COVID-19: ANY CLEARER YET?

MSC vessel A stimulation of transshipment and feeder demand at a pace faster than previously forecast is on the cards

COVID-19 is prompting a rethink of supply strategies. Increased transshipment activity is expected but, as Andrew Penfold confirms, margins will be slim and financing new capacity challenging.

At the macro level the dust is beginning to settle. The IMF is projecting a global economic contraction of -4.9 per cent for 2020. Even with a relatively strong demand recovery 2021 world output will still be around 6.5 per cent smaller in than was predicted prior to COVID-19. The outlook for the developed economies (still the major driver of container demand) is for a contraction of eight per cent this year. The pace of any recovery will be determined by the risk of a ‘second-wave’ and any renewed lockdowns – this remains opaque.

GDP is the driver of trade, but this contraction will also see structural shifts – even if the recovery proves to be ‘V-shaped’. Political changes are underway that will dominate beyond the current crisis. What will be the impact on container shipping and ports?

SHORT-TERM SHOCK EFFECTS

The initial container trade hit was focused on lower output in China, but this has partially bounced back. The real impact will be on the level of demand – especially in Europe and North America. Current analysis suggests a drop in demand for 2020 in these markets of around 12-15 per cent.

This means severe over-capacity in the container fleet, with this being focused on the largest fleet sector – where expansion is still underway with massive commitments from HMM, MSC, Evergreen, OOCL and CMA CGM still to be introduced into the global fleet. Is this another example of lines ‘fighting the last war’ – are these the ships that will be needed and, if so, how many?

Capacity management has allowed freight rates to hold-up fairly well – at the expense of returning chartered-in vessels to their owners – frequently straight into lay-up. Other tonnage absorption moves such as trading via the Cape on the Europe trades have also effectively cut capacity. These are short term reactions; much more fundamental shifts will be required to match capacity with demand – there is only one direction for rates if this fails.

For ports, the emphasis has been on handling a contraction in demand. This has meant cost cutting has come to the fore – expansion programmes are prorogued, at least for now.

STRATEGIC IMPACT ON PORTS

It seems certain that China’s position as the primary driver of the container business will change. Political pressures were reaching boiling point, even before the crisis. Reliance on the part of western economies on an increasingly bellicose China cannot be sustained.

One strategy is increased near-sourcing and repatriating of manufacturing. This has received a lot of attention, but the cost arguments counting against this remain difficult to overcome. More likely will be substitution of other low-cost suppliers (mostly in Asia) in any gap resulting from Chinese contraction.

The shipping arguments for the largest vessels remain sound on these long-haul trades, but the port infrastructure is not fully in-place. The switch to alternate low cost suppliers was already underway due to the declining cost-competitiveness of China and political pressures ahead of the crisis. This trend has been turbocharged and clearly has a long way to go.

A strong upturn in export production in Indonesia, Vietnam, India and elsewhere will drive further port expansion for 24,000 TEU-capable terminals and for the associated inland infrastructure. At present, insufficient capacity exists and there remain ship size limitations. It will take several years to rectify this shortfall (and the uncertainties in the market will render bankability problematic in many cases).

WHAT ABOUT TRANSSHIPMENT?

The outlook will differ in various regions. In lower cost manufacturing zones in SE Asia and India demand will run ahead of 20,000TEU+ terminal capacity. The solution will be increased reliance on transshipment hubs. Locations such as Port Klang and (of course) Singapore will benefit from increased feedering into large vessels bound for Europe and North America. This will continue until direct capacity is introduced. This means a stimulation of transshipment and feeder demand at a pace faster than was earlier anticipated. This is an opportunity but will need very careful financing strategies.

Wayport hubs – Algeciras, Port Said, Salalah, etc. – will increasingly suck in feeder volumes as lines strive to increase load factors on the biggest vessels. On the other hand, there will be pressures to deploy these vessels (where possible) into the major Mediterranean gateway ports. Overall, these factors will balance each other out, but port overcapacity will continue to place downward pressures on stevedoring rates.

At the import end in Europe over-capacity in shipping and wide availability of 20,000 TEU+ terminal capacity will see lines continue to offer multi-port rotations, even though from a strict fully-costed perspective transshipment would be the optimum approach. This is simply because it will be cheaper to absorb excess capacity than to save money on transshipment. Only the trades into the Baltic seem likely to continue to grow, with much larger feeder vessels.

North America has never been a transshipment market as a result of the restrictions of the Jones’ Act – political pressures are unlikely to see any modification of this in the foreseeable future. Pressure to deploy larger vessels will continue to favour West and East coast ports that have made (or are making) the necessary investments to handle the largest vessels.

Port investment in the developing world will be under severe pressure as demand develops more slowly. Existing transshipment hubs will benefit from this with smaller ports maintaining their role. However, margins will remain very tight on transshipment business and financing expansion will be highly problematic.

SO, WHAT IS THE OUTLOOK?

In summary (and assuming there is no negative second wave) we can anticipate the following:

  • Weaker demand further upsetting the supply/demand balance in the shipping sector – with this focused on the largest vessel classes.
  • Increased pressure to diversify away from China as the primary source of imported goods – with other lower-cost sources rapidly substituted.
  • A requirement for increased terminal investment in these alternative sources of supply – especially in ASEAN markets and India.
  • Continued multi-port rotations in Europe and North America to absorb excess tonnage.
  • Further declines in freight rates and line pressures to reduce stevedoring prices.
  • Financial pressures on shipping lines resulting in further terminal divestments.
  • Terminals increasingly focusing on cost control and very close examination of the viability of large-scale investment projects.
  • Economic difficulties will hit the Developing World very hard – calling into question any marginal port development programmes.

COVID-19 will change every aspect of the business and any further contraction as a result of a second wave of infections could make these difficulties even more acute. These changes mean that the assumptions behind container port and terminal development have changed. Financing will be much more closely examined and required rates of return will increase accordingly.

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