Covid-19 to stifle investment in multipurpose and heavylift shipping

Charter rates for multipurpose (MPV) ships, including both breakbulk and heavylift vessels, are not expected to recover back to pre-Covid-19 levels until the end of 2021, with the recovery anticipated to take even longer if the global pandemic is not contained. And given a projected slump in project cargo demand, newbuild investment is at particular risk.

Covid-19 has had a significant effect on world trade and the long term ramifications to the economy and global investment are still uncertain. The multipurpose and heavylift sector sits between the container and dry bulk shipping segments and, as such, is subject to the market changes from each of these. It is our opinion that the influence of these competing sectors has as much of an effect on the MPV charter market as the pure economics of supply and demand. In our report we look at all the factors affecting the market.

In Drewry’s latest Multipurpose Forecaster report we have moved away from best and worst case and now have a base case and then two – worsening – scenarios based on the containment on Covid-19. Our base case is that Covid-19 is contained globally over the next few months and there is no second wave. This allows the global economy and dry cargo demand to rebound in 2021. We then present a set of scenarios with worsening outlooks dependent on a series of caveats, which include further recessions for the global economy and longer-term damage to demand, causing a longer downturn in the freight market. Our base case is still the most likely but there is growing concern that a second Covid-19 wave could arise, giving our other scenarios increasing probability.

Base-case forecast
Our base-case scenario starts with the premise that the virus will be contained globally within the second half of 2020. The global economy will record a sharp recession over the year with latest assumptions for global GDP at -5% when compared to 2019. Thereafter the V-shaped economic recovery for 2021 puts global GDP up 6.5%, with weakening but positive growth for the longer term.

This V-shaped economic recovery produces a similar pattern for cargo demand (see Figure 1). Dry cargo demand as a whole is expected to decrease by some 4.5% compared to 2019 as container port handling and steel production (and therefore associated imports and exports) collapse over 2020 due to the twin effects of COVID-19 and lower crude oil prices. Thereafter the return to positive growth is swift as countries come out of lockdown, manufacturing activity resumes and business sentiment improves.

Indeed this improvement has already started to happen in the US and Europe as both the FTSE 100 and S&P 500 indexes are showing positive growth from the low points in April. Drewry’s base-case (and indeed best-case) scenario therefore predicts a decrease in MPV demand of almost 7% over 2020, compared to 2021, with an associated rebound in 2021 of 7.4%. The concern now is when (or possibly if) a second wave might hit and for that we have developed two alternate scenarios.

Alternate scenarios
Scenario A is our next best case, with the assumption that COVID-19 is contained over 3Q20 but then a second wave occurs over 2021. The timing of any second wave is difficult to predict but there is increasing concern among public health experts that a further outbreak in the first half of next year is likely.

Drewry have based scenario A on the assumption that a new outbreak in 2021 will reduce any pent up demand as further lockdowns will come into force on a wider scale. This will mean the ongoing global recession will weaken longer term demand and, for the short-term, the V-shaped recovery will be much shallower. This in turn will limit the return to growth of container port throughput and is likely to stall crude steel production and manufacturing activity.

As the uncertainty around this second wave grows, we believe that demand for MPV in 2020 will remain significantly below 2019 levels and 2021 could see growth of less than 3%.

Our last scenario (Scenario B) looks at the effect of a longer outbreak in 2020 plus a second wave in 2021. This really is our worst case. It looks at the effect on dry cargo demand of a deeper global recession in 2020, with continued recession in global economic activity in 2021 and beyond. General cargo levels are expected to sink to unprecedented lows as manufacturing production and business confidence fail on all sides. The effect on MPV demand is devastating as recovery is stalled and competition from other sectors will remain high. Whilst we give this scenario our lowest probability value, we do believe it is worth considering for the full picture.

Fleet outlook
The stagnation of the MPV fleet is a long-term problem that has been ongoing since before the current crisis. The terminal decline in the simple (non-heavylift capable) vessels versus the slow growth in the project carrier (heavylift capable) fleet is not quite balanced and the overall fleet is expected to decline by an average of about 0.2% per year in the medium term. It is possible, in our worst-case scenario (B), that decline will worsen as a lack of investment will impact new ships.

It is also possible that in our base case scenario that the potential for the project cargo market to adversely suffer a drop in cargo demand, due to the ongoing crisis in the oil market, will limit growth further. Investment in future projects has already been halted in much of the world, whether due to a lack of investor confidence in oil & gas projects due to lower crude oil prices, or a lack of investors due to the global recession. Either way it is Drewry’s opinion that we could be looking at a hole in the project cargo market post 2021, which will reduce any need for newbuildings in this sector.

Market outlook
Drewry’s Multipurpose Freight Rate Index illustrates the collapse of the market in 2020 (see Figure 2). In our report we take this out to 2024 for all three scenarios. Only in the worst case is the outlook less than positive. In our base case we expect the charter market to return to average 2019 levels during the course of 2021.
Source: Drewry

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