Coronavirus impact: Slump in dry bulk shipping market will be protracted, says expert

The coronavirus outbreak has dented sentiments and spooked markets around the world. When China sneezes, the whole world catches a flu. This especially holds true for the commercial shipping markets, which remain heavily reliant on China, both on the import and export side, said Peter Sand, Chief Shipping Market Analyst at BIMCO – the world’s top shipping association, representing 58 per cent of the world’s tonnage -- in an interview. Excerpts:

The virus spread coincides with the Chinese Lunar New Year (CNY), which marks the traditional low season for shipping markets. Thus, the virus’ knock-on effects have been hard to single out so far with next to no hard facts and figures to substantiate the matter. However, it does remain abundantly clear that an extended shutdown of China will temporarily cripple the shipping markets and hit freight rates hard.

Every week that China remains “closed” will mark a slowdown of economic growth. Seaborne trade is closely linked to economic developments in Asia and the effects are already felt in several different ways.

While we are probably still in the early stages of the outbreak, it is evident that this health crisis will put a drag on Chinese economic growth in the first quarter of 2020, potentially taking a toll on annual GDP growth as well.

Consumer spending, associated with CNY celebrations, has certainly taken a substantial hit. This dip in consumption cannot necessarily be made up for once the virus has been contained. The lockdown of large parts of the transport system has limited the consumption of oil, and refiners have cut crude runs across the board. Demand lost because of this is unlikely to return to boost shipping demand after the crisis is over.

Advanced economies’ imports of manufactured goods from China remain the main driver of container shipping growth, with seven out of the 10 largest container ports located in China. Widespread factory shutdowns result in a slowdown of manufacturing and industrial production. The intra-Asian container shipping market, the largest in the world, will be the first to feel the fallout from the coronavirus if intra-Asian supply chains are disrupted. Secondly, the long-haul trades to North America and Europe will be affected.

Extended blanking (cancellations) of sailing by global liner companies has been the first measure taken to ease the pressure of low demand. But if goods are not produced at all, short-term alternatives do not exist. Medium-term alternatives will rise fast though, meaning alternative producers of the goods, just as we have seen as an effect of the ongoing trade war between the US and China.

Aside from stepping up their efforts to contain the virus, the Chinese government has also rolled out fiscal stimuli to combat the economic impact from the coronavirus. But it is not boosting shipping demand at present.

The virus illustrates just how dependent the world has become on China, with many supply chains deeply embedded into the country. Anecdotal evidence suggests that South Korean car manufacturers have started to reduce output due to the supply shortage of Chinese goods.

Dry bulk shipping rates have extended their rout over the past two months, driven largely by seasonality and the newly implemented IMO2020 sulphur regulation, which has sent fuel oil costs soaring.

Chinese imports of dry bulk commodities are the main driver for the dry bulk market and with a slowdown of industrial production in the short term, the outlook for Q1-2020 is not shaping up particularly well. Freight rates will stay low until Chinese merchants get back into the market for the usual commodities, such as grain, coal and iron ore.

The traditional dry bulk low season is usually in Q1, and the market tends to rebound post-CNY. Yet, with the coronavirus not under control yet, the slump will inevitably be more protracted. The Capesize index fell into negative territory on January 31 and has continued its descent to reach -133 index points on February 4. If large parts of China remain under quarantine, it is likely that earnings will continue to drop across the dry bulk segments.

Tanker shipping has certainly felt the heat in the past week, partly from the virus, but also with the lifting of US sanctions for a lot of Chinese-owned oil tankers. A lot of the oil tanker business is carried out in the spot market and freight rates have already seen substantial changes.

China is the largest crude oil importer in the world with a staggering 506 million tonnes imported in 2019. A shutdown in China will bring with it a transitory slump of crude oil imports and accompanying refinery cuts in run rates.

The market has been turned on its head in a single month, where VLCC (very large crude carrier) earnings from the Middle East Gulf to China has dropped from $103,274 per day on January 3 to $18,351 per day on February 3.

In the January15-signed US-China “Phase One” trade agreement, China pledges to buy an additional $200 billion of US goods over a two-year period, of which a lot of energy and agricultural products will be seaborne. It remains questionable whether these purchases will ever see the light of the day, and the virus outbreak could prove to be an additional hindrance to this Chinese pledge. White House economic adviser Larry Kudlow has said that the “export boom” of US commodities will be delayed as a result of the virus.

As the virus continues to spread, it remains immensely difficult to forecast the medium- to long-term implications, yet the short-term consequences are clear: demand and freight rates are dropping.

With past epidemics, the markets have rebounded sharply in a matter of months, so the question is essentially about how long China will stay locked down in a quarantine.

China also holds a significant share of the global shipbuilding industry. Data on new-built deliveries for January 2020, do not seem to be impacted. But, for the coming months, BIMCO expects to see an effect.

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