coronavirus: may 2020 shipping update m… · world oil demand growth trends 10.0...
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Coronavirus: May 2020 Shipping Update 1
1 . SUMMARYMacroeconomic conditions have deteriorated and despite the gradual easing of lockdowns, concerns remain over a potential second wave of cases. Forward-looking indicators point to a slow recovery from coronavirus against initial hopes of a potential V-shaped rebound. An economic “shock” this year is expected to set a lower base for growth in 2021.
It has been a mixed picture in the shipping industry. The tanker market has already enjoyed a prolonged period of strong earnings and is poised to benefit from favourable fundamentals throughout the rest of the 1H 2020. Conditions in the dry bulk sector remain tough, but there is room for improvements during the latter half of the year. The outlook is challenging for containerships, yet liners are displaying notable discipline in navigating through the crisis.
Although virus-induced 2020 demand destruction for shipping services is capturing headlines, supply-side developments are much more favourable. At the start of April, the world orderbook stood at a record-low of 8.3% of existing fleet capacity. Contracting is expected to remain low in 2021 against the backdrop of ongoing rationalization in fleet expansion capital. There is also an accelerating environmental agenda, which creates uncertainty over newbuilding vessel specifications and incentivises the faster phase-out of older and less fuel-efficient tonnage.
CORONAVIRUS: MAY 2020 SHIPPING UPDATEMICHAIL BEGLERIS , PENINSUL A MARKET ANALYST May 2020
2 . MACROECONOMIC FRAMEWORK DETERIORATESWhile the unique nature of the “Great Lockdown” has caused the largest dispersion in macroeconomic forecasts in modern history, there is consensus that the output loss associated with the pandemic will outweigh the losses that occurred during the 2008-2009 global financial crisis. The IMF’s most recent projections point towards a 3% annual contraction in global GDP this year, which would constitute the most severe recession since the Great Depression of the 1930s.
Growth in the advanced economy group is currently projected at a series low of -6.1 percent in 2020. All advanced economies are expected to contract, with the most severe downfalls being witnessed in the Euro area (-7.5%), the UK (-6.5%) and Canada (-6.2%). Slightly milder but still substantial contractions are expected in the US (-5.9%) and Japan (-5.2%).
The group of developing economies is expected to contract by -1 percent on average in 2020. Severe slowdowns of -5.5 and -5.2 percent are anticipated in Russia and Latin America, with contractions of -2.8 and -1.6 percent registered in the Middle East and Sub-Saharan Africa. Emerging Asia is estimated to be the only region with a positive year-on-year growth rate in 2020 of 1%, yet this would still be more than 5 percentage points below the 10-year average trend.
PENINSUL A MARKET ANALYSIS
Coronavirus: May 2020 Shipping Update 2
Highlighting the severity of the current crisis, the overall fraction of countries that is expected to experience negative per capita income growth in 2020 is estimated at over 90%, which would be the highest since comparable data became available in 1990 (Chart 1).
Chart 1. Countries in Recession
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Share of countries with negative per capita growth (LH-axis)World GPA per capita growth (LH-axis) Source: IMF
In the medium-term, world GDP is expected to rebound from contraction of 3% in 2020 to growth of 5.8% in 2021, which would mark the fastest expansion since 1973 and the largest year-on-year improvement on record. But despite this seemingly explosive growth, any gains in 2021 will still be from a lower base. Economic output in advanced nations is not expected to return to 2019-levels until the 4Q 2021, while emerging economies are seen rebounding to pre-virus trends possibly in the 3Q of this year (see Chart 2).
Chart 2. Quarterly World GDP1Q2019 = 100; dashed lines indicate pre-coronavirus trends
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Source: IMF
Advanced EconomiesEmerging and Developing Economies
Reflective of the ongoing restrictions to non-essential economic activities, global PMI indicators have been registering historically low levels in recent months in both the manufacturing and services sectors. Weak forward-looking indicators such as new orders and unemployment (which fell to their lowest since the Great Depression) hinder the prospects of a sharp rebound any time soon.
While lockdowns are being eased, social distancing rules are likely to extend into the latter half of the year, while sectors that rely on social interactions such as travel, hospitality, sports and entertainment and tourism will continue to see low levels of consumer demand for some time. A slow recovery from coronavirus supports forecasts of negative year-on-year oil demand growth throughout 2020 (see Chart 3).
Chart 3. World Oil Demand Growth Trends
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Source: PlattsIndustrialized Economies
Emerging Economies
FSU & Eastern Europe
China
Only China returns to positive year-on-yearoil demand growth in 2020
Overall, annualized world GDP expansion of 2019-2021 estimated at around 1.5%, lower than normal economic trends. Conditions are expected to be particularly weak for some commodity exporters in the Middle East and Latin America, as these countries are also hit by lower demand and prices for their goods. Annualized 2019-2021 growth for these economies could fall to negative territory.
3. SHIPPING PERSPECTIVE
3.1 TankersTanker market trading conditions have been robust since September 2019, providing healthy profitability and cash generation to owners. Fundamentals remain supportive to earnings for the remainder of the 2Q 2020, which would mark 9 months of uninterrupted strength in the market. Buoyant tanker rates have recently reflected a significant increase in demand for floating storage, which has removed a substantial amount of the fleet capacity from the spot market (see Chart 4).
