• Container Shipping and Covid-19: Not so bad after all

    Shipping lines have been able to resist, given a series of more or less unexpected factors

    https://www.mundomaritimo.cl/ – Drewry’s latest report on the Container Forecast, published at the end of September, revealed that the performance of the world’s container ports confused expectations in the second quarter of 2020 (and most likely in the third as well) to record a much smaller decrease than the forecast of approximately less than 8% year-on-year (compared to the forecast fall of 16% published in June).

    There was then a total recovery, but port performance in the first half was good enough to improve the overall annual forecast for this year to -3.3%, compared to -7.3% as published in June.

    Similarly, to economic analysts, Drewry has gone backwards and forwards with this year’s demand outlook, as apparently his provisional update in May and the June reports were too pessimistic.

    The mistake of Drewry

    The relationship between GDP and container transport activity has followed a decreasing and inconsistent trend in recent years, but the simple logic was that, given the impact that the pandemic was having on the world economy, port handling in the 2nd quarter of 2020 would sink by a much larger margin.

    Already in 2009, a one percentage point drop in the world economy translated into a contraction of almost 10% in the world performance of containers. Fortunately, that exponential multiplier effect has not been repeated during this crisis.

    Drewry, as well as most analysts, seriously underestimated the addiction of Western nations to consumption, particularly when they are protected from the harsh realities by massive state safety nets. In this way, they mistakenly assumed that populations, fearing long-term job security, would duck and limit non-essential purchases, discarding the ingenuity of the human spirit when faced with adversity and, perhaps more revealing, the untapped potential of e-commerce.

    Involuntary savings from travel restrictions, holidays, entertainment and fuel costs were instead used to buy consumer goods, all ‘one click away’.

    Physical goods, such as home office and gym equipment, suddenly returned to fashion, a complete reversal of the recent trend favoring services.

    Capacity management programs for shipping lines also generated some additional traffic. Service cancellations during the second quarter resulted in more transshipments with all their wonderful double-counting properties.

    The replenishment of stocks and the rapid advance of some orders due to the fears of the second wave have caused volumes to increase not only on the East-West routes but also on the North-South routes. Container mobilization is expected to continue to show a small decline between July and September, as the spread of the virus has been delayed in some parts of the world, but should reach a breaking point in the last three months of the year, reports Drewry.

    Although the consultancy is certainly more optimistic about the market prospects than three months ago, it is difficult to remove the feeling that part of the recent upturn in container transport is not based on solid foundations.

    The virus remains the number one risk in the forecasts and continues to weigh down, with a second wave outbreak that could shatter the fragile economic recovery, with the consequent impact on global port handling.

    Many of the state support programs have been extended to the (northern) winter months but, once governments begin to reverse these plans, unemployment could increase considerably and a reduction in household disposable income would curb consumer purchases.

    Similarly, once entertainment activities are fully resumed, there could be less discretionary spending on assets. Nor is it clear how much is being advanced by stockpiling which could be hiding a cargo vacuum at some point in the future.

    This year, shipping lines have controlled capacity more strictly than in previous crises and have been able to ensure very high load factors, very high rates and lower costs. Some say they have ‘learned a lesson’ during the Covid-19 crisis on how to manage their business in times of unstable demand. This could have long-term repercussions on the resilience and profitability of shipping lines in what is normally a cyclical boom and bust business.

    Drewry estimates that the industry secured an operating profit (EBIT) of around US$3.5 billion and a margin of 7.7% on 2T20, easily the best quarterly performance in many years. It also anticipates that the 3T20 will set an even higher mark for profitability given the rapid inflation in spot rates during the period, before decreasing slightly during a slower season of the 4T20.

    After meteoric increases in spot rates in the third quarter, Drewry improved its orientation for industry-wide operating benefits in 2020 to US$11 billion from the US$9.2 billion forecast in the June edition. This would represent the industry’s most profitable year since 2010 (US$20 billion).

    The main influences that have driven the recent and surprising increases in Cargo rates are, for Drewry:

    The higher level of concentration of the shipping industry, combined with a new and stricter discipline of capacity management between shipping lines.

    Unexpectedly strong demand in North America and Europe, partly due to stock replenishment.

    A seasonal rush to bring in cargo before Chinese factories close for Golden Week in early October.

    Limited stocks of containers in Asia, which are not favored by service cancellations.

    The real test of discipline

    Drewry indicates that it is difficult to assign weights to these factors and the way they interact with each other, but the real test of shipping line discipline will come when these exceptional circumstances caused by the pandemic recede and the more traditional dynamics of supply and demand are reaffirmed. Drewry expects this trade discipline to continue, but there is still a risk that one or more players will break ranks and lower tariffs.

    Another important risk is regulatory oversight. Drewry warned earlier that making windfall profits during a pandemic could increase cargo owners’ problems and attract unwanted attention from regulators, and now the industry is under the supervision of the Chinese Ministry of Transport and the United States Federal Maritime Commission. 

    So far, the authorities have refrained from imposing any hard rules, but several shipping lines immediately withdrew the ERM in the Trans-Pacific and backed off with scheduled service cancellations in October.

    This puts shipping lines in a very difficult situation. Any loss of operational autonomy would put them at the mercy of the very unfavorable supply and demand fundamentals, and it is unlikely that they will find such powerful supporters to defend their cause if tariffs drop sharply. In the meantime, the lines will have to navigate carefully to ensure that they remain profitable, but not ‘too’ profitable.

    So far, the authorities have refrained from imposing any hard rules, but several shipping lines immediately withdrew the ERM in the Trans-Pacific and backed off with scheduled service cancellations in October.

    This puts shipping lines in a very difficult situation. Any loss of operational autonomy would put them at the mercy of the very unfavorable supply and demand fundamentals, and it is unlikely that they will find such powerful supporters to defend their cause if tariffs drop sharply. In the meantime, the lines will have to navigate carefully to ensure that they remain profitable, but not ‘too’ profitable.

    See original article at: https://www.mundomaritimo.cl/

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