Maritime transport is under the unpredictable threat by Coronavirus
Unpredictable big world events are generally positive for sea freight freight rates, but it would not be right to include epidemics in this category. The disadvantages of encountering a reduced demand for ships, especially when the epicenter of an epidemic is China, outweigh many inefficiencies.
The impact of a major global event on shipment demand is calculated in tons of miles, that is, multiplied by volume distance. If an event transfers more volume to the sea or, alternatively, spreads the same volume path on a longer route (as it occurred with the closing of the Suez Canal in 1956 and 1967-75), it becomes an unscheduled bulk service and increases ocean freight rates and It directs the supply / demand balance in favor of the owner / operator.
For planned services, such as container ship operations, major global events are often unfavorable because they can create lower usage and / or higher costs on routes that need to continue service.
If a global event reduces the volume of the cargo transported by sea, as in an epidemic disease, it is negative for both unplanned and scheduled bulk operations.
Effects on oil and tanker markets
we can compare this to the 2003 [SARS outbreak]. The main differences from 2020 are the size of Asian economies and regional energy demand. China, in particular, experienced a dramatic growth in the interim period. China’s oil demand was about 5.8 million b / d in 2003, compared to 13.6 million b / d in 2019. Any impact on Chinese / Asian oil demand is likely not only in volume, but also in the markets of import flows and fluctuations.
Meanwhile, based on the experience experienced in the similar event we have compared, the expectation that the market will recover rapidly prevails. The SARS outbreak in 2003 created significant fear and uncertainty. More than 8,000 people were infected and 774 deaths occurred in 27 countries. However, fear ultimately subsided. The recovery of economic activities and oil demand was rapid and strong. If the current crisis is following a similar pattern, there may be a strong recovery this year after short-term winds.
Impact on other transport elements
Due to the economic growth of China, iron ore and coal imports for the country’s steel production and the high demand for agribulk, it has an extreme impact on dry cast spot rates.
Dry pouring spot rates are already uncomfortably low. For Capesizes (ships with about 180,000 dwt), the rates do not even cover the low sulfur fuel cost. A negativity after the coronavirus outbreak will increase stress on operators.
The major concern for all maritime sectors, including container transport, is that Chinese employees in mills, refineries, factories and terminal facilities are unable to work in quarantine. As with weather-related disasters, workers’ inability reduces the flow of loads.
The start of WuhanCoronavirus took place during the Chinese New Year holiday week. As a precaution to this situation that started during the holiday period, the Chinese government announced that the holiday period will be extended for another three days. Factories in Suzhou’s large production center in eastern China were closed until February 8.
Other negatives and minor positivities
Ship operators and investors worry that this unexpected event will reduce global fleet capacity. They emphasize that they are afraid of possible delays. Assuming that there will be less delays in which ships will be addressed if the global ship supply is scarce, it is better in terms of freight rates. However, it is not very positive to carry the same amount or a possible load capacity by the existing fleet.
Outbreaks of the past have caused various inefficiencies. If the prevalence of the virus increases, the maritime industry can expect to experience the same problems as in previous serious disease outbreaks. In addition to the obvious danger of getting infected in a port in the infected area, the crew members can create reporting and quarantine measures to protect against the spread of the disease in previously infected ports and in busy ports. Or, in case of serious epidemic, ports can be closed completely.
As a result of the outbreak, unwillingness to stop by Chinese ports for container ships and gas ships is reported. Quarantine risk may lead to reluctance to move to these ports. After a busy port, quarantine obligation may arise in another port.
The drop in the price of crude oil is a potential positive for transportation due to low fuel costs. When crude oil increases, bunker (sea fuel) prices also increase. When crude oil drops, bunker prices also fall, albeit with a delay.
The price of Brent crude oil fell 7% last week, largely due to coronavirus fears, so bunker prices will likely fall in the coming weeks, which will be a pleasant development in terms of fuel costs. In 2003, the SARS epidemic “reduced oil prices by about 20%.
In the second half of last year and earlier this month, as a result of the unrest in the Middle East, analysts had a legitimate argument that the geopolitical clutter could cause rates to increase, because the volume of cargo at sea would remain the same or increase and travel distances would increase.
This is not the case with the Wuhan coronavirus. Potential ship demand negativities resulting from the pressure on the Chinese economy outweigh the positive factors created by the potential fleet shortage. Shipping stocks are falling. Just as trade war concerns have created a negative expectation among maritime investors, coronavirus fears can overshadow positive market fundamentals when it comes to stock pricing.
It would not be wrong to say that coronavirus fears have usurped the positivity of the Phase 1 trade agreement.
As a result, transport stocks are constantly threatened by the virus outbreak. We may think that this virus outbreak should not have a lasting effect on demand, and therefore the final adjustment to stock prices could offer a purchase opportunity.