Shipping industry’s worst nightmare: A corona Christmas
When Japan’s three largest maritime shippers combined their container-shipping operations in 2017 to establish Ocean Network Express, or ONE, then-Nippon Yusen President Tadaaki Naito said it was his wish for the new company to outperform and surpass its parents.
Billing itself as the world’s sixth-largest container carrier, the joint venture between Nippon Yusen, Mitsui O.S.K. Lines and Kawasaki Kisen now finds itself having to rethink its plans and its creators’ ambitions.
“We can’t possibly achieve these numbers,” an executive at one of the companies lamented when shown ONE’s budget plans in mid-March. It had estimated net profit to more than double on the year to $200 million in the fiscal year ending March 2021.
But with major European cities under lockdown over COVID-19, and the U.S. becoming the world’s new epicenter, the rosy plan stood no chance and was quickly shelved.
Container traffic is highly seasonal. Each year, after a slow three months, shipping usually gains traction from April onward. The fortunes of shipping companies come down to how skillfully they can secure and sail ships during this busy period.
COVID-19 presents the companies with a dilemma. When the coronavirus situation settles down and cargo resumes, “If you don’t have the ships, you are in trouble,” said Ryota Himeno, research analyst at JPMorgan Securities Japan. “But if you increase your ships too much while there is no demand, you are in real trouble.”
The worst-case scenario for shippers is what industry insiders have begun calling a “corona Christmas.” Should consumers remain holed up at home when the year-end shopping season arrives, they are unlikely to spend money at brick-and-mortar stores.
This bodes ill for containerships, whose main business is transporting such Chinese-made products as apparel and household goods to the U.S. and Europe.
China’s Cosco Shipping, Asia’s top container carrier, said when announcing its annual results Monday that it “will pay close attention to challenges brought by COVID-19 to the global economy and shipping market.”
Hong Kong’s Orient Overseas Container Line said in its 2019 earnings release last week that “the sudden outbreak of COVID-19 creates a tremendous amount of uncertainty.” Noting that the outlook grew more pessimistic in March, the company said: “If the epidemic is further escalated globally and lasts for a long time, the medium and long-term impact will be more extensive and significant, and the growth of the global economy and container shipping demand will decline.”
With little hope of a quick end to the crisis, an official at one of the major Japanese shipping companies said that “orders from the retail sector are certain to decrease.” Even such products as auto parts, which were largely immune from the coronavirus fallout, are expected to see shipments dwindle.
Just recently, A.P. Moller-Maersk, the world’s largest container-shipping company, said cargo shipments from China were returning to normal after the long Lunar New Year holiday. But relief that shipping activity was back proved short-lived. Concerns quickly grew that economic activity will freeze in the areas of consumption.
“Cargo that had been halted during the extended Lunar New Year is starting to move,” Nippon Yusen executive Shohei Yamamoto said of the recent recovery in outbound shipping activity from China. “But once this backlog clears, it’s uncertain whether a sufficient volume will continue from China.”
The Baltic Exchange’s main sea freight index has plunged to the lowest levels since the 2008 financial crisis, with the coronavirus fallout coming on the heels of the U.S.-China trade war. ONE’s profit affects pretax earnings at all three shipping companies, raising the possibility that earnings guidance for the year ending March 2021 cannot be released.
Shares of the major shipping companies have been underperforming the Nikkei Stock Average. Kawasaki Kisen has declined more sharply than Nippon Yusen, which has been buoyed by the improving market conditions for its air cargo unit. Each company’s ability to withstand a protracted slowdown from the pandemic will come under investor scrutiny.
Source: Nikkei Asian Review