Shipping Industry’s Outlook Remains Positive

For months, the world’s largest shipping conglomerates were under intense pressure. The industry seemed to be sailing in treacherous waters. The introduction of IMO2020 – an environmental regulation set to reduce emissions released from vessels, alleviated costs, which although partially borne by customers, were significant. Disruptions stemming from the unprecedented coronavirus outbreak, impacted demand and thus their revenue streams.

However, stringent capacity deployment through blank sailings, lower-than-expected bunker fuel prices, and ultimately a less severe decline in global trade volumes than previously anticipated improved the outlook.

The scenario today, significantly varies from prior expectations, then pointing towards a gradual recovery in-line with global economic growth and relatively stable freight rates. Expectations were indeed exceeded and the outlook is now, more than ever, optimistic. The record high freight rates have in Q2 led to the generation of abnormal profits. Supply disruptions are largely to blame.

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 consequent to the significantly more transmissible strain; the ‘Delta’ variant, said to have first originated in India.

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.

Since the end of last year 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 capacity shortages. The Suez incident towards the end of March, port closures in May, and a growing container shortage, worsened an already tensed situation.

Growing container shortage

For months the world’s largest shipping groups have grappled with container shortages and a lack of berths in ports, as fluctuating demand and the health crisis piled pressure on global logistics. Now, another shortage is occupying the industry’s attention, that of vessels and thus capacity.

Turnaround times for vessels and containers have significantly increased, leading to a reduction in the transport capacity actually available.

Despite a recent surge in orders for new vessels, the availability of container ships, at least in the near term, is likely to remain strained given soaring demand for their services and the complexity of retooling fleets for environmental reasons.

More Chinese ports may shut due to the Delta variant

Efforts by Chinese authorities to reduce the spread of the coronavirus pandemic, through increased testing and enforcing quarantine measures, have in recent months not only led to labour shortages, but have also disrupted global ship schedules and supply chains. Consequently, freight rates rose to record levels.

Should the spread of the ‘Delta variant’ strain increase and lead to new shutdowns, despite the recent reopening of Meidong container terminal in Ningbo-Zhoushan port, this increasing capacity and lessening supply constraints, container rates may once more thread higher. Particularly, should Beijing continue to step up testing and continues its zero-tolerance policy.

It is worth noting that full capacity at Meidong Terminal, which has 7 million TEU (Twenty-foot Equivalent Unit) annual capacity may not be restored for a number of weeks, similar to Shenzhen Yantian's three-week closure in May.

Risks of further port closures for “epidemic management” are certainly not far-fetched, despite improving vaccination rates amongst Chinese citizens. Most likely, vaccinated citizens have received the locally produced Sinovac and Sinopharm Coronavirus vaccines, which like others, may prevent deaths but not prevent the ‘Delta variant’s” transmission.

Maersk at the forefront of green initiatives

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, has in recent weeks stepped up its efforts, ordering 8 ‘carbon-neutral’ vessels.

The world’s largest shipping line stated that the ocean-going dual-fuel vessels, powered by carbon-neutral methanol or traditional bunker fuel, would generate roughly 1 million of annual CO2 savings by replacing older, more emissions-intensive ships. The order establishes Maersk as the first container shipping company to order large carbon-neutral vessels capable of sailing on the high seas.

The vessel order, placed with South Korean manufacturer Hyundai Heavy Industries, also includes an option for the largest shipping line to order four additional vessels in 2025.

Outlook remains positive

The global trade recovery remained solid into Q2 2021, despite a rapid rise in coronavirus cases, consequent to the more transmissible ‘Delta’ variant. Freight rate, positively correlated to demand, remained largely elevated, reaching record highs. The latter, generally enabling the largest shipping companies to report record profits.

The outlook going forward, particularly for the industry’s peak season remains positive. Favourable supply-demand dynamics, consequent to; sustained demand, port congestions and ensuing capacity constraints shall continue, at least in the short-term, to support the recent record-high freight rates.

Although pandemic-related risks remain, we expect volumes in 2021 to advance, in line with global economic growth. Seabury Consulting predicts volume growth of 6.3 per cent for 2021, contrasting a 1.0 per cent decline in the previous year.

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.

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