Analysis: Low oil prices a consolation prize for container, dry bulk shipping

London — The coronavirus has crushed global supply chains and destroyed demand for consumer goods, holidays and a raft of key commodities. With over 90% of global trade carried by sea, the outlook for containers, cruises and dry bulk over the coming months looks bleak. Low oil prices may provide some salvation but they are also symptomatic of the problem.

While the tanker market enjoys a bonanza with freight rates driven by a demand to store crude and its products at sea, its shipping cousins in containers and dry bulk are suffering. They have no need to come to the rescue as steel, copper and laptops are that much easier to store on land. Freight rates for clean tankers have spiked to record levels in the past week on all vessel classes, while container shipping rates have been under pressure amid much volatility.

Trade has been decimated, with S&P Global Ratings noting this week that it expects "a significant contraction in demand for container transport for at least the next several months," revising its outlooks on Maersk to negative from stable, on Hapag-Lloyd to stable from positive, and maintaining negative outlooks on CMA CGM and CEVA Logistics.

Analysts have been fretting that extended coronavirus containment measures will push the world into the deepest recession since the Great Depression of the 1930s, with the World Trade Organization earlier this month suggesting trade could fall by as much as 32% this year. That would be more than double the decline experienced just over a decade ago when the financial crisis hit.

Jason Silber, managing director at SeaCred, signalled the extent of the distress. "Aside from VLCCs, it's impossible to sugarcoat how bad things are. Container liners are suffering. The cruise sector is, well, comatose. I don't see how bankruptcies and payment delays across the board won't materialize," he said. "The only saving grace is that low-sulfur fuel prices are very low, which provides many shipping companies with breathing room during these fateful times."

PRICES PIVOTAL

The slump in Brent crude should provide some comfort across the shipping sector and not just to the tanker market, with marine fuel prices down sharply. On Friday, 0.5% sulfur marine fuel FOB Rotterdam barges were assessed at $149/mt, the lowest since S&P Global Platts started assessing the product in January last year. On the high sulfur fuel oil side, 3.5% FOB Rotterdam barges plummeted to their lowest levels in over 20 years last Wednesday to be assessed at $83.50/mt.

This led to the bunker element of ocean freight nosediving in recent weeks, eating in to the carrier all-inclusive ocean freight levels. "It's strange that rates don't come down when bunkers come down, but that is one of the current flaws of the bunker system for container freight – you don't capitalize on the falls or the rises," another freight forwarder said.

With volumes as they are, and already around 400 sailings voided for this year to date, carriers are supporting rates by pulling capacity. "The sad truth is that demand has tanked, but so have our operating costs -- we should be raking it in with bunkers so low, but that is life," a seasoned trade lane manager at a large container carrier said. Platts Container Rate 1 -- North Asia to North Continent -- fell $100 from March 27 to $1,200/FEU on April 27, and PCR 5 -- North Asia to East Coast North America -- fell $150 to $2,625/FEU over the same period.

CORONAVIRUS

Coronavirus is driving down demand for ocean freight significantly at the moment, but with some lockdown restrictions starting to ease, especially across much of Europe, there is hope in the market that there could be a boost in container freight demand. However, many importers and retail outlets are wary of a potential second string of lockdown measures should coronavirus case numbers start to increase again.

The dry bulk market has fared little better, despite signs of a recovery in demand in China. The metals sector in China has shown some signs of recovery but trade disruptions in other parts of the world affected by the coronavirus pose key risks to a full-blown return. Steel producers are reducing output and closing plants in the face of unprecedented drops in steel demand as manufacturing slumps," said S&P Global Platts Analytics, noting that "ports have imposed quarantine restrictions on ships, and many have blocked normal crew changeover procedures," to add to the challenges.

With issues surrounding port slowdowns across the world, despite port employees being classified as key workers in many nations, there are expected to be more logistical problems. "The issue isn't really whether the ports are operational at the moment, it's the number of truckers, the warehouse staff at the companies buying goods -- these are the people that we should be worried about as they are not classified as key workers," a freight forwarder source said. "If you can't move goods from the port, it's not much good if the ports are fully operational or not."