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Container shipping outlook butt-ugly in 2 out of 3 COVID19 scenarios – Drewry

PortandTerminal.com, February 28, 2020

Consultancy firm Drewry outlined 3 possible scenarios for how the coronavirus could develop and impact global trade, and thus the container sector. Two of them are butt-ugly. The one that isn’t Drewy doesn’t believe in anymore.

LONDON – Despite the coronavirus outbreak delivering a sharp hit to global container volumes and carrier earnings, Drewry expects that the medium-term impact will be manageable provided the virus spread is contained.

They are quick to note in their report though, and rightly so, that it all comes down to one question. How well will the virus be contained?

The consultancy notes that their original base-line forecast was the one we are calling “Optimistic Scenario” below. That changed though when the sudden spread of COVID-19 outside of China has caused them to re-think and adopt a “less optimistic position”. So forget about the best-case scenario for now.

For now, Drewry is going with the, less optimistic “Medium Scenario” outlined below.


Port of Shanghai Container Terminal, red and white container cranes, container yard. One ship docking.
File Photo: Port of Shanghai Container Terminal

So far the impact of coronavirus (COVID-19) on container shipping has just about been bearable, but the longer and more widespread the outbreak goes the more damage it will cause, noted the analyst in its latest research.

In terms of the short-term hit, container shipping is not as exposed to the coronavirus problems as the airline or tourism industries.

Nevertheless, Drewry’s interviews with Chinese port operators indicate that volumes were down by 20-40% in the three weeks from January 20 to February 10.

Non-Chinese ports have not reported falling throughput volumes, yet, but this will become visible in the next few weeks, when ships from Asia fail to arrive with containers from China.

READ: Georgia Ports expect 30-40% drop in imports due to coronavirus impact

Ocean carriers cancelled about 105 sailings on the routes from Asia to the North America and Europe/Mediterranean regions alone in February.

A 30% fall in container volumes in China (which accounts for 30% of global throughout) means a 9% reduction in global container volume, unless the shortfall is caught up later. But at least two months of global port volume falls should be expected, according to Drewry.

The cancellation of 105 sailings per month represents a shortfall in revenue of roughly US$1bn (105 x 10,000 teu x US$1,000), of which a portion will be made up later via full ships and extra loaders, but the short term damage to carrier profits is large, it added.

The analyst has devised three potential impact scenarios although it believes that on the balance of probability the outcome will not be devastating.

But it all depends on how well will the virus be contained.

Optimistic Scenario

Empty urban streets lined with buildings in China. Lone policeman wearing surgical mask crossing street.
Empty streets in China means empty factories in China. “COVID-19 has exposed the fragility of global supply chains that are overly dependent on a single manufacturing source” says Drewy

Even in the most optimistic scenario, the container market would not come out completely unscathed, and Drewry would anticipate making a slight downgrade to its annual global port throughput of approximately 3% made in December.

This estimate factors in the expected stimulus package from the Chinese government that should spur greater box traffic from Q2 2020 onwards.

READ: Coronavirus Shows U.S. Offshored Too Much – White House trade adviser

Drewry added: “Whatever the outcome, COVID-19 has exposed the fragility of global supply chains that are overly dependent on a single manufacturing source. We suspect that shippers will look to broaden their sourcing options as a form of insurance.”

“Medium” Scenario

An empty urban shopping mall in central Milan
An empty urban shopping mall in central Milan. Italy now has 655 confirmed cases of coronavirus and parts of the country are now under quarantine

The second scenario, which is now Drewry’s baseline forecast, considers that normal economic activity could resume in China before Q2 2020 but the virus embedding itself into consumption centres in Europe and North America would just shift the problem from one supply chain to another.

READ: Maersk CEO Predicts ‘Sharp’ Rebound After Coronavirus Peaks

Consumer confidence in Western cities could take a hit and strict quarantine measures may be introduced, leading to supply chain blockages, thus trimming economic forecasts.

The analyst noted: “The more widespread and protracted the situation the less likely it is that the container market will be able to register growth this year, while a weakened global economy would hold less pent up demand, making for a softer recovery in 2021.”

Under this scenario, carriers would be forced to extend capacity reduction plans, and the extreme of this outcome is to consider additional measures such as idling and heavier demolitions in addition to more blank sailings.

Worst Case Scenario

Crowded Chinese rail station. People rushing about wearing surgical masks being watched by two uniformed guards, also wearing masks.
Drewry’s most pessimistic scenario takes a sceptical view of official Chinese statistics and envisages a spike in infections as people start to congregate and travel more freely together once again

The most pessimistic scenario takes a sceptical view of official Chinese statistics and envisages a spike in infections as people start to congregate and travel more freely together once again, leading to the return of quarantines and further production outages.

READ: China heads back to work. “It will be harder to curb the spread of the virus” – official

If combined with a significant spreading of the virus outside China, trade flows would be choked off at both the production and consumption ends, although Drewry renders this the most unlikely chain of events.

READ: European logistics in crosshairs. Virus shutting down Italy. Markets terrified

In this situation, there would likely follow a global economic recession with significantly reduced container flows, a prolonged downturn for freight rates and an elevated risk of carrier bankruptcy.

Drewry noted: “To avoid such a prospect, carriers would be forced to revisit the playbook from the financial crash of a decade before and undertake large scale capacity withdrawal in the form of mass idling and demolitions.”

Wrapping it all up, their report simply states, “The container market looks set to suffer as a consequence of COVID-19 but there is currently too much uncertainty to confidently predict the outcome.”

How well will the virus be contained is the trillion-dollar question.

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