Rough seas

The shipping news is in – and it’s not very good.

Hong Kong-based expert Tim Huxley – the founder of Mandarin Shipping and a long-time WiC reader – discusses the devastating effect that Covid-19 is having on the maritime sector.

The coronavirus is the latest blow to an already beleaguered sector?

It’s a body blow. I’d prefer to run ships rather than aeroplanes right now, but yes, it’s really grim. It’s affecting every single aspect of shipping.

For dry bulk ships, the impact of China’s falling imports of natural resources must be hitting freight rates pretty hard…

For Capesize bulk carriers the average rate is down to about $2,500 a day. It’s not all down to the coronavirus. We have the delays that always occur during Chinese New Year, but what this has done is extend the Chinese New Year malaise and there is no immediate turnaround in prospect. Cargoes just aren’t going into China to any great extent. And we think that is going to be the case for the immediate future.

At $2,500 a day, how far below the breakeven is that?

Excluding your finance charges, your breakeven on a Capesize would be about $5,000 a day. Then if you put your finance charges on top of that you are making a significant loss at the moment. That $2,500 was the average of the five routes that make the Capesize index as of the end of last week.

Is the rate still declining?

Nothing has really happened so far this week. It can’t go much further down. There isn’t much optimism for the immediate future, although the forward freight agreements were a little bit up. There are still quite a number of coal cargoes rumoured to be coming out of Australia to China. But the infrastructure in China itself is a key concern – trucking, in particular. Availability has been really reduced, which means that stockpiles are going to build up at the ports. I think people are very much in a wait-and-see mode at the moment, holding off doing anything.

What about oil tankers?

That’s really fallen off a cliff because consumption in China has dropped so significantly. There was one report of 600,000 barrels a day being cut from Sinopec’s daily refinery production, which is about 12% of their capacity. You have earnings on VLCCs (Very Large Crude Carriers) – which were pretty good at the start of the year at $100,000 a day – dropping back to $25,000 now.

Apart from the truckers, the other issue is not enough workers in China’s ports to handle cargoes?

There’s that, and the volumes are down as a result for container ships.

There was a report last Friday that a 23,000-TEU container ship sailed from Shanghai with only 2,000 containers on board. So this has really slaughtered the exports out of China. That’s going to have a big effect on the container market.

We’re seeing it in the shipyards as well. A lot of ships were taken out of service to install exhaust gas scrubbers to meet the new emissions regulations that came into effect on January 1. There are about 200 vessels currently in repair yards in China – owners have been told there has been a delay in those ships being released back into the market because of a shortage of workers.

Then there are 856 new ships due to be delivered from China this year. A lot of shipyards are already issuing force majeure notices [because they will not be completed on schedule]. Plus you have the knock-on effect on Japan and South Korea, because a lot of steel and components for their shipbuilding industries come from China.

Paradoxically, any slowdown in ship deliveries is welcome for shipowners, more broadly. One of the problems we anticipated this year – even before we experienced the coronavirus – was quite a significant increase in the supply of bulk carriers. Any slowing of that new supply will help freight rates.

The Wall Street Journal was reporting at least 50 sailings cancelled since January. Are you hearing news like that too?

Yes, a lot of the container lines have either cancelled sailings or consolidated sailings into one ship. There is a lot of idle tonnage coming up and now the charterers are going to redeliver the ships as they come off their current employment.

What percentage of ships could be idle if this goes on till April, which is the best guess of China’s top virus expert Zhong Nanshan?

That’s a really difficult question to answer. It’s quite difficult to get services started up again if you shut them down, so you’ll try and keep maintaining your service to your customer.

However, there will be a very significant number that will be idled. Everyone tried to get their ships chartered in the run-up to Chinese New Year – as you don’t want to be idle over that period – but if you take the feeder container sector, you had about 28 ships available in Asia in the immediate aftermath of Chinese New Year. That number is now climbing and those ships are not getting chartered.

If some of these container ships are only 10% full, will they even cover their fuel costs?

No. But what you are now beginning to see is this continuation of the realignment of trade in that nobody wants to be so dependent on their complex supply chains within China. You might see more moves like what we have been seeing with the garment industry, much of which has effectively relocated from China to Bangladesh. Now, especially with a sector like the motor industry, you have a lot of factories in the region that are interdependent, so there are going to be some big questions about supply chain management and just-in-time deliveries that are going to have to be answered after this.

So it pushes forward the deglobalisation theme?

Almost, yes.

Has Hong Kong’s port benefited from an increase in volumes as cargoes are diverted from Guangdong’s ports?

No, not to my knowledge. Overall, this year we expect to see a slowdown. So many factories are still at a standstill or really low output levels, so the actual production and exports volumes are really low. This might singlehandedly sort out the US-China trade deficit…

On that topic, was the mood more optimistic at the beginning of the year when the phase one Sino-US trade agreement was signed?

It helped. There were other factors that also helped rates. What I mentioned about the scrubbers earlier and dealing with the new requirements for low sulphur – that took so many ships out of the market. It helped enormously. Last year you had quite a lot of cargo moving all the time just to stay ahead of the tariff increases and that helped the market as well.

The benchmark Howe Robinson Container Index of charter rates rose 28% in 2019. That was weighted towards the bigger ships and the need to move goods before the tariffs came in. So 2019 was not such a bad year and it laid the groundwork for what we had hoped was going to be a fairly strong 2020.

One market report said: “With arguably the most optimistic outlook for owners in more than a decade, and with a very real possibility of this becoming a reality, second hand asset values [of ships] look temptingly priced.”

But now the virus has come along.

When was that report published?

About three weeks ago… The coronavirus has basically shot the optimism we had for the first quarter to hell. But there are only two types of shipowner: the optimist and the slightly-less optimistic. So everyone’s always looking for a positive. And the feeling now is that it is going to lead to a lot of pent-up demand when all of this gets clarified – which I am sure it will. There will be stimulus packages, plus pent-up buying of commodities to make up for lost production. That will all need to be shipped.

In the meantime the price of ships is declining as we speak?

The sale and purchase market has almost ground to a halt. Conversely it is quite hard to get a secondhand ship delivered because so many of them are either in China or have Chinese crews.

The crews are the other big problem for ship managers – China is a big supplier of manpower for shipping. If you have a crew change somewhere and you have to fly in new crew, you can’t have them sitting around for a two-week quarantine period.

What percentage of crews does China provide to the global shipping industry?

There are about 1.6 million seafarers globally and of those, around 14% come from China, 11% from India and 18% from the Philippines.

---

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.