Demand growth for multipurpose shipping wiped out by coronavirus

There’s little chance left that multipurpose and heavy-lift vessels will see any demand growth this year following the outbreak of the coronavirus. “Any anticipated recovery will not be sufficient to offset contractions of the first part of the year”, says Drewry’s analyst for Breakbulk Shipping Susan Oatway. 

The coronavirus has rapidly spread to countries all over the world and while China seems to slowly be getting a grip on the outbreak, Italy has effectively shut down in the past 24 hours. The virus has already killed 631 people in Italy, which according to the latest figures counts over 10,000 infected citizens. The country yesterday also recorded its highest death toll in one day, with 168 fatalities in 24 hours.

The Italian government has stepped up its efforts to battle the virus and the entire country is effectively in lockdown, but with the virus quickly spreading through Europe other countries are ramping up their measures as well.

Current effect on the industry

Preliminary results of PCJ’s reader survey show that so far, 70% of the respondents are directly impacted by the coronavirus. 40% of the respondents said they mostly see effects in their Asia business. However, it is important to note that the survey was first issued at the end of February when the outbreak in Italy and Europe were less severe.

Lower demand, delays and suspension of services were the most frequently reported effects of the outbreak. The majority of the respondents said their company has not taken any specific measures to mitigate the effects but among the companies that did look for workarounds various actions were taken, ranging from vessel relocation to business development of less affected areas and moving cargo by train.

Three scenarios

It is uncertain how the virus will impact global trade in the next few months but according to Drewry, there are three possible scenarios. In the baseline scenario, China manages to contain the virus before the start of the second quarter but the virus will spread more rapidly in other countries. This is the pattern that is currently being reported around the globe.

Economically, this will result in a bigger slowdown of GDP growth and possibly even a contraction, depending on the size of the outbreaks in important consumption areas. Recovery of the global economy will be pushed into 2021 and likely be of a smaller scale. For MPV-operators, the reduction in dry cargo demand and increased competition from the bulk and container sectors will result in weaker demand in 2020. Silver lining is that the previously forecast breakbulk and project cargo slump in 2021 will be less severe.

In Drewry’s most optimistic scenario, China would contain the virus by mid-March and the cases outside China would not escalate. With the current situation in Italy, however, this scenario does not seem likely meaning companies should not expect a V-shaped recovery this year.

In the worst-case scenario, the coronavirus cases in China rise again as the country relaxes its quarantine measures and surge in the rest of the world. This would mean the virus would not be contained before the end of the first halfyear pushing the global economy into recession in 2020 as trade flows will be choked off at both ends from production and end-user demand. This, in turn, would lead to a severe contraction in dry cargo demand with uncertain prospects for 2021, resulting in a significant reduction in MPV-demand and a prolonged freight rate downturn.

Steel and renewables

Two important cargoes for the MPV sector in Asia and China are steel and renewables. According to Drewry, Chinese domestic demand for steel is not expected to pick up before April, but this has led to historically high inventory levels at many mills and an increased interest in exports. Meanwhile, construction of both wind and solar projects in China has slowed due to the coronavirus outbreak hampering the return to work after the Lunar New Year holidays. Recent reports, however, suggest that turbine production in China is increasing again.

“Our assumptions for breakbulk and project cargo are that although we expect some Chinese (overseas) projects to be delayed, there is clear momentum for most and there is some return to export demand. However, this will be hampered by the latest news of outbreaks in the Middle East, a significant region for project cargo”, Oatway says.

Outlook

The MPV sector faces additional pressure from competing industries like container and bulk shipping, which will be chasing breakbulk and project cargo more vigorously. At the same time, multipurpose cargo demand will be weaker due to the loss of Chinese exports and due to concerns for the global economy, investor confidence is likely to soften as well.

As a result, Drewry will be downgrading its full-year cargo demand forecast for multipurpose vessels from its previous projection of 1.8% growth when it publishes its next forecast at the end of March.

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Author: Tobias Pieffers

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