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Container shipping’s complex Covid-19 reaction

A wave of consolidation in container shipping has made the sector more robust over the past five-seven years. Nonetheless, the outbreak of Covid-19 will be a considerable stress on all container shipping finances, according to analyst Ti.

In Ti’s global freight forwarding market update, Thomas Cullen, senior analyst, noted that container shipping was an early casualty of the Covid-19 crisis.

Prior to the outbreak, the container shipping market was emerging from a period of depressed demand and prices at the beginning of 2020.

“2019 had seen some recovery in the first two quarters of the year, with both demand and freight rates drifting upwards, however this petered-out in Q4,” said Cullen. “That said the underlying trend in the market seemed to offer some support, with the global container shipping fleet size constrained both by scrappage but also by the needs to convert to low-sulphur bunker fuel. The Covid-19 crisis hit what was a gradually improving market.”

The trajectory of container shipping out of China has been one of violent contraction followed by some form of bounce back.

Cullen noted: “Shipping services were generally permitted to continue, however, the transport into the port and terminal operations were crippled by the inability of staff to leave their homes, whilst demand for shipping services from both importers and exporters in China fell violently; although it is important to note that it did not stop with important flows of goods such as food, energy products but also items required for the maintenance of infrastructure continuing. This fall led to the ‘blanking’ of services into China.

“The recovery took place in the third week of March with employees returning to areas such as trucking and container port operations. Demand also recovered, particularly from larger state-owned entities, although by the end of March it had not returned to pre-crisis levels.”

The market response was also complex. Initially, freight rates crashed. Then, the widespread blanking of services led to an increase in the rates for the consignments that did need to be moved.

In addition, acute congestion began to appear both within China and at ports outside China.

“By the last week in March, the situation was beginning to partially reverse, with services into China attempting to recover but destinations in Europe and North America coming under pressure with falling volumes and some constraints on vessels entering port,” said Cullen.

“The container shipping lines are engaging in survival strategies of considerable savagery and this has already had an impact on the supply/demand balance,” he added. Rather than just a collapse in the market, extreme volatility is likely to be the market’s main feature. Whiplash effects are also likely to be important in the short to medium-term.

“In this market, cash is likely to be king,” said Cullen. “The familiar issue of the risk of holding physical assets may become a vital part of any losses. During the financial crash of 2007-8, these were huge.”

For the car carrier segment, which was already struggling with soft demand in major markets, the swift contraction of car sales in China, Europe and North America has had an equally worrisome impact.

Cullen commented: “Governments are very likely to make significant efforts to boost car sales, however, do not assume that this will revive traditional trade patterns. The car carrier market could restructure for the long term with some merger and acquisition activity.”

www.ti-insight.com

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