The only risk to improved tanker fleet utilization in 2020-21 is “a black-swan economic event that punishes global oil demand,” wrote Evercore ISI analyst Jon Chappell in his latest shipping forecast.
Enter the black swan.
Or at least, a potential candidate – one that could, in the worst-case scenario, curb demand for crude, products and gas tankers, as well container ships and dry bulkers.
That unforeseen event is the Wuhan coronavirus. There are currently 2,794 confirmed cases (2,737 in China) and 80 deaths (all in China, including one in Shanghai). The head of China’s health commission warned that “the epidemic has entered a more serious and complex period.” Outside of China, additional cases have been reported in Asia, Australia, Europe, the U.S. and Canada. (A frequently updated infection dashboard using data from the World Health Organization is now online.)
Major unpredicted world events are often a positive for ocean shipping freight rates, but not epidemics. Downsides from decreased vessel demand far outweigh positives from fleet inefficiencies – particularly in cases when an epidemic epicenter is China.
The shipping demand effect of a major global event is calculated in ton-miles, i.e., volume multiplied by distance. If an event pushes more volume to sea, or alternatively, makes the same volume detour along a longer route (such as occurred with the closures of the Suez Canal in 1956 and in 1967-75) , it boosts ocean freight rates for nonscheduled bulk services because it drives the supply/demand balance in the favor of vessel owner/operators.
For scheduled services, such as container liner container operations, major global events are generally a negative, as they can induce lower utilization and/or higher costs on routes that must continue to be serviced.
If a global event reduces (as opposed to redirects) the volume of cargo shipped by sea, as is the case in an epidemic, it is negative for both nonscheduled bulk operators and scheduled liner operators.
Tanker demand effects
To gauge potential impacts on oil markets, analysts are comparing the latest outbreak to the SARS epidemic in 2002-03. Using SARS as a reference, Goldman Sachs predicted in a Jan. 21 client note that the coronavirus could reduce oil demand by 260,000 barrels per day (b/d), driven by a 170,000 b/d drop in jet-fuel demand and additional declines in gasoline demand.
Regarding gasoline, officials have now instituted a ban on driving in the city of Wuhan. The overall region has been placed in lockdown, restricting the movement of 56 million people. “Tanker demand could be at risk if the outbreak lasts longer than expected,” said Randy Giveans, the shipping analyst at Jefferies.
According to energy consultancy and brokerage Poten & Partners, “The main differences between 2003 [the SARS outbreak] and 2020 are the size of the Asian economies and their regional energy demand. China, in particular, has experienced dramatic growth in the intervening period. In 2003, China’s oil demand was about 5.8 million b/d, as compared to 13.6 million b/d in 2019. Any impact on Chinese/Asian oil demand is likely to be much more significant, not only in volume terms but also in terms of oil import flows and the ripple effect on tanker markets.”
Poten pointed out that the market could rebound quickly. “The SARS epidemic in 2003 created significant fear and uncertainty. More than 8,000 people were infected, resulting in 774 deaths in 27 countries. However, the fear ultimately subsided. The recovery of economic activity and oil demand was swift and strong. If the current crisis follows a similar pattern, we may see short-term headwinds followed by a strong rebound later this year.”
China’s economic growth has an inordinate effect on dry bulk spot rates, due to the country’s imports of iron ore and coal for steel production, as well its high demand for agribulk.
Dry bulk spot rates are already painfully low. For Capesizes (vessels with capacity of around 180,000 deadweight tons), rates are not even covering the cost of low-sulfur fuel. Any further rate deterioration in the wake of the coronavirus outbreak would heighten stress on vessel operators.
For all shipping sectors, including container shipping, a major concern is the potential inability for Chinese employees at mills, refineries, factories and terminal facilities to go to work in a quarantine situation. As in the case of weather-related disasters, an inability of workers to work decreases oceangoing cargo flows.
The onset of the Wuhan coronavirus occurred during the Chinese New Year holiday week. The Chinese government announced that the holiday period would be extended another three days. Factories in the major manufacturing hub of Suzhou in eastern China have been closed through Feb. 8.
When ship operators and investors talk about rate upside from unexpected events, they often highlight voyage delays that reduce effective global fleet capacity. The less global vessel supply, the better for rates, assuming, of course, that it’s not your ship stuck in the delay.
Past epidemics have resulted in a variety of voyage inefficiencies. According to a new client note from insurance provider Steamship Mutual, “If the prevalence of the virus increases, the shipping industry can expect to see the same sorts of issues arising as with prior severe disease outbreaks. Apart from the obvious danger to crew members of contracting the illness at a port in an infected area, port authorities may institute reporting and quarantine measures to guard against the spread of the disease from vessels that have previously called at infected ports, and in the most severe cases of outbreak, ports may be closed altogether.”
Steamship Mutual continued, “A risk of quarantine might lead to a reluctance by owners to call at contractually agreed ports in two situations: where a call at an agreed port might lead to quarantine elsewhere and where the agreed port has itself instituted quarantine measures on particular vessels.”
Chinese port-call delays are already being reported for container ships and gas carriers as a result of the outbreak.
Beyond fleet inefficiency, there’s also a potential silver lining for shipping due to lower fuel costs. When crude prices rise, bunker (marine fuel) prices rise quickly in tandem. When crude falls, bunker prices fall as well, albeit with a lag.
The price of Brent crude oil has fallen 7% over the past week, largely driven by coronavirus fears, so it is possible that bunker pricing could decrease in the weeks ahead, which would be a welcome development given the surge in fuel costs due to the IMO 2020 regulation. Poten noted that the SARS epidemic in 2003 “pushed oil prices down nearly 20%.”
In the case of Middle East unrest in the second half of last year and earlier this month, analysts had a legitimate argument that geopolitical unrest could cause rates to increase because the cargo volume at sea would remain the same or increase and the voyage distances would rise.
Not so with the Wuhan coronavirus. The potential vessel-demand negatives from pressure on the Chinese economy far outweigh the potential fleet-inefficiency positives. Shipping stocks are falling. Just as trade-war concerns have instilled a negative sentiment overhang among shipping investors, coronavirus fears could overshadow otherwise positive market fundamentals when it comes to stock pricing.
U.S.-listed shipping stocks fell sharply on Friday, Jan. 24. Shares of Golar LNG (NYSE: GLNG) and GasLog Ltd. (NYSE: GLOG) declined by 7%; Nordic American Tankers (NYSE: NAT) by 6%; and Frontline (NYSE: FRO), Teekay Tankers (NYSE: TNK) and DHT (NYSE: DHT) by 4%.
The Copenhagen-listed stock of container line Maersk was down 4% in midday trading on Monday, Jan. 27. Before the opening bell in New York, Dow futures indicated a precipitous drop for U.S. equity markets.
“Coronavirus fears have usurped Phase One trade-deal positives,” noted Giveans.
Chappell acknowledged in a new client note, “The headline-grabbing, and fatal, coronavirus that originated in China is causing concerns regarding potential impact on commodity demand. In this initial period of uncertainty, sentiment is likely to outweigh facts, as seen in the energy and equity markets.”
According to Clarksons Platou Securities analyst Frode Mørkedal, “Shipping equities are down on continued fear around the virus outbreak. Bottom line is that we believe this virus outbreak should not have a lasting impact on demand and as such the recent correction to stock prices could offer a buying opportunity.” More FreightWaves/American Shipper articles by Greg Miller