Coronavirus: May 2020 Shipping Update 3
Chart 4. Weighted Average Tanker Earnings vs VLCC Floating Storage
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Average Tanker Earnings (LH-axis) VLCC Floating Storage (RH-axis)
The collapse in global oil consumption due to impacts from the Covid-19 pandemic has led to a significant oil surplus, causing a rapid build-up of land-based inventories. With onshore logistics capacity being tested to the limit, tankers quickly became one of the few viable options to place the excess oil. Meanwhile, the steep contango in the oil markets means the economics for floating storage have never been so profitable. An initial flurry of VLCC floating storage time-charter fixtures in the 1H April (around 9% of the VLCC fleet is estimated to be currently storing crude) was followed by a jump in product tanker storage plays, with nearly 300 clean tankers potentially storing fuel as of early May. Consequently, LR2 earnings had surged to record levels of over $165,000/day by early May.
Besides floating storage, additional constraints to fleet capacity are being presented by discharge delays (as on-land storage is near capacity) and low Rhine water levels which restrict barge movement and slow down bunkering operations. Global oil supply is expected to continue outpacing demand until at least July, underscoring prospects of sustained near-term floating storage enquiry.
A downwards correction in tanker rates is anticipated in the second half of the year, as the combined effects of the fundamentally lower global oil demand and voluntary production cuts filter through the market. Further pressure may be added by the expected winding down of some of the land-stock inventories that have been building since the start of the virus crisis. But there will still be some supporting factors which should help to cap the scale of losses. One key example is that oil demand from Asia is expected to be resilient, as refiners will likely seek to benefit from the very low oil prices. Crude imports from China, which account for around 25% of world seaborne crude oil trade, are set to be underpinned by a recovery from coronavirus and supportive government policies towards the domestic refining sector. Furthermore, at a time when tanker fleet capacity is already constrained from extensive floating storage employment and severe
delays at discharge ports, the recent legal proceedings involving Ocean Tankers could now remove up to 18 VLCCs, 24MRs, 5 LR1s and 12 LR2s from the market.
Overall, while pressure from lower oil trade lies further ahead, tanker owners should have substantial reserves to withstand the challenge, while there are some silver linings that may mitigate the upcoming negative demand side trends. Most importantly, the process of unwinding the oil currently stored on tankers will likely be gradual, which is expected to place a higher floor on earnings as vessel oversupply becomes less frequent.
3.2 Bulk CarriersIn contrast to robust performance in the tanker sector, conditions in the dry bulk market have come under significant pressure so far in 2020. Weakness earlier in the year was attributed to seasonal trends and disruption to Brazilian iron ore exports due to flooding. Following a temporary recovery in March-April, the Baltic Exchange Dry Index returned to its lowest levels in the year-to-date on 12 May at a mere 433 points. Notably, the recent downfall comes despite the fact that rates tend to rise during this time of the year (see Chart 5), indicating the negative virus-induced effect on the market. Reflecting weak conditions, daily average Capesize earnings have remained below cash break-even levels (daily opex plus financing costs) in the year-to-date.
Chart 5. BDI Historical Trends
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Coronavirus: May 2020 Shipping Update 4
Consensus among industry players is that the market is near the bottom and there is room for improvements during the latter half of the year as economies re-emerge from the pandemic. Furthermore, current dry bulk asset values have seemingly reached a floor, and even at these depressed levels, earnings should be almost double from their current levels (see Chart 6).
Chart 6. Bulker Earnings vs Second Hand Values
Source: Clarksons, Peninsula
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Cautious optimism in the Capesize sector is based on the fact that around 75% of the Cape fleet is employed for transportation of iron ore cargoes to China, while there is much less exposure to markets west of Suez which are facing the most significant pressure from coronavirus. Rising utilization at Chinese steel mills and improving profit margins suggest output will be higher, underpinning iron ore demand. Capesize rates are also expected to be bolstered in the 2H 2020 from a normalization in Brazilian iron ore supply, which stood nearly 10% lower year-on-year in January-April 2020.
Coal trade is impacted by the slowdown in world economic activity and the consequent fall in demand for both power generation (steam coal) and construction activities (coking coal). Underscoring weak demand prospects, the International Energy Agency expects coal consumption to decline by 8% year-on-year in 2020, a fall unmatched in the last 80 years. To make matters worse for coal, on-land flows from Mongolia into China have resumed following the re-opening of borders. Unsurprisingly, although iron ore and coking coal prices normally track each other fairly closely, weaker demand trends for the latter have led to a relative outperformance of iron ore on the futures market. Demand weakness is compounded by several virus-related disruptions to coal output, with Wood Mackenzie suggesting that more than a third of seaborne coal supply could be at risk in a worst-case scenario.
