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Liner market: Covid-19 and beyond
The impact of the Covid-19 crisis on trade has been put into numbers and it is not pretty reading. The market reaction is to start the clear out of historically large vessels from the fleet
Without the numbers, it is difficult to put into words the impact of the Covid-19 coronavirus on the container markets. Fortunately, Clarkson Research Services (CRS) recognised this problem and has now produced Covid-19: Shipping Market Impact Tracker. It shows that as at the end of July 2020, the World Health Organisation was reporting over 155,000 new Covid-19 cases. Rapid intervention took place and China, the initial epicentre of the outbreak, created the first episode of lockdown, which then spread around the world.
Global GDP growth, the lead indicator for seaborne trade, was forecast as a respectable 2.9% in 2019 and actually rose to 3.3% in January 2020. April 2020 is generally seen as the first month to show the true impact of Covid-19; GDP growth fell to -3.0%. Since then, GDP forecasts have continued to go downward and at the halfway point of 2020, GDP growth was down sharply to -8.2%.
The impact of Covid-19 on ocean carriers, owners of container ships, operators and the supply chain as a whole has been stark. On the container ship side, pre-Covid-19 coronavirus pandemic, the idle tonnage in 2019 represented 5.4% of the available fleet TEU. As the shockwave from the impact spread, the idle fleet rose to 11.1% in March 2020, according to CRS. At the mid-point in the year, the idle fleet is 9.8%.
The earnings outlook at the beginning of 2020 was very different following the multi-year highs seen at the end of 2019 and early January 2020. The first sector to succumb to the fall in charter rates was the larger post-Panamax container ships, whose earnings have fallen circa 60% from US$30,000 per day in early January 2020 to US$12,000 per day in June 2020.
The smaller sectors saw earnings fall toward operating cost levels. According to a recent report from counterparty intelligence and business data specialist Infospectrum, since April 2020, the decline in rates for all vessel sizes in the liquidity-providing sub-5,100 TEU charter market has been widely evident. Vessels in the 1,000 TEU and 1,700 TEU geared ranges have experienced 13% and 25% declines in daily hire rates from 1 January 2020 to mid-June.
“The day rates for the old Panamaxes of 4,400 TEU have declined by 40% over the same period and rates in the vessel ranges above 5,100 TEU up to about 9,000 TEU have halved since January 2020,” says the Infospectrum report. The counterparty intelligence group sees parallels with the last cycle of carrier collapses. “The charter market is trending towards the barren years of 2012-2017 when banks became shipowners, and demolitions accelerated.”
In July 2020, there was a small reversal in the freight rate situation, as noted by VesselsValue, but it may come at a cost. “Throughout July, large container rates increased by nearly 15% partly due to void sailings and recovery in demand. However, this positive sentiment comes with some concerns. As we move into August and September, the number of void sailings is set to fall which could potentially limit further increases to rates.”
The decline in earnings and, more importantly, the expectation of a continued decline in earnings has damaged values across all container ship sectors as the VesselsValue matrix reveals. These falls have been quite significant and fast. Part of this is due to container ship values rising through 2019 as the market improved, meaning values had further to fall. VesselsValue notes that it is seeing favour move against container ships as market participants readjust their forecasts for international and container trade over the next years to take into account expected possible recessions in some major importing countries.
“These falls in value of over 12% for the larger, more modern size vessels over a 1-month period are quite significant. This is obviously an issue for owners looking to sell or refinance, but also presents opportunities for buyers to lock in low prices and benefit from the potential upside as the market improves due to the easing of lockdown,” notes VesselsValue.
The fall in values and lack of demand has resulted in a new size record for a container ship sold for recycling. 9,600-TEU, 1998-built Sine Maersk has been sold for recycling in Turkey. It is probably difficult to believe today, but 9,600-TEU Sine Maersk was one of the largest container ships of its day. Originally built in 1998, as a 6,418-TEU vessel in Maersk’s own shipyard in Odense, Denmark, such was the growing demand for ever-larger container ships that the vessel was jumboised to 9,600 TEU in 2011. According to Clarkson Research, there were fewer than 100 vessels larger than 8,000 TEU at the time. Today, there are 624 vessels of 5.8M TEU in the 8,000 to 11,999 TEU size range.
The 8,000+ TEU container ships dominated the Far East to Europe trades in the way their modern 20,000+ TEU counterparts today govern the transpacific and Far East trades. Who is to say whether these giants of their day will also be facing the breaker’s torch in 20 years’ time? On a side note, in sending Sine Maersk for recycling in Turkey, Maersk is maintaining a commitment to the EU Ship Recycling Regulation to only use EU-approved demolition yards.
The deep cuts in container ship valuations have come at a point when the value of the public-listed liner companies is falling. Compared to the start of 2020, Maersk B shares fell by 48% at one point before rallying to close the first half of 2020 only 20% down, according to Alphaliner. COSCO Holdings also fell steeply, by as much as 45%, before closing the first half of the year on 35% off the 1 January 2020 value. In fact, all the public-quoted liner operators suffered losses in share values in the first six months of 2020.
But it is not all bad news. Using a newly developed metric, VesselsValue has spotted signs of stability in container ship demand that could herald better days ahead. It noted that on a weekly journey basis – measuring weekly count of container ship journeys starting and ending in countries and regions of interest (ie China and partners) versus the usual TEU-mile demand – demand stabilised in May and began rising significantly in June. In mid-June, demand surpassed January 2020 levels, which is taken as a positive sign for future values and earnings across the whole container ship sector.
Drilling down through the weekly journey data shows that demand for container ship voyages out of China is rising. Journey levels spiked considerably in mid-June, exceeding figures seen pre-Covid-19 in early January. This is a very positive sign and suggests demand for Chinese exports is rising again, as countries begin to ease lockdowns.
More remarkable has been the way that US-bound container ships leaving Chinese ports have picked up to reach levels seen at the start of the year. This was reinforced by Alphaliner, which noted that in July 2020, transpacific trade levels have returned to 2019 levels. A sustained recovery will be needed to lift values for vessels and companies alike, but not to the level of keeping the older once-largest vessels, in the fleet.
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