Market insights: The global shipping industry – Navigating choppy waters

Shipping image

The shipping industry provides access to the global economy, and for many developing countries, it represents a lifeline in terms of social and economic development. In fact, transportation has been one of the four key pillars of globalisation, together with communication, international standardisation, and trade liberalisation. Shipping provides efficient low-cost transportation, and without it the movement of goods necessary to sustain the global economy would be impossible. 

The industry has undoubtedly faced many challenges and continues to navigate through unchartered waters since the outbreak of the Covid-19 pandemic in 2020. Pre-Covid, the industry was already facing increased uncertainties amid geopolitical tensions and IMO 2020 (which limits sulphur content in shipping fuel). The supply chain disruptions brough on by Covid-19, coupled with the Suez Canal crisis in early April 2021, had a major impact on global trade and proved to be a nightmare for global trade and the shipping industry. 

Total global merchandise exports (US$ million)
Total global merchandise exports
Source: World Trade Organisation

Navigating the Covid-19 storm

The rapid spread of Covid-19 had a major impact on the demand for shipping goods as initiatives undertaken by governments and shipping companies to curb the spread of the disease caused significant setbacks for the industry, which had to deal with order and trip cancellations, increased costs as well as a decline in trade activities.

The impact of the outbreak was more pronounced on dry bulk cargo and liquid bulk carriers, particularly in 1H20. Dry bulk cargo continues to account for over two-thirds of maritime volumes and liquid bulk commodities account for the remainder. Major dry bulk cargo includes iron ore, coal (coking and steam coal as well as grains) and major liquid bulk commodities include crude oil, liquefied natural gas and chemicals. 

For crude tankers 2020 was a particularly volatile year. The sector underwent changes in global oil production, with rates increasing to record highs from mid-March to early May 2020 – largely due to the contango structure created in the market. This resulted in market participants buying oil in the spot market at low prices and storing it to sell at a profit, with many very large crude carrier (VLCC), Suezmax and Aframax fleets serving as temporary floating storage. As a result, company earnings were boosted by these market conditions. However, these highs were very short-lived as the demand for crude oil declined between May and October 2020. 

Post-pandemic fuelled recovery?

Crude tanker demand has shown signs of recovery after the lifting of lockdown restrictions and the initiation of vaccine rollouts in many countries. However, tanker rates have not yet fully recovered. According to Bimco, average rates for product tankers from January 2021 to May 2021 were so low that tanker carriers were unable to cover their costs. 

The average rates were between US$9 168 and US$10 334 per day compared to a break-even rate of between US$22 000 and US$25 000 for a VLCC. Bloomberg research asserts that floating storage is now returning to close to pre-pandemic levels, which also contributes to the pressure in the market. In addition, the severe Covid-19 crisis in India has had a significant impact as India is the second-largest importer, after China, of crude oil by ship.

While the dry bulk market experienced many twists and turns in 2020, particularly when it comes to vessel demand and supply, 2021 has so far seen a rebound in cargo demand.  

Factors that have driven the recovery include increased iron ore imports by China as steel demand increased after the government introduced a new infrastructure programme. Iron ore is largely transported in Capesize vessels, which, according to Bloomberg Intelligence, are trading at over 10-year highs. Capesize rates have increased 110 times since their May 2020 lows and are up 10 times on average so far in 2021.

Furthermore, given an anticipated increase in the demand for power as global economic growth ramps up, the possibility of excess capacity utilisation at existing coal power plants can result in increased coal imports, currently the second-largest dry bulk commodity (~ 23% of seaborne tonnage). 

Bloomberg Commodities Price Index

Bloomberg Commodities Price Index
Source: Bloomberg Intelligence

The graph below shows that the BI marine shipping peer group continues to outperform the general market and has returned 193% year to date compared to 14% returned by the S&P 500 index. This was supported by strong fundamentals within container liners and dry bulk sectors, while the tanker market lags but remained resilient.

BI Marine Transportation Index versus broader market

BI Marine Transportation Index versus broader market


Source: Bloomberg Intelligence

In addition to the above demand drivers, we have also seen an increase in exports for grains and soybeans. The International Grains Council (IGC) released its estimates and provided a generally optimistic view for 2021/22’s key grains production, which is also expected to feed into the dry bulk demand. Furthermore, the container liner sector also held up well in 2020 as the food and beverage sectors had a boom, while the supply chain of essential items remained uninterrupted. This contributed positively to growth of the global container liner market and resulted in an increase in rates, which has continued well into 2021. 

Major players in the sector

Despite the impact of Covid-19 on the global economy, ocean carriers enjoyed the most profitable first quarter in recent times. AP Moller – Maersk recorded the best quarter in its history, reporting a net profit of $2.7 billion for Q1 21, compared with $209 million for Q1 20. These quarterly figures were just $2 million short of its earnings for the whole of 2020, and Maersk said that it expects “favourable market conditions” to continue well into Q4 21. Increased rates and a major boost in demand from 2H20 have led CMA CGM group to continued improvements in profits during 1Q21. China’s state-owned carrier, Cosco (the world’s leading ports operator), also reported solid growth since 1H20.

Locally, while Grindrod Shipping was loss-making in FY20 (to December), this was because of impairment losses. A low dry bulk orderbook coupled with shipyard delays will contain fleet supply, while there seems to be steady demand for minor bulks, which are the key cargoes for Grindrod Shipping’s vessels.  The company has seen a strong start to FY21, supported by a rebound in commodity demand and pricing across a wide swathe of commodities including grains, iron ore and coal. 

Outlook

The outlook for the global economy is improving, with the International Monetary Fund (IMF) increasing their global GDP growth estimates to 6.3% for 2021. A strong rebound in demand for goods is expected as global economies open up amid vaccine rollouts, which will continue to support freight rates. In addition, trade spats between China and Australia continue to impact the dry bulk market, with China now importing its coal from farther places like Brazil and Africa, and Australia exporting to Europe. This has resulted in increased mileage and demand for shipping with resultant lower supply, thereby further supporting rates

It remains to be seen whether these elevated spot rates will be sustainable long term as lack of visibility on demand remains a key risk to the sector. The tanker market is also expected to continue to face some headwinds for the remainder of 2021 given the resurgence of Covid-19 cases in various regions, which is likely to impact the global oil demand. 

The industry is highly cyclical, and both the dry bulk and tanker sectors have historically exhibited seasonal variations in demand and charter hire rates. Furthermore, unpredictable weather patterns tend to disrupt vessel routing and scheduling as well as the supply of certain commodities.