One of the most immediate effects of the COVID-19 pandemic has been on Chinese manufacturing, which had effectively shut down around Lunar New Year. It’s picked back up slightly since then, but that drop contributed to decreased demand for shipping around the world. To get a better picture of the global shipping industry, GLG’s Ceren Eroglu on March 10 spoke with Mark Williams, Managing Director at Shipping Strategy, who advises investors, financiers, ship owners, and others on shipping economics, investments, and strategy. His thoughts can be found in the below Q&A, which has been edited for length and clarity.

What is the impact of coronavirus on the shipping cycle in 2020?

Mark Williams: Coronavirus obviously is an ongoing situation. It’s evolving and developing day by day. But the overall impact of coronavirus on the shipping industry cycle has been to lengthen, if not deepen, the cyclical downturn that most major sectors of the shipping industry were already going through in 2020. Basically, we have slower macroeconomic GDP growth in 2020 across the OECD nations and the newly industrialized nations of Asia. As we went into this year, we expected to see a recovery in the freight markets, but that recovery may get delayed by a month, a quarter, half a year, or a full year by the impacts of coronavirus. There are sectoral differences, whether it’s container shipping, dry cargo shipping, oil and gas shipping, or geographic differences. But shipping is an international industry, and where it’s affected in one part of the world, it’s usually affected globally.

How does the impact of coronavirus affect debt levels in the shipping industry?

Mark Williams: We were already going to see increased leverage this year and some restructuring, or at least renegotiation of loans, extension of tenors, and so on, because of the decreased profitability of the shipping industry across the different sectors. At the same time, you’ve had the Federal Reserve cutting interest rates, so money is cheaper. We are likely to see further interest rate cuts as governments and central banks do what they can to offset the economic slowdown effectively caused by people being quarantined. The whole of Italy is now locked down, and China has locked down cities. People being quarantined does have that immediate effect on consumer activity, which has a knock-on effect all the way down the value chain to raw materials, as we’ve seen with the oil prices.

Are there any geographic aspects or differences to bear in mind, and how will various geographies in the shipping industry be impacted?

Mark Williams: China obviously being at the center of coronavirus had the most immediate impact, and we saw the Lunar New Year shutdown in China manufacturing get extended. Think of it this way: Manufacturing represents about 45% of Chinese GDP, and Chinese manufacturing is usually open for 50 weeks a year because they shut for Lunar New Year every year. Each week that they shut down is equivalent to reducing the manufacturing inputs into GDP by 1/50th. We have seen lots of blank sailings out of Chinese container ports. We do see manufactured goods being stuck at marshaling yards and not making it as far as the coasts or getting stuck in ports.

But at the other end of the value chain, we’re not seeing necessarily any greater slowdown in imports of things like coal and iron ore for steelmaking into China than we would otherwise have expected. That’s just being added to inventory. It’s very cheap to store coal and iron ore at the dockside. China has huge port capacity for storing that stuff. They’ll just pile it up, and then they’ll soak up inventory later as they get their steel manufacturing back up to speed and back up to fuller capacity utilization nature in a year. Our best guess is that any loss of productivity in China gets recovered later in the year by simple productivity gains like overtime and night shifts at factories, steelworks, and shipyards.

The effect from coronavirus contagion in Europe is slower consumer spending, and it’s already fed into things like airlines, passenger transport, and public transport. That will trickle into shipping as it feeds into lower demand for shipping in the first half of this year, especially for manufactured goods. People aren’t going out and spending money on consumer durables, which fill up the department stores. That’ll cause an effect on Chinese and other Asian manufacturers. The same for textiles. People aren’t going out and buying clothes.

North America has already seen the effect of lost throughput at West Coast ports in the United States. That may end up having an effect on employment and jobs, but I imagine that in an election year the administration will be working hard to ensure that any lost economic growth is recovered quickly, certainly before November.

We’re not seeing a huge impact on the big commodity and energy exporting nations of the Southern hemisphere. It remains to be seen what the secondary impacts of coronavirus are in terms of public health in the poorer nations of Latin America, Africa, and Southeast Asia. But we expect to see a recovery in Chinese commodity and energy consumption in the second half of this year, so that will hopefully stop some of those big exporter nations from collapsing into recession. As I said, there was already going to be an economic slowdown worldwide this year, and coronavirus has extended that slowdown, but not necessarily deepened it. Like a rubber band, the longer you stretch it, the harder it snaps back when the time comes.

Which of the primary sectors, between container ships, dry bulks, tankers, LNG, etc., would most heavily be impacted in the medium term?

Mark Williams: Container ships are most likely to be impacted by slowdown in the consumer markets. The longer that happens, because of the virus, the bigger the impact on the container shipping markets. My expectation was already that container shipping was going to have a difficult 2020, so I think it will face the biggest impact. The tanker markets are most impacted by the low oil prices because the anticipation is that will support demand for shipping cheap crude into storage or even using ships for storage. They could see a benefit, ironically, from the coronavirus impact because of the Saudi decision to add a lot of fuel to the world. Dry cargo has been most impacted by the Chinese manufacturing hiatus, but that has been quite short-term because we’re now starting to see capacity utilization at Chinese assembly and manufacturing plants recover.

Already, we’ve seen a 16-day positive run in the Baltic Dry Index, starting around February 20. Even as the stock markets and oil prices have been collapsing around us, the dry cargo freight market has been staging a small recovery from a very low base. But nonetheless, it’s been moving in the opposite direction for everybody else. It may well be that dry cargo gets the least and the lowest impact from all of these. I don’t expect LNG to see any huge impact from this. Most LNG is sold on multi-year, multi-decade contracts, and there’s a guaranteed demand for it from energy use for burning the gas to make electricity.

How can the shipping industry stay afloat amid COVID-19?

Mark Williams: In any downturn in shipping, the advice is always to keep as much cash as you can. The best-of-best balance for any ship owner at any point in the cycle is to have a good mix of cash and ships. As coronavirus keeps the markets lower for longer, there is going to be an opportunity to buy the dip, and then it just comes down to timing, but somebody is going to win big out of this.

I’ll give you a quick example. After the Asian financial crisis, a Belgian shipping company took advantage of low dry cargo markets in 1998 to hire about a third of the available capsize tonnage in the world, which they just put into soft layup off the coast of Ireland. It just sat in the Atlantic. It was a couple hundred ships, at one point. As the market turned and recovered, they put those ships into the slot market, and they made something like $5 billion in the space of a year.

Those who are prepared to gamble on buying the dip and the recovery will do so at scale and make a lot of money. Not everybody can do it, but that’s why shipping is not for the fainthearted.

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About Mark Williams

Mark Williams is an advisor in the shipping industry through Shipping Strategy Ltd. Mark advises investors, financiers, ship owners, and other industry participants on shipping economics, investment, joint ventures, new business formation, and strategy. He also writes quarterly updates and reports across shipping vessel supply/demand.

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This article is adapted from the GLG teleconference “Impact of Coronavirus on the Shipping Industry.”  If you would like access to this teleconference or would like to speak with Mark or any of our more than 700,000 experts, contact us.

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