The maritime freight industry is on course for a projected 7.3 percent decline in demand for container shipping in 2020, its worst year since a 16 percent decline in 2009 in the heart of the Great Recession.
That was the outlook from Simon Heaney, senior manager of container research and Martin Dixon, director of research products at Drewry, the U.K.-based maritime research and consultancy, on a webinar to discuss the state of the sector and the impact from COVID-19.
The plunge in demand is having the biggest impact on the major trade route destinations of Europe, Africa, North America, South Asia and Latin America, Heaney said. However, the industry quickly cut capacity after the pandemic hit by canceling routes, issuing blank sailings and idling about 10 percent of the container ship fleet in May and June, helping to support freight rates, Dixon said.
Drewry’s composite World Container index dipped 0.4 percent after reaching a five-year high to $2,023.20 per 40-foot container (FEU) for the week ended July 9. That was after falling to just above $1,700 per FEU in February, when the coronavirus caused port shutdowns in China and elsewhere in South Asia.
Dixon thought freight rates could soften in the second half of this year, with an overall 3 percent gain, as carriers are challenged to match capacity to recovering demand.
The quick response to the demand decline helped steer the ship owners above water, he said, and they are now on track for operating profits of $9 billion this year, “which is a complete reversal of the $4 billion deficit” forecast in March.
Dixon said 2021 would be another strong year, with carriers forecast to generate operating profits of $7 billion compared to $3 billion forecast in March, although that is “predicated on carriers holding onto the gains” seen this year.
Healey presented several scenarios for container freight demand through 2014. The “baseline” outlook calls for the industry to see modest demand in the period, with a compound average growth rate (CAGR) of 3.5 percent. But Healey said there were “huge downside risks from a larger virus outbreak this year and new outbreaks next year.”
The worst-case scenario of a longer outbreak this year and a new flare-up in 2021 would mean demand doesn’t return to 2019 levels until 2025 and a CAGR through 2024 of negative 4.4 percent, Drewry forecast.
“Next year there is greater uncertainty with either 10 percent growth or negative growth,” Healey said. “Nobody is in control of the virus,” which made it challenging to be confident in any forecast, he added.
“We do think, though, that the situation will improve as we progress through the second half of the year,” he said. “Lockdowns are being lifted. We think that quarterly year-over-year growth is still going to remain negative though, until at least next year, particularly as the world is just adjusting now to the new ways of living that we have become accustomed to.”
On the supply side, Heaney said, “the world fleet continues to grow, even though carriers probably would prefer that it wasn’t.”
“COVID-19 has exacerbated the industry’s longstanding oversupply problem and the fleet now stands at around 23 million TEU (20-foot equivalent units), and by the end of this year, we think it’s going to grow by approximately 2.,5 percent year on year, and that’s 9 percentage points above our forecast, and clearly that’s just going to magnify the supply overhang,” he added.
There are forces at play that have slowed down that process slightly, he noted. Deliveries of new builds is slower than expected because the virus has disrupted shipyard operations and a lack of urgency by carriers to pick up new assets.
“We do expect to see very significant slippage,” Heaney said. “By which I mean there’s going to be far fewer delivered at the end of the year compared to what was into the beginning. So, our new fleet forecast calls for annual deliveries of around 740,000 TEU this year. That would represent about 65 percent of what was expected on Jan. 1.”
He said the pandemic is also playing a role in how quickly owners can get rid of unwanted ships. Strict restrictions in South Asia have caused the demolition market to slow considerably in the first half, for example. In addition, the appetite for new ships has also diminished.