Minor bulk trade has also been impacted, not least due to the series of supply disruptions that have been reported around the world, including in the Philippines, South Africa, Chile, Peru and Brazil. Furthermore, demand for minor bulk goods such as steel products, cement, nickel ore and others is vulnerable to economic trends, as indicated by the 12% year-on-year contraction of minor bulk trade during the 2008-2009 financial crisis.
Grain trade has arguably been the sole significant source of Panamax/Kamsarmax employment in recent weeks, primarily due to record high Brazilian soya exports in April. Support is also being lent by an upturn in Chinese soybean demand, as the country recovers from the impacts of coronavirus while there is also reduced availability of other oil seeds. Chinese soybean demand is on a longer-term path of recovery following the previous effects of swine flu. Beijing has shown determination in restoring its swine population, having significantly raised inflows of live pigs from the US. There are also prospects for US grain exports, with corn shipments expected to increase significantly on the back of historically high production forecasts and a drop in US ethanol demand (40% of US corn use) which promotes export availability.
Overall, a particularly weak 1H 2020 is expected to push the Dry Bulk Trade to Fleet Capacity ratio to historically low levels in 2020 (see Chart 7). Improved dry bulk trends are anticipated into 2021, with a healthy rebound in trade being met by the lowest fleet growth in over two decades.
Chart 7. Dry Bulk Trade to Fleet Capacity Ratio
Source: Clarksons, Peninsula
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Coronavirus: May 2020 Shipping Update 5
3.3 Containerships
The containership sector is arguably the one most severely impacted by the effects of the coronavirus. Under the World Trade Organization’s (WTO) most optimistic scenario, merchandize trade will decline by 13% year-on-year in 2020, which translates to a fall in container shipping demand of around 10%. A much steeper fall in liner trade is possible if the WTO’s pessimistic scenario of a 32% annual contraction in trade materializes.
The initial impact on boxship activity focused on export availability from China, where the economy is now effectively restarting. The risk profile gradually became global, and the previous lack of Chinese containerized exports was replaced with a sharp drop in demand from the rest of the world. Underscoring weak consumer spending, sales of clothing accessory in the US dropped by 50% in March from February, at a time when lockdowns in the country were not even at their peak. In response to the slowdown in demand, carriers have reduced deployed capacity through blanked sailings, which pushed the idle containership fleet to a record high during the first week of May. Container shipments out of the Far East to Europe and the US West Coast have been affected the most, with around 25-30% of these trades being blanked in the 2Q 2020.
Despite the negative near-term outlook, the gradual reopening of economies from coronavirus should mean that carriers are past the point of maximum pressure. Data from Sea-Intelligence shows that the state of the market has reached a plateau, where carriers are now blanking very few additional sailings. Notably, the scheduled blank sailings for July 2020 are currently lower year-on-year. This indicates that liners are likely implementing a “wait-and-see” approach, hoping that a rebound in demand will be seen in the 3Q 2020. The collapse in bunker prices provides much needed support until demand recovers.
Another positive sign for the liner industry is that carriers have managed to limit fleet capacity enough to prevent an uncontrollable downfall in freight rates, despite the loss in demand (see Chart 8). Notably, the benchmark China Containerized Freight Index (CCFI) had fallen by 168 points during the previous containership crisis in January-April 2009, before recovering throughout the rest of the year. The respective index fell by just 27 points during the first 4 months of this year, while freight rates remain comfortably above year-ago levels.
Chart 8. Average of CCFI and SCFI Container Index
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The relative resilience of freight rates has had a visible impact on the industry’s operating results, with large liners recording unexpectedly healthy profits and margins during the first quarter.
Besides blanking sailings, effective TEU carrying capacity has been reduced by slow steaming, with Clarksons’ containership average speed index falling to a record low of around 73 in April.
Consolidation is one of the key factors that has prepared liners to mount such an effective response to the current crisis. The top operators have continued to raise their market share during the last decades (see Chart 9). Since the start of the pandemic, there has also been notable cooperation among them through the merger or “controlled” suspension of services. Data is showing that the virus outbreak has bolstered this ongoing consolidation, as niche/smaller carriers have seen a much larger negative impact on the size of their fleets than larger carriers during the period.
Coronavirus: May 2020 Shipping Update 6
Chart 9. Top Liner Operators Market Share
m teu, end year
Source: Clarksons
Other Operators % Top 10Top 10 Operators
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The previous crisis and subsequent rebound over 2009-2010 served to weaken some carriers and strengthen others, and a similar story is expected to unfold this time. However, it should be noted that even during the worst parts of the 2009 financial crisis, no large or mid-sized carrier went bankrupt. The only large carrier that has gone bankrupt is Hanjin, and this was not triggered by a major crisis. Overall, although the near-term outlook remains challenging, large liners are well positioned to navigate the crisis through access to liquidity and the ability to negotiate favourable terms. More financial pressure is expected on smaller “regional” players.
Longer-term, supply-side dynamics are expected to further support consolidation in the sector, which also underpins Peninsula’s support to the likes of Maersk, COSCO, MSC, etc. The containership orderbook is at its lowest levels on record (at just 10% of existing fleet) and most of it is owned by just a handful of carriers. Minimal containership fleet growth of under 1% is projected for both 2022 and 2023.
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