Shipping: Mixed blessing of early vaccine
Demand is expected to spike with the arrival of a vaccine through a combination of less supply disruptions, a return to re-stocking in inventory cycles, and a revival in capital spending. However, fleet supply bottlenecks as a result of pandemic-induced port congestion would evaporate and tankers on storage duty would be returned to the available trading pool. The resultant glut in supply would put firm pressure on freight rates. IHS Market principal consultant Daejin Lee made the observations in the latest joint Baltic Exchange/Institute of Chartered Shipbrokers seminars, which took place in Singapore and London last week.
Speaking from London at the sister seminar, MSI managing director Dr Adam Kent cautioned against predictions that the recovery from the pandemic will mirror that from the global financial crisis in 2007-2008.
“Shipping markets have periodically had to deal with black swan events, however Covid-19 has been like bevy of black swans given its far reaching and global impact,” he said. “Naturally, many have tried to compare the recent events to those of the global financial crisis given the spread and the levels at which events have unfolded. However, from a shipping perspective I would say that they are different.” MSI does not expect Covid-19 to produce the same global long hangover as the global financial crisis did for several converging reasons. Firstly, the macro economic collapse is different this time; secondly, the shipyard capacity landscape is very different now compared with the 2000s; thirdly, today’s orderbook is a shadow of its former self; and fourthly, MSI expects contracting to remain in check.
Taking each of the three main sectors in turn, Lee said he expects global dry bulk trade to increase in 2020, albeit at a marginal rate, largely supported by Chinese stimulus related industrial materials, primarily iron ore and bauxite. Lee also noted that while India reduced its coal imports in the first half of 2020 as a result of the pandemic, the country is set to be the world’s largest coal importer in the second half of 2020.
Controlled fleet growth and anticipated growth in energy demand and prices as the world economy recovers could be countered by decreased port waiting times once a vaccine is available, a lack of short term stimulus from China, and environmental policies that favour gas and renewables over coal. Taken together, IHS Markit forecasts dry bulk fleet growth of 1%-2% for 2021-2022 and 3%-4% growth in trade over the same period.
Kent added that while from an earnings perspective MSI expects an improvement in one-year timecharter rates across the board for dry bulk from 2021, earnings will not return to 2018’s levels until 2024.
On the container front, Kent expects incremental demand to fall in 2020 and then bounce back strongly next year. “We think the supply side will post relatively modest growth, especially in the context of recent years, and that will support market balances and earnings levels,” he added.
On that fleet supply side, Lee said that while the logic of scale drives orders for ever-larger ships, he believes that the size of container ships is plateauing and is not expected to get much larger. “There is a cross over point where the port costs start outweighing the benefits of scales,” he said. Additionally, a continued shift to short haul trade would eliminate the need for more mega boxships.
IHS Markit predicts 3%-4% growth in the container ship fleet and 4%-5% growth in trade for 2021-2022. Influencing this outlook are the pluses of controlled near term fleet expansion and a reduced risk of trade protectionism against the minuses of the risk of new ordering spurred by high freight rates and empty yards, which would limit long term sustainable growth.
Tanker supply change
In the tanker sector, MSI’s Kent notes that while the physical fleet will not increase significantly in 2021, the available fleet will swell as significant volumes of ships return from storage duties to trade, putting downward pressure on freight rates. “After 2021, demand will begin to outstrip supply and as a result we see a tightening of market balances,” he added. MSI forecasts recovery of one-year timecharter rates for both a medium range tanker and a VLCC post 2021.
Lee noted that over the past decade, global oil consumption has grown, mainly in emerging markets such as mainland China and India, while the expected policy changes related to the regulation of carbon dioxide emissions suggests a slowing market share for liquid bulk in the energy mix. “The oil market is expected to struggle with supply surpluses in the first half of 2020 before vaccine driven demand growth picks up in the second half of 2021,” he said. “That’s why we are seeing forecast oil and bunker prices make a gradual recovery over 2021 and 2022 – but that forecast is for after the vaccine is available in the market.”
IHS Markit expects 2%-3% growth in the tanker fleet 2021-2022 and 2%-3% growth in trade. Factors affecting those forecasts include the positives of getting fleet growth under control, an increase of long-distance trade, and recovery of energy demand and prices. The negatives include floating storage returning to the active fleet, environmental policies favouring biofuel or electricity rather than oil as fuel, and cheaper coal replacing oil fuel demand in power generation.
In summary, Lee sees shipping on a long-term recovery cycle with fleet growth largely under control with limited new orders. Kent agrees that shipping cycles will remain a regular fixture of shipping markets and while Covid-19 has been an event like no other, some shipping sectors have bounced back already and as a whole the industry has adapted well.
Source: Baltic Exchange