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4/8/2020 4:00:00 PM ID:990120078957
CORONAVIRUS: SHIPPING MARKETS STRUGGLE WITH DISRUPTION

CORONAVIRUS: SHIPPING MARKETS STRUGGLE WITH DISRUPTION

Before the spread of the mysterious respiratory virus in China, The Drewry Research Institute had predicted that the dry bulk and tanker market will continue to move on a positive wave in 2020. Dry bulk trade is projected to increase by 5.58 billion tons that shows 3.7% growth. Recent estimates also show that dry bulk trade has reached 5.39 billion tonnes in 2019, representing a rise of 4.5%.
While some activists in the dry bulk market expect the freight rates jump by 20%, the others are less hopeful. However, dry bulk ship owners will certainly benefit from the soaring demand for high-grade iron ore from Brazil in 2020, opposed to 2019, when the Brazil’s iron ore exports was down.
In the dry bulk shipping sector, there are positive and negative outlook for what the new decade will look like in terms of demand and revenue. Some operators hope for higher freight rates, while others believe that the market will continue to remain steady, or experience a downward trend.
Trade barriers and geopolitical tensions reduce industrial activity and have an inevitable impact on the transportation of raw materials, As a Result, the global economy is in a downward slope. Moreover, environmental concerns that may influence coal consumption in the years ahead will affect market trends.
On the one hand, fleet growth is expected to outstrip demand growth which result in reduced average revenue, but on the other hand ,vessels will be taken out of service for scrubber installation until the middle of 2020. This may help reduce tonnage and increase freight rates. In addition, mandatory speed limits for ships using more expensive fuel compatible with lower sulfur fuels, may limit total growth in tonnage supply, which is considered a good sign for freight rates. The Baltic Dry Index (BDI) represented unusual fluctuation in 2019 and recorded lowest level in three years, but it jumped to its highest level a few months later.
It should be noted that : according to the recent statistics, in early December 2019, the dry bulk fleet stood at 12 thousand and 43 ships with a total capacity of 2 million DWT. Compared to other vessels, the bulk fleet isconsidered to be a young fleet with an average age of 5 years. Over 2019- 2023 period, 2000 ships are expected to be delivered, which will be the same number within the past five years. But in terms of capacity, the deliveries of the new ships will reach 5 million DWT over the next five years, a 4% increase over the last five years.
It is also projected that only 38 million DWT of bulk capacity will be demolished over the next five years, while the demolition of 99 million capacity DWT is registered over the past five years.
Bulk fleet capacity has experienced an annual compound growth rate of 2.9% over 2014 -2018 period, and an average annual growth rate of 4.4% is estimated for the next five years. An upward trend of fleet capacity is predicted due to maximum vessel delivery, especially for larger vessels.
The slow growth of the world tanker fleet capacity, the increase in long-distance trade across the Atlantic, and the positive impact of the IMO’s low-sulfur fuel regulation, will lead to an increase in tanker market freight rates in 2020.
The container market is expectedto continue installing scrubbers on container ships throughout the year so that numerically 15 to 18 percent of ships will be fitted with scrubbers by the end of the year.
Although at the beginning of 2019 only 0.4% of the fleet capacity had installed scrubbers, towards the end of following year this number increased to about 4.4%. As more container ships were taken out of service, due to installing scrubber, the total inactive fleet capacity increased. By the end of the year it reached 1 million and 200 thousand in TEU suggesting 5.4% growth.
What is certain is that the implementation of low-sulfur fuel law will significantly affect the shipping lines’ cost. Inactive fleet capacity stood at 1.200 million TEU in January 2020.
The emergence of the mysterious respiratory virus in China and reaching beyond its borders has spooked the global market and sent it into a wealth-destroying tailspin. This new virus has sounded the alarm that it will send other shock waves across the market in the near future.
The profits of the trade war ceasefire and geopolitical peace will be destroyed, affecting the global economy which makes the businesses, works and families facing the threat of decline or failure.
