the heels of the trade war with the U.S. would even further strengthen China’s resolve to build its own self-sufficient global trade infrastructure. And that has negative implications for the future of non-Chinese shipowners.
“To go back to Aussie-Sino trade relations, what if China were to bring much more iron ore from Brazil, but what if it simply decided to employ its shipyards to build a whole new flotilla of Valemaxes?
“If so, I doubt there’d be benefits to individual shipowners. They would just pick up the crumbs.
“I’m confident that if China had decided 10 years ago that it wanted 100% of its imports on Chinese ships, it would have put its yards to work and China would have already been there today.
“The Communist Party holds the line for decades, unlike in the West, where the political winds can change from one year to the next. So, China is in no hurry. It will move steadily ahead and eventually get what it wants. And we believe it’s going down the path of Chinese imports on Chinese ships.” Click for more FreightWaves/American Shipper articles by Greg Miller
MORE ON CORONAVIRUS FALLOUT: What the shipping cycle implies about COVID fallout on land: see story here. Q&A with Deutsche Bank’s Amit Mehrotra on post-COVID transport-stock recovery: see story here. Q&A with IHS Markit’s Paul Bingham on how the virus will impact the global supply chain: see story here.