Coronavirus: rationing container capacity

he world is a very different place to when the last edition of Drewry’s Container Forecaster report was published in December. The only certainty is supply and demand volatility.

The outbreak of coronavirus (COVID-19) has laid bare the fragility of humankind and the supply chains that help us to live as we have become accustomed. Each passing day brings more grim new statistics that make it clear that our early assessment of the crisis and its likely impact on the container shipping market was too optimistic.

What started out as an isolated supply shock has rapidly mutated into a global demand crisis as governments across the world are implementing social distancing measures (to varying degrees) in a bid to contain the virus. China is nearing full production activity, but its position as the factory of the world won’t mean much if its trading partners are not making purchases while in lock-down. Production outside China is also starting to be hit.

It is too early to say precisely how COVID-19 will impact the container shipping world and how it will measure against the container market’s nadir of 2009 due to the uncertainty surrounding the virus.

That will only become possible when these key questions can be answered:

  • Will the virus spread with the same force in every geographical region?
  • When will the virus be contained so that normal social and economic activity can be resumed?
  • Will government rescue measures be sufficient to prevent a permanent scarring of the global economy?

Regrettably, Drewry has no special insight into these questions that have thus far eluded experts in the fields of epidemiology and economics.

Instead, the approach taken in the Container Forecaster report was to outline three potential scenarios and their implications for the market. We know that our forecasts won’t be perfect, but in outlying the broad trends it is hoped that it will help all stakeholders prepare as best they can.

The main difference between our three scenarios is the timing of the recovery. If China is a reliable guide, countries can expect that containment will take a minimum of three months, although because different regions are on different curves and there is a lack of uniformity in containment methods, it seems that China’s example is a best-case that few, if any, will replicate. For our base-case scenario we have taken the view that global containment will not be achieved for at least six months.

While the direct public health impact might vary from region to region, in our view all countries will suffer economic hardship as a consequence of COVID-19. Countries with relatively few cases will still experience a fall in container handling due to the interconnected nature of world trade. A finished goods shipment from China to the US, for example, is only possible because of numerous other prior movements of primary and intermediate inputs from elsewhere in the world.

The only thing that is certain is that 2020 will be volatile from a supply-demand perspective. Ocean carriers’ finely tuned skills in the art of capacity management are going to be sorely tested in the coming months. It is their daunting task to judge how much containership capacity is needed during the demand pullback, and also to be ready to service the market when the recovery begins, whenever that may be.

Making the task even harder, competition laws mean that carriers have long been forbidden to discuss collective capacity actions. Drewry can see a case for relaxing these laws during exceptional ‘Black Swan’ events such as COVID-19. While the intention of such rules in more normal times is to prevent unfair pricing for cargo owners, in these more chaotic days the consequence of leaving capacity decisions to individual lines to plot for themselves could be a haphazard result with either too much or too little capacity available at critical times.

In our baseline demand scenario that foresees a demand collapse in the first nine months and recovery from 4Q20, we have assumed that carriers will have to be even more pro-active on the supply-side. Even so, Drewry’s global supply-demand index (not adjusted for idle fleet and where a reading below 100 represents over-supply and above 100 equals under-supply) is forecast to fall to its lowest ever mark this year at just 85.8 (annual average).

Not doing anything on supply is simply not an option this year. It is worth looking back to 2009 when the container market suffered its first ever demand contraction to see how carriers responded. Carriers’ survival tactics back then involved suspending around 40 East-West services, leading to around 10% of the fleet being laid up, slow-steaming to absorb capacity and re-routing some Asia-Europe voyages via the Cape of Good Hope to save on canal fees.

The combined measures meant that after a slow start by around mid-2009 carriers had so effectively reduced the amount of available capacity that there were actually space shortages, which drew considerable ire from shippers at the time. The ‘real world’ impact was reflected in Drewry’s idle-fleet adjusted supply-demand index, which averaged 97.9 for the year, some nine full points above the standard unadjusted index (88.7).

Drewry expects to see a slightly smaller differential between the two indices in 2020; with the idle fleet adjusted index projected to end the year around 6 points above the unadjusted benchmark at 91.6.

One reason we don’t think the adjusted index will scale the same heights of 2009 is that it is starting from a much weaker position. In 2008 the industry was in rare perfect balance with a standard global supply-demand index reading of 100.1, making it ‘easier’ to cut the supply cloth accordingly. That is not the situation today. The unadjusted index has barely broken past the 90 point mark in the past decade, struggling with sub-90 points reading in the past two years. The idle fleet is already close to the ratio it was in 2009; squeezing more capacity out of the system will be more challenging than a decade ago.

Void sailing notices from carriers for April are coming in thick and fast and while rapidly decreasing fuel costs might tempt carriers to persist with this tactic as the primary defence for a little while longer, the need to preserve cash will soon force lines to suspend loops and park ships up.

Recommendations to stakeholders
Carriers should prepare action plans for supply-side retrenchment across a wide range of demand scenarios in order to maintain an acceptable supply-demand balance. All service plans should be well communicated to customers with as much advance warning as possible in order to maintain business relations when the recovery arrives.

To mitigate the elevated risk of operating losses, lines should consider off-hiring chartered tonnage wherever possible and laying up owned units to preserve cash in the event of a prolonged demand downturn.

Cargo owners should expect significant service disruptions this year with more blank sailings and very probably a number of service suspensions. Shippers should consider adding a few “backup carriers” to their list of vendors if their primary service providers ration capacity or stop loops. Despite the unexpected reduction in fuel costs, shippers prioritising transit times need to watch out for slower service speeds as some carriers may be tempted to extend round voyages to absorb capacity.

Our view
Without any coordinated response, carriers will not always get it right when it comes to vessel deployment. Communication and understanding will be essential to keep the supply chain rolling as smoothly as possible.