As the current global coronavirus pandemic unfolds, it is no doubt a challenging situation for all industries. Here is an analysis of how the ocean shipping industry is being affected by COVID-19, according to industry experts.
Falling stock prices
As of February, Investment bank Jefferies’ shipping index and the Capital Link Maritime Index were both down 30% and 24% year to date, respectively.
Jon Chappell, shipping analyst at Evercore ISI, stated, “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.”
“By shutting down industrial production and limiting refinery runs, commodity demand is slumping [ . . . ] The impact on commodity prices, shipping rates and equity values has been immense,” he noted.
Chappell added that recent negatives in shipping stocks “are likely to reverse, and potentially even overshoot to the upside depending on China’s policy response. 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.”
The virus outbreak has come at an already weak period for ocean shipping. Frode Mørkedal, managing director of research at Clarksons Platou Securities, explained, “Seasonality issues have been compounded by coronavirus uncertainty and the resultant impact on GDP growth, energy consumption and overall industrial production. 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.”
Contracting activity in the shipbuilding activity has been severely impacted, with newbuild deliveries being postponed and many companies declaring force majeure, meaning that they cannot fulfil contracts due to the circumstances. Randy Giveans, the shipping analyst at Jefferies, said that many shipyards in China have declared force majeure related to the coronavirus outbreak.
In the first quarter of 2020, contracting activity dropped 55% from the first quarter of 2019, according to data from BIMCO. Only 6.6 million deadweight tonnes (DWT) were ordered across the three major shipping segments, down from 14.7 million DWT last year.
Peter Sand, Chief Shipping Analyst at BIMCO said, “Uncertainty about future environmental regulations, as well as lower demand growth outlook in the coming years, already had many think twice before ordering a new ship. The very sharp decrease in market sentiment and global shipping demand has only lowered contracting activity further.”
OPEC has also extended production cuts through the end of 2020 and reduced production even further through the second quarter in response to the pandemic. These production cuts, both by OPEC and nonmembers, will result in falling tanker demand and rates.
Throughout the industry, rates are being impacted due to significantly reduced demand, including tanker rates, dry bulk rates and LNG shipping rates. Dry bulk rates are coming very close to all-time lows, while LNG spot shipping rates “could potentially drop to around $35,000 per day,” according to Mørkedal.
Deliveries in both segments of the tanker shipping industries have been nearly cut in half compared to the first quarter of last year; -49% and -43% for crude oil and product tankers respectively. In the container shipping market, total deliveries were down 58.6% compared with the first quarter of 2019.
Said Sand, “As long as freight rates hold up for tankers, owners will be less likely to scrap their ships, but even in this market, demand has evaporated and the current high freight rates are not sustainable.”