DynaMarkets Monitor - Time to take stock: New normal, underlying uncertaintyNow that various world economies, trade lanes and individual producers are beginning to open up, perhaps it is time to take stock. Towards the end of 2019 and into the beginning of 2020, things were beginning to look up for the container shipping sector. While 2019 will not go down as a particularly tough time in the grand scheme of things, many will agree that it could be characterised by one word; uncertainty. The prolonged trade tensions between the US and China saw many twists and turns but finally a phase one deal was signed, albeit the future of the agreement has now been thrown into a serious amount of doubt. However, 2020 was shaping up to be a more stable affair. Yet, through the first quarter of the year, the proliferation of the Sars-Cov 2 virus and the associated COVID-19 disease hit the container shipping sector hard. The political and economic responses, firstly in China but later across the world caused a problems throughout the supply chain, ranging from a significant but straightforward drop in volumes, to more complex phenomena including the inability of companies to enact crew changes, redistribute equipment and other delays arising from the reduced productivity in the supply chain. While we are now said to be moving towards a new normal, perhaps it is time to take a step back and have a closer look at some of the factors in play.
Firstly, the direct impact of the coronavirus. While various estimates have been put out regarding the state of the world economy over the coming months it is largely agreed that we will be in the midst of an historic recession. Yet agreement is missing in terms of the shape of the recovery to come. A whole range of aptly named models ranging from L shaped recoveries to U and V shaped recoveries have been touted but as of yet, few agree on what is likely to come. Yet there are certain concrete measures that one can investigate for a snapshot of the impacts, some of these measures include container throughput and container shipping capacity. The former has often been cited in recent weeks and for good reason, looking at Europe's container trade for example, in the first three months of this year, worldwide container volumes to, from and between European countries (including all countries bordering the Mediterranean) reduced by 2.9% to 13.3 million TEU, according to (provisional) figures from Container Trades Statistics (CTS). Exports went up by 0.7% to 5.3 million TEU and intra-Europe trade rose by 4.2%, but due to the corona crisis in China and the start of similar in Europe, imports dropped by 7.4% to 5.84 million TEU. With respect to Europe’s containerised imports, there were massive drops from the Far East (-12%) and Australasia (-13.8%), and smaller declines from the Middle East/Indian Sub-Continent (-2.6%) and Sub Saharan Africa (-0.9%). Only the trades from North America and Latin America were larger than in the same three months of the year earlier. Furthermore, when looking at the equivalent North American statistics, During the first three months of 2020, North American container volumes dropped by 4.3% to 10.0 million TEU. The dominant imports went down by 5.8%, whilst exports reduced by a much smaller 1.6%. The tiny intra-North American trade contracted by 17.4% to 72,400 TEU. North America’s containerised imports were heavily affected by a 9.4% decline from the Far East. Also the much smaller Australia trade reduced substantially. The trade with Europe was virtually unchanged, while volumes with the other trading partners were still substantially higher. These figures give an indication of the upheaval across the major trades, and no doubt more disruption will become apparent in important regional trades such as intra-Asia. Volumes are said to be bouncing back as of late May, but with a great deal of uncertainty regarding the trajectory of the virus, coupled with the apparent shifting of the virus’ epicentre to Latin America, any return to how things were make take a long time or not take place in its entirety at all.
Second, it is necessary to address the state of supply in the market. Carriers have been lauded for their approach to the corona crisis following strict capacity management which has led to historic highs in both the idle fleet and the number of blanked sailings. For example, as was reported in DynaLiners 14, "in the period January-mid-March, 23% of vessel capacity in the Asia trades was withdrawn, representing 7% of global capacity. For the period between mid-March and the end of April, until the last week (week 13) of March it counted 386 blank sailings announced." The same dynamic could be seen across most major routes, with capacity now only starting to tentatively come back online. Furthermore, the downturn in the amount of sailings, along with container volumes, the idle fleet has grown sharply. Later, as of week 21, DynaLiners reported that " Compared to two weeks earlier, the idle fleet grew by eighty-three ships and250,600 TEU to 524 ships/2.64 million TEU. This represents 11.3% of the entire fleet and is expected to rise in the coming period. Fifty-three vessels are in the largest size category. Currently, seventy-one units for 659,600 TEU are undergoing scrubber retrofits". Overall, the actions of carriers have enabled the majority, while suffering, to continue to operate through the difficult period while spot rates have remained relatively resilient. However, more recently owners have been beginning to feel the pinch with charter rates dropping, especially in the larger vessel segments.
Overall, following the above market trends, which represent just two of the many important factors at play, the industry has started to look forward to what may be a new normal although a multitude of questions remain unanswered. There is the question of whether world manufacturing patterns will remain relatively unchanged or whether the rate of domestic reshoring, especially in light of the supply chain difficulties and shortages experienced with some products, will continue to increase. In a similar vein, will the economies of South East Asia, now cheaper in terms of labour than China, benefit from a redistribution of industrial and economic capacity away from China to avoid having all one's eggs in the same basket. Furthermore, the trade tensions that overshadowed 2019 are likely to return with a vengeance once or if the focus moves away from controlling the virus. The war of words between the US and China could well escalate into renewed tariff and non-tariff barriers, while other major trade partners such as Australia and China are also moving towards a more acrimonious state of affairs. Finally, in a more general view, we may be seeing an increased pace towards protectionism and nationalism. The integrated world economy and especially the relatively free movement of people around the world has helped the virus spread around the world at a far quicker pace than ever before in history. Many countries, especially those hit hardest in an economic sense but also in the sense of loss of life, may not be in a rush to return to the pre-COVID state of affairs. All of these trends could result in a new normal characterised by an underlying uncertainty for the container shipping sector. Supply chains may have to make themselves more resilient and diverse, while other markets may become more appealing or open, drawing economic activity from one place to the other and if working patterns have to change, including reduced productivity and working time exposure between colleagues, it is almost inevitable that congestion will increase. Will major hubs such as Singapore, which has already seen heightened congestion, see increased risk in terms of ship collisions while carriers look to move away to other regional hubs with lower waiting times. Overall, only time will tell but it may take a prolonged period of reorientation or a series of sudden shocks to the world trading system for a new "status quo" to emerge.