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Against all odds, the shipping industry, expected to be sailing in treacherous waters following; the US-China trade war, the introduction of IMO2020 – an environmental regulation set to reduce emissions released from vessels, and disruptions stemming from the unprecedented coronavirus outbreak, navigated 2020 well.
Shipping companies, demonstrating considerable resilience at the peak of the pandemic, reported improved year-on-year operating results.
The optimistic results achieved by the majority of shipping companies have been 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.
What kept the industry afloat?
In an attempt not to trigger a supply-demand imbalance that could negatively impact the freight rate and ultimately hurt profitability margins, shipping companies at the peak of the pandemic announced blanked sailings. A blanked sailing is a shipment that the carrier has cancelled. Cancellations typically involve a vessel skipping one port or the entire string.
By reducing supply, container-shipping companies, through the system of alliances and consortia in the industry, managed to compensate for the decline in demand, holding the freight rate, initially feared to witness a significant drop.
Following the scheduled peak in April, blanked sailings employed by the shipping alliances that enable slot-sharing and vessel-sharing agreements started to decline, portraying an uptick in demand, consequently pushing the freight rate even higher.
Indeed, management capacity, coupled with the considerable drop in bunker prices and other cost-cutting initiatives implemented to mitigate the strain, proved crucial in mitigating revenue pitfalls, despite a decline in volumes.
Although volumes pointed substantially lower in the first half of the year, the coronavirus pandemic and resulting hit on global trade proved less severe than previously anticipated. According to estimates, global trade shrank by about 1 per cent overall in 2020 but had seen a 7 per cent decline in the first half of the year.
The coronavirus pandemic and subsequent multiple national lockdowns across the globe prompted a remarkable shift in consumption towards tangible goods from services. Combined with the accelerated penetration of e-commerce, bottlenecks in the air freight logistics, congested marine ports, and shortage of containers triggered a surge in container shipping freight rates towards the end of 2020.
Despite the expectations for freight rates to subside, particularly following the Chinese New Year when factories are usually shut, and thus lowering demand for container space, this has not been the case.
The global trade recovery remained solid into the first quarter of 2021, despite the usual seasonal slowdown. Freight rate, positively correlated to demand, continued to strengthen into 2021. Notably, the freight rates on the main container liner trades; Transpacific and Asia-Europe, hit record highs at the end of February 2021.
While demand for shipments is set to remain, at least in the short-term, sustaining the recent record-high freight rates, we expect container liners to pursue their disciplined capacity deployment and that containership supply growth will remain muted over the next several quarters. The latter, possibly leading to tighter supply conditions.
Although pandemic-related risks remain, we expect volumes in 2021 to improve, 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.
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