Container sea freight rates will likely remain lower for a while longer

A recent article by strategic research firm Stratfor makes dire reading for the shipping industry and their investors.

However, the piece holds out hope to consumers that shipping freight rates will likely stay lower for longer as a result of the COVID-19 pandemic, to some extent helping to mitigate the economic damage being caused elsewhere.

The article explores both the short- and long-term implications of consumers, companies and countries’ reactions to the spread of the virus.

Front and centre is the demand destruction that started in Asia and has spread west with the virus.

Demand has dropped precipitously while, at the same time, local restrictions on vessels forcing quarantining and denying crew changes have added to shipping delays and vessel rescheduling. Shipping capacity is now expected to fall by up to 20% on the Far East to North America route, and up to 25% in the second quarter of 2020 on the Far East to Europe route, despite moves by Europe and the U.S. to ease the lockdown and get industry back to work.

Rising unemployment, currently mitigated by governments to varying degrees with income support or furloughing policies, will to some extent be translated into permanent unemployment in Q3 when such policies are wound down.

The UK government has spent some £39 billion (U.S. $48 billion) on furloughing workers and suggestions are already being made that the UK cannot afford to continue the policy into Q3. The hit to demand due to unemployment alone will be significant, committing Western economies to recessions for 2-3 quarters this year, the Stratfor article suggests.

The firm predicts a tough few years for the shipping industry. Without a vaccine, the firm sees potential for repeated COVID-19 outbreaks will likely sustain a global recession for at least another year, restraining consumer spending in the process.

Whether they are proved right that economic activity will not recover to pre-pandemic levels until at least 2022, and double-digit unemployment rates in developed economies will last well into 2021 remains to be seen. Talk of further trade wars between Washington and Beijing certainly don’t help the prospects for a bounce-back.

Already, the early moves by some firms to embrace nearshoring are looking prescient; this trend is likely to accelerate as firms evaluate the cost-benefit of shorter supply chains. Supply from Mexico is via truck, not container, and if it increases as seems likely the global shipping industry will experience further declines in demand.

There could be — indeed, probably will be — casualties among shipping lines. Older vessels will certainly be scrapped rather than fitted with expensive scrubber upgrades. The industry will emerge from this smaller and probably loaded with more debt.

In the longer term, less competition could mean higher freight rates and less frequent sailings. In the meantime, lines are engaging in tactics like “blanking,” sailing back with completely empty ships on some routes to reduce space and support freight rates. Space on Asia to European services is certainly more disrupted and yet less discounted than the loss of traffic would suggest it should be.

Lines are fighting to maintain the container freight rates they held during Q1, but cracks are showing in Q2 and lower rates are becoming widespread. The expectation is as economies gradually open up again, more shipping services will be brought back onstream and the competition will keep rates at the current lower level — any lower and operators will likely start idling ships again.

Falling fuel prices will help offset some of the immediate impact of lower shipping rates for lines, the report suggests, with global oil prices unlikely to rise much past $50 in 2021 as the COVID-19 crisis continues to depress demand and maintain excess capacity among shipping lines.

Source: Hellenic Shipping News