Drewry: Coronavirus medium-term impact manageable for container shipping

Drewry: Coronavirus medium-term impact manageable for container shipping
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Despite the coronavirus outbreak delivering a sharp hit to global container volumes and carrier earnings, Drewry expects that the medium-term impact will be manageable provided the virus spread is contained.

So far the impact of coronavirus (COVID-19) on container shipping has just about been bearable, but the longer and more widespread the outbreak goes the more damage it will cause, noted the analyst in its latest research.

In terms of the short-term hit, container shipping is not as exposed to the coronavirus problems as the airline or tourism industries.

Nevertheless, Drewry’s interviews with Chinese port operators indicate that volumes were down by 20-40% in the three weeks from January 20 to February 10.

Non-Chinese ports have not reported falling throughput volumes, yet, but this will become visible in the next few weeks, when ships from Asia fail to arrive with containers from China.

Ocean carriers cancelled about 105 sailings on the routes from Asia to the North America and Europe/Mediterranean regions alone in February.

A 30% fall in container volumes in China (which accounts for 30% of global throughout) means a 9% reduction in global container volume, unless the shortfall is caught up later. But at least two months of global port volume falls should be expected, according to Drewry.

The cancellation of 105 sailings per month represent a shortfall in revenue of roughly US$1bn (105 x 10,000 teu x US$1,000), of which a portion will be made up later via full ships and extra loaders, but the short term damage to carrier profits is large, it added.

The analyst has devised three potential impact scenarios although it believes that on the balance of probability the outcome will not be devastating.

Even in the most optimistic scenaro, the container market would not come out completely unscathed, and Drewry would anticipate makinga slight downgrade to its annual global port throughput of approximately 3% made in December.

This estimate factors in the expected stimulus package from the Chinese government that should spur greater box traffic from Q2 2020 onwards.

Drewry added: “Whatever the outcome, COVID-19 has exposed the fragility of global supply chains that are overly dependent on a single manufacturing source. We suspect that shippers will look to broaden their sourcing options as a form of insurance.”

The second scenario, which is Drewry’s baseline forecast, considers that normal economic activity could resume in China before Q2 2020 but the virus embedding itself into consumption centres in Europe and North America would just shift the problem from one supply chain to another.

Consumer confidence in Western cities could take a hit and strict quarantine measures may be introduced, leading to supply chain blockages, thus trimming economic forecasts.

The analyst noted: “The more widespread and protracted the situation the less likely it is that the container market will be able to register growth this year, while a weakened global economy would hold less pent up demand, making for a softer recovery in 2021.”

Under this scenario, carriers would be forced to extend capacity reduction plans, and the extreme of this outcome is to consider additional measures such as idling and heavier demolitions in addition to more blank sailings.

The most pessimistic scenario takes a sceptical view of official Chinese statistics and envisages a spike in infections as people start to congregate and travel more freely together once again, leading to the return of quarantines and further production outages.

If combined with significant spreading of the virus outside China, trade flows would be choked off at both the production and consumption ends, although Drewry renders this the most unlikely chain of events.

In this situation, there would likely follow a global economic recession with significantly reduced container flows, a prolonged downturn for freight rates and an elevated risk of carrier bankruptcy.

Drewry noted: “To avoid such a prospect carriers would be forced to revisit the playbook from the financial crash of a decade before and undertake large scale capacity withdrawal in the form of mass idling and demolitions.”