Shipping stocks fell sharply on Monday as Wall Street’s main indexes closed higher. Multiple shipping names sank by double digits, adding to last week’s pullback.
U.S.-listed shipowner shares face simultaneous sentiment pressures on multiple fronts.
The longer China’s COVID lockdowns last and the further they spread, the more concern there is on China’s economy, its demand for tanker and dry bulk import cargoes, and its ability to export containerized cargoes. Russia-Ukraine war fallout is jeopardizing global economic growth. Consumer spending — previously driven by COVID-era changes to purchasing behavior and government stimulus — is under threat as inflation soars. The Fed is hiking interest rates.
Shares of container stocks have been under pressure since late March, mirroring a downturn in domestic freight transport stocks. Dry bulk and tanker stocks (which are still up year to date) didn’t begin falling until last week, coinciding with a economic forecast downgrade by the International Monetary Fund (IMF) and worsening COVID news out of China.
Longer voyages could offset economic decline
Last Tuesday, the IMF reduced its global gross domestic product growth outlook to 3.6% for 2022, citing fallout from the war. That’s down from its previous forecast of 4.4%. The IMF lowered its 2023 growth outlook to 3.6% (from 3.8%) and foresees 3.3% growth in subsequent years. Such growth levels would mark a steep slowdown from last year’s consumer-spending-juiced growth rate of 6.1%.
“For shipping, slower economic growth is not good, all else being equal,” wrote Clarksons Platou Securities analyst Frode Mørkedal on Monday.
He continued, “What is likely to cushion the impact on [dry bulk and tanker] shipping, in our view, is significantly longer trading distances because of the Russia-Ukraine crisis, and low fleet growth.”
“One important factor for shipping demand is the length of voyages. If average nautical miles increase, this could compensate for lower volume. For both dry bulk and tankers, we have seen a lengthening of average trading distances on the back of reduced Russian exports. Low underlying fleet growth also means that slowing economic growth is less worrisome than in prior periods.”
Clarksons estimates that the Russia-Ukraine war could reduce total seaborne trade by 0.9% this year in terms of tons. However, because cargoes are being transported longer distances, it projects that shipping demand measured in ton-miles (volume multiplied by distance) “has remained very similar to previous projects, at a firm 4%, despite the downgrade to volumes,” said Mørkedal.
China lockdowns: Different timing for different segments
Meanwhile, COVID closures in China appeared to be worsening on Monday. With Shanghai still under lockdown, Beijing looks like it may be next.
Chinese lockdowns should affect all shipping segments, but to different degrees with different timing.
Surprisingly, container shipping indicators don’t yet show a major effect. Shanghai export container waiting time has not risen, and carriers have not yet canceled a large number of Asia-U.S. sailings. Port congestion off Shanghai and Ningbo is up but still below levels seen last year. Trans-Pacific spot rates have not fallen significantly since the lockdowns began, nor has the Los Angeles/Long Beach ship queue decreased (in fact, it has slightly increased in recent weeks).
Evercore ISI China analyst Doug Straszheim predicted that container shipping would feel significant lockdown effects starting later next month. “We expect a burst of exports from China after Shanghai gets unlocked. And we expect that unlocking to start around mid-May,” he said in a client note on Saturday.
In contrast to container shipping, China’s lockdowns are having an immediate effect on tanker shipping. “The latest information from China suggests that lockdowns have curbed domestic oil demand by almost one million barrels per day [b/d],” wrote Alphatanker on Monday.
“As Chinese demand has taken a hit, refiners have reduced their activity … [and] in turn, this has seen Chinese seaborne crude imports drop back by around 1.6 million b/d year over year, to 10.1 million b/d in March, the lowest since last October.”
“Demand is being walloped,” said Alphatanker.
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