Covid-19 or not, ocean shipping does better than expected in 2020 - can such good fortune endure?
 Like the Covid-19 crisis, the state of international container shipping turned out to be not nearly as bad as anticipated.
Yes, there was a recession, markets sagged, and the future looked grim, but it was not the end of the world as we know it. Despite lower demand, ocean carriers enjoyed high freight rates and profitability through large-scale capacity reductions as well as low bunker prices.
Not pleased with this, China reacted. Suffering as it was from pangs of an open trade war, the flight of capital and factories whose output was dependent on western buyers for sales, it attacked carrier profitability.
Also irritating Beijing's increasingly authoritarian regime was mounting criticism over the seizure of the Spratly Islands, interference in Hong Kong's autonomy, Muslim concentration camps, border skirmishes with India, a refusal submit to international inquiry into its handling of the Covid-19 bug - not to mention its Orwellian face recognition "social credit" surveillance of the population as well as plans to station Communist Party agents as members of boards of private foreign companies.
Added more recently to this incomplete list, were fears that China's would ban blank sailings if not prohibit capacity management itself. Granted the idea is supposed to take effect in mid-October, the end of the peak season when there is likely to be a reduction in shipping volume, anyway. But if such regulations were to grow teeth, capacity management over cargo from China would be controlled by the state and not by carriers.
And capacity management was the key to profitability wrung from these hard times of Covid-19 lockdowns. Each carrier put on its game face and walked the tightrope between maintaining market share and freight rates. Shipowner lobby, London-based BIMCO (Baltic and International Maritime Council) expects freight rates to fall unless capacity adjustments are constantly made to rebalance the market.
The unadulterated good news arising from present circumstances, is the resilience in intra-Asian volumes. This highlights the fact that the region is becoming less dependent on exports. In fact, Exports on to the main trade lanes are experiencing double-digit declines, compared to a less than five per cent drop in accumulated volumes in the intra-Asian trade in the first half.
This is the result of many years with high economic activity in the region increasing the size of the middle class and, therefore, the population's wealth and spending.
As a result carriers have been, and continue to be, in a better place to face this crisis than tonnage providers, as carriers could blank sailings and, in many cases, get unwanted tonnage off their hands. Tonnage providers, on the other hand, were left with these unwanted ships, having to cover their cost and, at the height of the crisis, unable to charter them out, even at low rates.
Carriers also achieved big cost savings through lower bunker prices, which has resulted in falling voyage costs. The price of both high-sulphur fuel oil and low-sulphur fuel oil has fallen, though - as the latter has fallen more than the former - the price spread between the two fuel types has narrowed. This decrease in the spread has increased the payback time for a scrubber, which just less than a quarter of containership capacity has installed. Despite the increased payback time, they still make economic sense.
Container shipping is vulnerable to consumer spending, which has been severely impacted by lockdowns worldwide, though cushioned by burgeoning ecommerce. This is evidenced by the record new hires at United Parcel Service and Federal Express.
True, April and May were the worst months for container shipping volumes, in line with when the strictest lockdowns were in place. But volumes have recovered in June and July while remaining considerably below last year's level.
Compared with last year, the volumes for April and May were down 1.9 million TEU (-13.6 per cent) and 1.7 million TEU (-11.0 per cent) respectively. The lost volumes in June were less than half this, down 0.7 million TEU (-5.1 per cent).
Comparing the first half of this year with last, accumulated volumes are down by 6.8 per cent, to 78 million TEU, a loss of 5.8 million TEU. Volumes are down on all the major trade lanes: intra-Asia down 4.2 per cent, Far East to Europe down 12.3 per cent (-1 million TEU), and Far East to North America down nine per cent (-0.8 million TEU). All these trade lanes follow the global pattern in which volumes have recovered slightly in June, with intra-Asian volumes up compared with June last year, while the east-west trades remain below last year's level.
Though volumes have started to recover, actual demand for goods is down. The high rates are testament to shippers again frontloading their goods, this time ahead of a potential second wave of Covid around the world and resulting lockdowns. In late 2018, frontloading occurred ahead of an increase in tariffs because of the trade war. Total retail sales in the US, excluding food and drink, are down 1.3 per cent in the first six months of the year.
Higher unemployment and lower consumer income are looming, as governments start easing back on their stimulus measures. Even the higher state support was unable to stop consumer spending falling in the major consuming nations of the world, and, as this comes to an end, spending is likely to suffer even more, lowering demand for container shipping. The effects of this lower actual demand on container shipping will be more painful given the frontloading that we are currently seeing, which will depress volumes and freight rates in the future.
In July, housing starts (private houses on which construction has begun) in the US saw a recovery from the previous months - but, at 1.406 million units, remain 4.5 per cent below levels in February, before the pandemic. BIMCO has previously estimated that there is a 22-month time lag between housing starts and container imports in the US.
June was the first month this year in which volumes shipped on intra-Asian trades were higher than the corresponding month in 2019, up by 35,000 TEU. This by no means makes up for the lost volumes earlier in the year and, compared with the first half of 2019, volumes are still down by 890,900 TEU. Furthermore, with the new export orders index for manufacturers still contracting month on month in China in August (49.1), exports out of the region will remain muted.
The resilience of intra-Asia shows a renewed strength of this often disparaged high volume, low value trade, What's more, it appears to have become self-reliant and less dependent on exports. Exports on to its main trade lanes suffered double-digit declines. This is the result of many years with high economic activity in the region increasing the size of the middle class and, therefore, the population's wealth and spending. |
