Anchoring expectations

Almost a year ago we spoke to Tim Huxley – the founder of Mandarin Shipping and a long-time WiC reader – about the devastating effect that Covid-19 was having on the maritime industry in the early days of the pandemic (see WiC483). Much has changed since then so we met again with the Hong Kong-based expert to talk about the current conditions in the shipping sector.

So how has China’s relatively rapid economic rebound from Covid influenced chartering rates; what impact are Sino-Australian trade tensions having; and how are shipowners coping with rotating their crews at a time of ever-stricter quarantines?

Have Sino-Australian tensions been a major factor for dry bulk shippers?

The major impact for bulkcarriers has been on the coal trade, with no significant impact on the crucial iron ore trade. As of last week there were 19 capesize bulkers and 47 panamaxes waiting to discharge Australian coal in China, about 7.5 million deadweight. That’s down from the previous week when there were another nine ships waiting. They’ve now headed off to markets like Malaysia and Vietnam to unload.

The average waiting time to unload coal in China has been close to six months. Prices of Australian coal have also dropped significantly, to the point that there is real belief that some of it will now be accepted. But if China starts to import significant amounts from the Atlantic basin [Colombia and South Africa], that will have a positive impact on tonne miles – a measure of ship utilisation ­– and hence help freight rates.

How has Covid-19 influenced dry bulk rates in the past 12 months?

Last year there was an overall reduction in the coal trade, which was negative for dry bulk. In May rates fell below $2,000 a day but the economic recovery in China meant that by mid-September they were back above $30,000 a day. Even now they are still over $20,000.

One of the key reasons was that shipments of iron ore remained very strong. It was a bumper year for iron ore.

There has been a surge in China-Europe container rates too?

Container rates have surged from around $2,500 to $10,000 for an FEU (forty-foot equivalent unit) going China-Europe and this looks like it will be maintained for the next few months.

There is a shortage of empty containers in Asia and the rebound of manufacturing, together with careful management of shipping capacity, has seen the container lines enjoy a surge in profitability.

In April last year, when Covid-19 was wreaking havoc on export-led Asian economies, particularly China’s, it was estimated that the global container liner industry could be facing losses of $23 billion in 2020. By November they were predicting profits of $14 billion, making it the best performing shipping sector by far last year.

While it may be difficult to sustain these earnings for the long term, the order book for new ships is at historic lows, so supply is being managed and intra-Asian demand remains strong, which has prompted cautious optimism.

When we spoke last year tanker rates were soaring because of the plummet in oil prices, which saw some tankers being used for offshore storage. Have things normalised in this segment of the industry?

Tankers are on their knees right now, so to speak. Oil demand has been massively curtailed with the restrictions on travel and production cuts in the Middle East. That has slashed demand for tankers. We need a significant stimulus in demand to get earnings back to anything close to breakeven levels.

How have the shipping firms managed the challenges of crewing, bearing in mind the various national quarantines?

The issue of crews getting stuck on ships because of Covid-related quarantine restrictions has been the big headache of the last 12 months. Crew who signed up for six to eight month contracts have been stuck on their vessels for beyond a year. Aside from the financial implications, it is becoming a humanitarian disaster, creating serious mental health issues (see WiC483).

Also, remember that there are just as many crew wanting to go to work and start earning their wages again as there are people stuck aboard.

The issue has to be addressed with an acknowledgement that seafarers are key workers. They need priority both in quarantining rules and in receiving vaccinations.

The industry has gone out of its way to follow strict protocols to prevent the spread of the virus but more still needs to be done, including closer ties with the aviation industry to help connectivity – for example, in Hong Kong crews have to board a flight out of the city within 12 hours of disembarking from their ship, which doesn’t give much room for working out shipping schedules.

Hopefully governments will realise that it won’t just be problems with Covid that will escalate if the shipping sector grinds to a halt. Longer term, it is going to make it more difficult to persuade young people to pursue a career at sea too.

This week 300 shipowners, charterers, insurers and other parties in the sector announced the Neptune Declaration on Seafarer Wellbeing and Crew Change. This is an industry effort to put standardised procedures in place for the easier rotation of crews. The signatories to the declaration are now lobbying governments around world for a uniform approach to addressing the Covid disruptions.

What of the problems at ports with virus outbreaks: for example those reported in Los Angeles and Long Beach recently?

Aside from crewing issues, Covid has posed problems for port operations, customs, clearance and trucking etc. They’ve all been affected through reduced workforces due to social distancing or workers getting the virus. This has led to delays, with backlogs in both incoming and outgoing freight, which has forced up costs.

Even if things were to return to normal tomorrow, it is going to take some time for the supply chain to recover. The crisis has also shown just how stretched supply chains had become before Covid came along. There are lessons being learned.

There was a spectacular 41.7% drop in TEU container throughput at Dalian Port last year, the biggest percentage decline for a major port in history. What are we to make of that?

The onset of Covid saw a massive decline in volumes through all the Chinese ports and this is reflected in full-year figures. A recovery is now underway, although ports in northern China have also been affected by the weather. It has been brutally cold this year, which has affected both rail and sea transport.

What is the current supply-demand situation and does it promise better days ahead for the profitability of the shipping industry?

This is where you have some genuine cause for optimism. Order books for bulk carriers and some sectors of the container market are now below 8% of their respective fleets. On an historical basis that suggests stronger market conditions in the future.

It will take a couple of years to build up any meaningful addition to supply. Also, owners will probably hold off on ordering new vessels as new environmental regulations and decarbonisation rules mean it is difficult to decide on what propulsion system to install. You could easily end up buying a ship which will be technically redundant soon after it is delivered.

There has also been a lot of consolidation across the shipyards, so hopefully shipbuilding capacity will be better managed. The longer we keep the order book under control, the longer we can have decent markets. And this will generate the capital that shipping needs to reach decarbonisation targets.

Your assessment on the general mood in the industry going into the Year of the Ox next month?

People are talking about a new shipping cycle, with an optimistic outlook for anything from 18 months to three years (longer if owners resist the temptation to order new ships). Of course, we expected last year to be an improvement and then Covid came along. But we are still going into the year in a positive frame of mind. Whilst we are all aware of just how volatile this industry can be, you have to be an optimist to be a shipowner!

---

© 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.