Troubled Waters

Impact of coronavirus outbreak on the shipping industry

Dr Abhijit Singh, Executive Director, Indian Ports Association 

As the country comes together to slow the spread of COVID-19, the union government has expressed concerns over its continuing spread. The government took drastic steps of suspending all visas for entry into India and restricted the arrival of people from abroad. These steps were taken at the directions of a Group of Ministers under the ambit of the 1897 Epidemic Disease Act under which the government can detain people or vessels that come from abroad. This has also affected the supply chain of goods including supply of necessities. The guidelines for all ports, both major and non-major, have already been issued by the Directorate General of Shipping for dealing with the COVID-19 pandemic, including strict instructions to maintain proper hygiene and sanitation at their facilities.

With international transport at the forefront of trade and dependent on travel and human interaction, the shipping industry has been impacted both directly and indirectly by the COVID-19 outbreak. All shipping segments from oil tankers to container lines have been hit by the economic impact from factory shutdowns and travel restrictions put in place across the world to control the spread of the virus. Shipping is the lifeblood of the global economy and without it, intercontinental trade, bulk transport of raw materials, and the import/export of affordable food and manufactured goods would simply not be possible. However, the coronavirus pandemic has disrupted shipping which in turn has affected global trade.

Impact on global shipping industry

On March 16, 2020, Moody’s changed the shipping industry’s outlook from “stable” to “negative” in the wake of the virus outbreak. Moody’s expects the supply-demand balance to tilt towards oversupply for the container shipping and dry bulk segments, especially in the first half of this year. The situation is more positive for tankers at the moment given the recent sharp drop in oil prices.

Operations of shipping companies and related industries, including terminals, ports, etc., have been affected due to personnel having been advised to refrain from travelling or reporting to work. Lower demand for commodities and raw materials, and thus the reduced need for shipment, has pushed freight rates lower. Several shipping companies have started warning about reduced earnings visibility and weak future earnings results. Cruise, travel and related industries (conferences), etc., have also suffered, and it is noteworthy that North America’s largest container line conference, Trans-Pacific Maritime 2020, was cancelled, literally on the eve of its opening.

So far, there do not seem to be any segments of the shipping industry that are immune to COVID-19. There have been headlines about cruise ships not being allowed to dock and placed under quarantine for weeks. Commodity vessels, such as dry bulk and tanker vessels, have seen lower demand and lower freight rates. There have been reports that very large container ship vessels are leaving Chinese ports filled to just 10 per cent of their capacity. With lower demand, crude oil prices have collapsed, and this will further exacerbate the bad state of the offshore drilling industry. The shipbuilding and ship repair segments have collapsed, and shipping finance and ship brokerage have also been affected as they involve travel and need some momentum and enthusiasm, both presently in low supply. The shipping legal professionals have been poring over charter parties and exploring the possibility of whether COVID-19 can constitute force majeure, a variable with numerous implications on the charter market.

Given that the freight market for dry bulk vessels and offshore drilling assets has already been weak for a while, it will not be surprising to see COVID-19 catalysing the filing for bankruptcy protection this year by a few financially unstable companies in these segments. On a brighter note, a slowdown of shipping finance and building of new ships is welcome news as this would limit tonnage supply.

Impact on the Indian shipping industry

The coronavirus has had a major impact on the usually lowest-priced intra-Asia trade lanes, which typically meet much of the equipment repositioning for the region. According to ICRA, the COVID-19 outbreak has had an adverse impact on Indian export-import (exim) trade, given the scale of bilateral trade between India and China. With a flurry of blank sailings and much lower inbound volumes, Indian shipping industry leaders generally expect container volumes to have taken a major hit during March and April due to COVID-19, but anticipate a strong turnaround thereafter, subject to the crisis easing. The Jawaharlal Nehru Port Trust (JNPT) loads the bulk of Indian containerised trade. APM Terminals Mumbai, JNPT’s busiest gateway, had four blank sailings in February and had six confirmed cancellations in March, of which three are related to the lunar new year and the other three are linked to the coronavirus.

From JNPT/Mundra to Shanghai, average spot rates increased to $150 per twenty-foot equivalent unit (TEU) and $200 per forty-foot equivalent unit (FEU) from $100 and $150, respectively, around mid-February. Rate levels have also surged for return trips, to about $650 per TEU and $850 per FEU from $400 and $500 around mid-February. There have been complaints of shipment delays between India and China, and there are serious concerns regarding the overall earnings of Indian shipping companies in the first quarter of 2020. There has been a sharp drop in dry bulk cargo movement since the third week of January 2020, as the shutdown in China has meant that ships cannot enter Chinese ports. Capacity utilisation at major Chinese ports has been 20-50 per cent lower than normal and more than a third of the ports have said that storage facilities were more than 90 per cent full, according to a survey conducted by the Shanghai International Shipping Institute, a Beijing-backed think tank. The effects on the shipping industry are likely to prove lasting.

On the whole, the impact of COVID-19 has been negative for the Indian shipping sector and any recovery will be dependent on demand recovery in the Chinese industrial segment following the abatement of the pandemic. Many industries such as chemicals, dyes and pigments, pharmaceuticals, textiles, electronics and auto could witness short-term supply disruptions due to a production shutdown in China. In turn, the reduced economic activity could result in a slowdown in bulk consumption and indirectly also affect bulk imports like coal, crude and other commodities. Ports that have significant exposure to the affected cargo categories could see an impact on their cargo volumes in the near term.

Conclusion

As the virus continues to spread, it remains quite difficult to forecast the medium- to long-term implications, yet the short-term consequences are clear – demand and freight rates are dropping. The full effect of the outbreak is still to be assessed as the situation remains dynamic and Chinese mainland ports start work in a restricted manner with a reduced workforce, and the same is the case with India. Currently, the shipping sector is facing headwinds due to loss of trade which has resulted in daily hire rates dropping to below opex levels and this is seen more in the dry bulk trade. Reduced exports out of China had given some incentive to the steel sector to increase exports to Western countries; however due to the European lockdown that too has not materialised. For shipowners, the situation is more drastic and additional incentives to have a greater share in coastal movement or imports may allow some breathing space till the economy improves.

India imports huge volumes of components and raw materials from China. Disruptions in the supply of these items will not only impact the export manufacturing and assembly industries but will also have an impact on the shipping and port sector as well, as ports account for nearly 95 per cent of exim trade by volume. With past epidemics, the markets have rebounded sharply in a matter of months, so the question is essentially how long will China and the rest of the world stay locked down.

Ports, port ecosystems, water transport and supply chain partners are to be considered essential businesses and critical infrastructure as the country comes together to slow the spread of COVID-19. They have a role to play in protecting public health, ensuring safety and supplying necessary goods. If the water transport ecosystem is disrupted it will have a direct adverse impact not only on other transportation functions but also on the economy as a whole. Hence, maritime transport and its supply chains, along with transportation, delivery and logistics networks, need to be sustained throughout the duration of this global pandemic to ensure that healthcare and medical supplies can reach hospitals and patients; essential supplies, services and food can get to families; and essential components can get to factories, distribution networks and consumers.

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