The impact of Covid-19 on global shipping: part 1, system shock

Adele Berti 2 April 2020 (Last Updated April 14th, 2020 10:42)

The rapid spread of coronavirus has had a major impact on global shipping markets, with the slump in demand for goods from China having a ripple effect on everything from container ships to oil tankers. In part 1 of our coronavirus special, we look at how it has unfolded so far.

The impact of Covid-19 on global shipping: part 1, system shock
The coronavirus crisis escalated to unprecedented levels in March.

You can read the second part of this piece, The impact of Covid-19 on the global shipping sector: part 2, silver linings, here

You can also read a timeline of the most significant events involving the shipping sector here.

Initially, everyone thought that it was China’s problem. Nobody thinks that anymore. The first country to be hit by Covid-19 is now the only one with a recovering economy and re-emerging population. For the rest of the world, uncertainty is the only certainty.

The soon-to-be global pandemic began in late December with only a dozen cases in Wuhan, China. The coronavirus outbreak has now tightened its grip on the entire world, with Europe as its current epicentre. As of the 2nd April it has now infected almost 900,000 people and claimed nearly 50,000 lives.

With Western countries now enforcing nationwide lockdowns that could last for months if not years, world economies are in danger of bleeding out. Numerous industries are at a standstill and the shipping sector is navigating uncharted waters.

Over the past two months, Ship Technology Global has been speaking to analysts and experts – both directly and indirectly – to offer a comprehensive view of how the global pandemic is affecting the industry.

January: a shock for the Chinese maritime sector

Prosperity within the shipping sector has long been strongly tied to China, a major trade partner for several countries and a key leader in shipbuilding.

Throughout January, during which the virus started spreading across the rest of the country and to its neighbours, the industry seemed to experience only a marginal impact – initially witnessing only a minor fall in demand as ports in China and nearby countries started operating at limited capacity.

“The outbreak came at a time when shipping companies are used to lower demand due to the Chinese New Year (CNY) and had already planned for this, for example by blanking sailings in the container shipping industry,” BIMCO chief shipping analyst Peter Sand told Ship Technology Global magazine earlier last month.

“Coronavirus caused demand to fall lower, and remain at lower levels for much longer than in a usual year.”

The situation largely deteriorated as January passed by and the CNY holidays were extended. After a passenger tested positive for Covid-19 onboard a Princess Cruises ship off the coast of Japan, ports started limiting – and eventually banning – cruise traffic at their terminals. Asian ports in countries including South Korea, Taiwan and Singapore also started introducing screening procedures at their hubs, putting Chinese crews under quarantine and working to limit the spread of the virus.

From the very beginning, these initiatives caused significant setbacks for both the cruise and shipping sectors, which found themselves dealing with orders and trips cancellations, spikes in costs and a drop in trade opportunities. In addition, Chinese shipping was hit by a nationwide ban on all non-essential travel, a largely reduced workforce and the closure of production and shipbuilding facilities.

As BIMCO’s Peter Sand puts it, “coronavirus caused demand to fall lower, and remain at lower levels for much longer than in a usual year; for many in the industry it became about prolonging their measures for dealing with CNY, which were already in place, with little other options to deal with the blow.”

According to figures from Chinese think-tank the Shanghai International Shipping Institute, this led to reduced capacity utilisation – which fell between 20% and 50% at the biggest Chinese ports – and a sharp increase in the use of port storage facilities.

February: the impact on global shipping

Despite Asia’s prolonged struggles, it wasn’t until February that the global shipping sector started to really feel the impact of the Covid-19 pandemic.

As IHS Markit principal consultant Daejin Lee explains, shutdowns and limited activity further led to labour shortages across Chinese maritime segments, which in turn affected trade. “Exports from mainland China have dropped significantly in February 2020 as the Purchasing Managers Index compiled by IHS Markit dropped from 51.1 in January to 40.3 in February,” he says. “It is not surprising but still massive; it’s the sharpest deterioration since our survey started almost 16 years ago.”

Mid-February data from market intelligence service VesselsValue showed a radical drop in demand for Chinese crude tankers from an average of 3.4 billion tonne miles per day in 2019 to almost zero. According to the company’s Charter Rate assessment, the daily cost of hiring a very large crude carrier (VLCC) for a year plummeted by over 20% between 14 January and 14 February 2020. Spot earnings also decreased by more than 70%.

“The reason that coronavirus is having particularly horrendous effects on the shipping industry is its relationship with China.”

