Shipping industry’s outlook remains positive

The phrase “a lot can happen in a year” seems rather fitting for the shipping industry, then employing blanked sailings not to trigger a supply-demand imbalance that could negatively impact the freight rate and ultimately hurt profitability margins.

An industry that initially seemed to be sailing in treacherous waters have navigated 2020 well. This, notwithstanding the challenges faced, notably; the introduction of IMO2020 – an environmental regulation set to reduce emissions released from vessels, and disruptions stemming from the unprecedented coronavirus outbreak.

Optimistic results achieved by the majority of shipping companies and thus turnaround was a result of; stringent capacity deployment through blanked sailings, lower-than-expected bunker fuel price, and ultimately a less severe decline in global trade volumes than previously anticipated.

The outlook, following an uptick in demand and resultant surge in freight rates, improved.

Strong fundamentals; sustained demand

The global pandemic situation, albeit less profound owing to vaccination programmes being well underway, at least, in the developed market world, continues to prevail.

The health crisis and ensuing restrictions on movement to mitigate the spread, resulted in a shift of retail consumption in favour of goods rather than services. This, notably supported by the development of e-commerce. Consequent to this shift, the demand for transport and logistic services recovered quickly from the trough levels witnessed in 2Q 2020. Shipping liners have been operating at full or quasi-full capacity ever since.

Towards the end of last year and during 1Q 2021 the level of demand combined with the disruptions relating to the pandemic, such as staff shortages, have created a severe congestion in global supply chains. In container shipping, this translated into slower asset rotations and severe vessel and container shortages. The Suez incident towards the end of the quarter worsened an already tensed situation.

Increased congestion in China as ships avoid key ports

Supply chain bottlenecks that have snarled major ports through the pandemic, severely impacting trade and triggering a rise in freight rates in the process, are now disrupting operations at key export hubs in China.

Facilities in Guangdong province – south of China, namely; Yantian, Shekou and Nansha ports, are facing challenges due to efforts by local authorities to disinfect and enforce quarantine measures that have led to labour shortages.

Notably, Yantian International Container Terminals, an operator of terminals at Shenzhen port, was partially closed late last month for a few days after some dockworkers were among those confirmed positive with coronavirus amid an outbreak in Guangdong Province. The disruption at the world’s fourth-busiest container port is putting stress on an already fragile global supply chain. While vessels are calling at Yantian, port activities there and in nearby facilities remain largely restricted.

Higher shipping rates may indeed follow as terminal congestion is set to persist.

A shift towards a cleaner environment

While efforts are being made by the whole industry to reduce the emissions released from vessels, particularly through investments in LNG vessels, Maersk – the liner at the forefront of green initiatives, is calling for a carbon tax on fossil fuel-based marine fuels to push cost incentives for change as the shipping industry moves towards greener targets.

The world’s largest shipping line called its carbon tax proposal a move that would “bridge the gap” between fossil fuels and greener alternatives that will not only increase operating expenditure, but are years aware from being available at scale.

The announcement comes as IMO's Marine Environment Protection Committee is expected to meet for its 76th session.

Despite the efforts being made by the industry at large, oil-based shipping fuels remain the most commonly used shipping fuel amongst the global fleet.

Positive outlook

The global trade recovery remained solid into the 1Q 2021, despite a second coronavirus wave. Freight rate, positively correlated to demand, shall remain largely elevated. Notably, the freight rates on the main container liner trades; Transpacific and Asia-Europe, hit record highs at the beginning of June 2021.

Favourable supply-demand dynamics should, at least in the short-term, remain, sustaining the recent record-high freight rates. We expect container liners to pursue their disciplined capacity deployment, should demand weaken.

Although pandemic-related risks remain, we expect volumes in 2021 to advance, in line with global GDP growth.

Disclaimer: This article was written by Christopher Cutajar, Credit Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

For more information visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.