Drawing parallels between the global financial crisis of 2007/08 and the current economic slump can be, according to MSI’s regional director for Asia, “very constructive”.
While a Covid-19-prompted global recession is expected to be much more acute than the recession sparked by the global financial crisis, there is potential for a faster recovery, says David Jordan.
Mr Jordan was speaking at last week’s joint Baltic Exchange/Institute of Chartered Shipbrokers lunchtime lecture webinar.
There are two reasons for MSI’s forecast of a swifter snapback: firstly, the impact of Covid-19 is centred on the real economy rather than on any financial markets. So, while there is a risk of the situation escalating, there is also greater scope for governments to introduce stimulus packages which would hopefully facilitate a quicker recovery, Mr Jordan said.
Secondly, on the shipping side the markets are in a much better position today than they were in 2007/2008 when the global financial crisis hit. This, he said, largely revolves around the supply side. “You have to remember that shipbuilding capacity isn’t as high and that the supply side overhang that loomed in the 2010s isn’t there – it’s much more under control. All of that really combines to provide an additional promise of a quicker return to normal throughout the second half of this year and into 2021.”
Going forward, the pandemic and ensuing recession is expected to suppress newbuilding activity through to at least 2021. In fact, MSI expects that the next wave of serious newbuilding will not be until after 2025. The upside of this enforced delay to placing orders will be that ship owners will be given some breathing space to assess the feasibility of future fuels.
On the current ship supply front, Mr Jordan expects that the number of bulk carriers in warm and cold layup will continue to rise. This can partly be attributed to the fact that operators are not able to send ships for scrap while the major shipbreaking countries are in lockdown, but also because the dry bulk fleet employment rate has fallen off a cliff.
Further, MSI expects scrapping of dry bulk carriers to reach 17m dwt by the end of this year, but only if scrapyards come back online in the second half of the year.
Meanwhile, it’s a mixed picture for iron ore prospects with the positives of China’s recovery – the world’s largest importer of the commodity – and Australia’s continued ability to supply set against production shutdowns at mines in Canada and South Africa, and Brazilian supply concerns.
“Vale recently slashed their production guidance by 30m-40m tonnes for 2020 largely due to the virus,” said Mr Jordan. And while the Brazilian national and Para state governments have identified mining, processing, commercialisation and shipping as “essential operations” that can continue if there is a lockdown, there is still expected to be a significant hit to business operations if there is a sustained disruption.
Longer term, Mr Jordan expects China’s imports of iron ore to slow as a result of a number of factors, including a reduced need to leverage trade as the share of imports in consumption reaches saturation, an increased use of recycled steel and the approach of peak steel consumption.
The coal sector also raises concerns. Short term, demand has been seriously curtailed in the key regions of India and Europe. While Vietnam offers a “pocket of hope”, China is the ultimate “swing factor”. Dynamics of the coal sector are described as “uncertain” and overall “the negatives outweigh the positives”.
“We don’t expect the seaborne trade in coal to peak soon, but it will slow,” Mr Jordan said.
On the upside, grains trade is seen as a “positive story at the moment”, with production of the main trading grains continuing, uninterrupted by the pandemic. However, Mr Jordan does sound one warning bell: “The Achilles key for grains trade is likely to be inland transport networks and port throughput –– if these are badly affected for major exporters then trade will suffer.”
Longer term, owners of smaller ships should find themselves protected by the growing global population and changing diets – both leading to an increase in grain demand. Added to which, “the geographical structure of the growing Asian economy means more trade has to travel by sea, both domestically and internationally, which will support trade in steel products, forestry, etc. in smaller parcels”, said Mr Jordan.
Source: The Baltic Exchange