The spread of the Corona virus has paralyzed the total global market; shipping industry market is no exception. It is certain that the shutdown of China’s markets will cripple marine markets and severely hurt freight rates. It will definitely take some time for the shipping industry to get back on its feet again. As the virus continues to spread, it is difficult to predict the short- and long-term consequences, the dropping demand and falling freight rates are its definitive immediate consequences.
Due to the pessimistic forecast for a decline in demand, leading container shipping lines such as Danish Maersk and French shipper CMA CGM have announced that they have cancelled services and calling at Chinese ports. Cancelling the shipping trade to China was always applied by the shipping lines to manage the capacity during the Chinese New Year Celebrations. The outbreak of the Coronavirus-hit showed a bad the holiday season. As the Corona virus continues to spread, it is expected that the travel plans will continue to be canceled, which maycause the excess capacity to exacerbate.
It should be noted that the dry bulk market has been severely affected by the spread of the Corona virus. Recently the production in virus-affected cities has been shut down, and as the virus spreads, the risk of closing off more cities is increased. Accordingly, the Baltic Index of the dry bulk on January 31st experienced a sharp downward trend which appears to be a continuing trend.
Drewry is not optimistic about shipping freight rates following the spread of the Corona virus and low iron ore exports from Brazil. Moreover, the virus outbreak will hit the China’s massive appetite for importing iron ore.
It has been reported that the tanker shipping rate is expected to decline in the next months. The seasonal weakness in refinery activity, low Chinese oil demand, as well as a sudden influx of vessels to the world fleet after the US lifted sanctions on China’s COSCO shipping tanker are among the factors that will drive down shipping freight rates in the next two months.
Following the decline in freight rates, ship owners will move back to demolishing their old vessels in the first quarter of this year. Moreover, high bunkering costs resulting from IMO law will lower shipping revenue. Estimates also suggest that LPG prices will go down in the following months, as the Asian LPG market demand has been declined due to the Corona virus spread.
In spite of the decrease in world trade tensions, including the first phase of the US-China trade agreement, event such as the outbreak of the Coronavirus negatively impact optimism on global economic growth.
In 2019, economic growth was only 2.9 percent, which is the lowest level since the global financial crisis. Recent developments have made the global economy forecast to grow at 3.3 percent in 2020. However, a number of factors can cause the global economy growth.
One of the most important factors is the outbreak of Coronavirus. The prolonged closure of factories and the reduction of imports could affect the first phase of the US-China trade agreement.
Noting the China’s significant presence in world trade, serious disruption to its economy has had bad consequences onthe rest of the world. Bulk and tanker trades have been directly affected by the decline in Chinese demand. While the demand for container exports from China depends on other countries, the long-term closure of the country’s manufacturing sector limits the ability to meet needs. Therefore, the container shipping sector will be damaged.
During 2020, it is predicted to face a low demand growth in the container shipping sector, while shipping lines are working to raise freight rates to cover the additional costs of implementing 2020 laws of IMO. It should be noted that the growth of the fleet capacity in the current year will be lower than the previous year, but it is very high compared to the demand growth rate.
The cancellation of 105 sailings of passenger and cargo ships on the routes from Asia to the North America and Europe in February 2020 has caused a shortfall in revenue of 1 billion dollars.
The volume of maritime trade has fallen to 20-40 percent between January 20 to February 10 in 2020. This is due to the inactive Chinese ports and limited ship traffic in Asia.
According to the report, the 5% decline in economic activity in China has had a negative impact on global trade and maritime trade.
Drewry has added that cargo owners and shipping lines are desperate for a swift resolution that will see Chinese factories resume production.
While all of the Chinese ports, apart from Wuhan, have remained open, they are not operating at full capacity with staff shortages arising from travel restrictions and quarantine measures.
Drewry experts believe that the most optimistic scenario is when the Chinese government will do everything in its power to bring China back into the world of trade. However, increasing stock market indices requires a lot of time.
Economic slowdown in China will unfortunately increase the number of blank sailings, which could lead to the bankruptcy of some shipping companies.
In this regard, it is imperative that all countries work together to prevent damage to the maritime transport industry, and that the Chinese government will make every effort to return to its original condition.