Container markets braced for devastating demand downturn
With demand in key markets increasingly devastated by coronavirus lockdowns as governments around the world attempt to stem the loss of life, the outlook for container shipping is turning grimly bearish.
“The near-term outlook for the containership industry has deteriorated rapidly following the spread of COVID-19 cases worldwide and subsequent efforts to limit the number of deaths and cases,” notes Maritime Strategies International (MSI). “After moving past the worst of the disruption to Chinese manufacturing output, containerised trade flows will very soon plummet as quarantine measures choke off consumer demand, exchange rates weaken and cash-constrained businesses worldwide cut back on purchases.”
Even though export availability out of China continues to improve, Maritime Strategies International now views the downturn in demand as equivalent – or worse – than during the global financial crisis of 2008-09.
“The world economy has entered recession,” claims the analyst’s latest report. “MSI are working to forecast the full extent of the demand-side downturn across trade-lanes, but there seems little doubt that containerised trade will shrink in 2020, with near-term rates of decline potentially approximating – or even exceeding – those seen during the financial crisis.”
Economic outlook nosedives
There is a growing mountain of negative economic data which supports MSI’s demand outlook. In the US, consumer confidence is crumbling, auto sales have fallen off a cliff, manufacturing output is down, and huge job losses are predicted.
Similarly, the eurozone economy suffered an unprecedented collapse in business activity in March as the coronavirus outbreak intensified, according to provisional PMI survey data from IHS Markit.Manufacturing production saw a steep downturn and inflows of new business fell at the sharpest rate yet recorded, linked in part to a record fall in export business as cross-border trade flows seize up.
“In addition to demand conditions deteriorating markedly during the month, supply chains also worsened,” said HIS Markit. “Since the manufacturing survey began in mid-1997, only one month – May 2000 – saw more widespread supply chain delays than reported in March.”
In China, meanwhile, the lockdown of January-February, slower-than-expected business resumptions and slumping external demand due to the global pandemic has prompted Nomura to forecast that GDP growth will plummet to -9.0% year-over-year in Q1 from 6.0% in Q4 2019
All of this translates into devastating fundamentals for container shipping which, having moved past the worst disruption in China, now faces a collapse in consumer spending in Europe and North America.
Import demand collapses
According to MSI, with non-essential stores in major European importers now closed, many manufacturing businesses suffering disrupted or shuttered operations, and consumers retrenching in the face of uncertainty and physical confinement, “European containerised imports face near-unprecedented headwinds”.
Citing card payment data in Denmark compiled by Danske Bank, MSI said daily clothing and footwear expenditure in March was 50-80% below its normal level, although DIY spending was up. “A shift to online retailers will cushion this to a degree, but certainly not enough to prevent a sharp near-term fall in consumer outlays,” said MSI.
While liftings data from March should remain reasonably positive, thereafter MSI expects it to be a case of ‘how bad can it get?’ for container shipping.
Lines make further capacity cuts
Understandably, container lines are continuing to take drastic steps to cut supply and support freight rates. According to Sea-Intelligence, blanked sailings are being introduced at very short notice, creating supply chain issues for customers. 2M partners MSC and Maersk, for example, have cancelled 21% of Asia-Europe capacity in the second quarter.
The speed and scale of the announcements is already creating major problems for shippers and is a “clear indication of just how quickly demand is dropping, due to the pandemic shutdown of major parts of the global economy,” said Sea-Intelligence.
The challenge for near-term forecasting, according to MSI, is the unprecedented nature of the demand shock and how long it will endure.
Similarities and differences to GFC
“At the depths of the financial crisis, the worst year-on-year volume contractions were in the order of 30%, year-over-year,” it added. “Overall we expect the scale of the demand contraction this year will fall short of 2009, but a comparable performance in Q2 20 is a real possibility.”
MSI expects the “sequencing” to be different, but forecasts that on the current trajectory both the Asia-Europe and transpacific trades face a similar shock, with the hit to transpacific volumes arriving later in the year.
The analyst remains optimistic container shipping might enjoy a delayed peak season as economies are opened up and restocking resumes. However, much depends on the length of the lockdowns.
“The main risks concern the duration of quarantine measures, and whether the crisis leads to a longer-lasting recession and associated unemployment,” said MSI.
“Policy responses – which are unpredictable – are therefore key.
“Both (the Asia-Europe and the transpacific trades) are very likely heading for full-year contractions, and most likely severe ones.”