This was just the start of what was about to become a global crisis for all sectors including shipping, which was hit by slowing demand in goods’ production, exports and oil. Here are some of the key figures from February.

VesselsValue chief operating officer Adrian Economakis told us in early March: “In terms of rate, the most significant affected have been the large crude tankers and the large bulkers. China is a significant importer of crude oil, usually through VLCCs, so the reduction in economic activity in China is certainly having a negative demand effect for crude tankers.”

Analysis from BIMCO is further testament to this trend, as it showed VLCCs and overall tanker freight rates were subjected to heavy downward pressure towards the second half of February. “Earnings from the Persian Gulf to China have dropped from $103,052 per day on 2 January to $18,326 per day on 18 February 2020,” said a blog post from BIMCO at the end of the month.

In February, capesize was another heavily affected category, which is in largely driven by China. “The problem with capesize is that the market had been terrible anyway, and it’s gotten even worse,” said Economakis in March. “It is effectively reaching a five-year low at around just over $2,000 a day earnings, which means they’re losing a lot of money per day.”

Finally, the container sector, another category that significantly relies on China, fell victim to the coronavirus outbreak. As Economakis put it, “The container sector is naturally less liquid but we have seen a reduction in rates and values. Containers are the most closely linked to economic activities and economic activity is down all around the world.

“The story here is the reason that coronavirus is having particularly horrendous effects on the shipping industry is its relationship with China. China really is the driver of the shipping industry. We are so dependent on Chinese demand and also Chinese exports, so demand for raw material, exports of a finished product for driving cargo volumes and cargo demands.”

March: coronavirus in Europe

The coronavirus crisis escalated to unprecedented levels in March. Even though deaths in China slowly started to decrease, an ever-growing number of cases started appearing in Europe. Soon after the World Health Organisation declared the Covid-19 outbreak a pandemic, the whole of Italy was put into lockdown and was quickly followed by Spain, France and, towards the end of the month, the UK and some US states.

“The virus is still spreading like wildfire,” says Navin Kumar, director of Maritime Research at Drewry. “The impact is already visible. Trade has been severely impacted, charter rates are down, supply chains have been disrupted. The world has been too dependent on China for everything. And this pandemic has come as a rude shock to them.”

During a webinar hosted by BIMCO and Bloomberg Intelligence in March, BIMCO’s Peter Sand introduced his presentation with a gloomy forecast: the International Monetary Fund expects the global economic outlook in 2020 to reach at least the same levels as the Global Financial Crisis – meaning a world recession is inevitable.

Needless to say, this means that future months could become increasingly harsh for the whole global sector, which will be forced to operate in a limited way. This, Sand stressed, is not going to be the sole result of the coronavirus pandemic but rather a ripple effect of its spread, the introduction of the 2020 sulphur cap by the International Maritime Organization, and the failed implementation of the US-China phase one trade agreement.

“After a disastrous 2019, the shipping industry would have definitely benefited from the trade deal between US and China,” confirms Drewry’s Kumar. “The trade deal required China to import a certain volume of some commodities in 2020.”

Narrowing down on sailings, BIMCO analysis showed all sub-categories of shipping will soon fall prey to the situation. In the dry bulkers’ realm, for example, freight rates have suffered as a result of IMO 2020 and coronavirus, though the capesize sector has also witnessed even harder times.

“Container shipping [could soon be] developing into the epicentre of the crisis in the global shipping industry.”

Meanwhile, demand for oil tankers is currently on the rise as the breakdown of the OPEC+ alliance – which triggered a 30% fall in oil prices and a potential price war amongst world leaders – is supporting Arabian crude oil exports. Nevertheless, Covid-19 is expected to heavily damage oil demand for 2020, something that will negatively affect oil freight rates in the coming months.

Finally, said Sand, “container shipping [could soon be] developing into the epicentre of the crisis in the global shipping industry, due to the fact that containerised goods, being produced in East Asia predominantly have already been hit”.

Demand in this realm continued to slow, partially due to the postponement of the CNY, the missed introduction of the China-US agreement and struggling economies in the west. “Production facilities in China may have workers now, but in terms of productivity we are still not seeing 100% of activity,” said Sand. “The number we saw from late last week was an indication of around 70% of productivity. And then of course, in order to see a sustained flow of cargo out of the Far East, we can only see the backlog of orders to be delivered right now. And right now we’re fairly busy doing something else in the Western world to keep orders coming.”