Container Shipping’s Rough Ride Ahead

As the COVID-19 began to unfold it became clear that every shipping segment was going to be impacted in a unique manner. As prospects for a V-shaped recovery soon gave way to the prolonged U-shaped theory (which I maintain here) theories about how each segment would recover were also quite varied.

For container shipping the end to a theoretical V-shaped recovery, as staggering unemployment took hold, saw the prospect of pushed-back demand destroyed. That pent-up demand would no longer carry the forward outlook but rather a demand collapse would prevail, pushing a very bearish narrative.

As the global outlook remains in question, and many would argue continues to deteriorate, prospects for a container shipping recovery in the short run slip away while the medium to longer term outlook must be called into question.

The story up till the COVID-19 outbreak was the bifurcated market with larger vessels seeing a massive glut and mid- to smaller-sized seeing extremely low fleet additions.

Source: Clarksons SIN

But demand destruction on a massive scale has become the great equalizer among all classes.

Source: Data Courtesy of VesselsValue – Chart by ShipBrief

This has caused rates to plummet with the larger classes being sustained by coordinated blanked sailings.

Typically, in these situations, the supply side would adjust with increasing demolitions to mitigate the impact. But the result of a historic bear market in 2016 has left the mid to smaller classes with minimal prospects, while the larger 15,000+ TEU vessels aren’t nearly old enough to consider scrapping.

In terms of vessel numbers, the balance between old and new looks decent.

Source: VesselsValue

But, looking purely at ship numbers by age can be a bit misleading since what we are most interested in is capacity, or TEUs.

Source: VesselsValue

In this context, you can see we are dealing with a young fleet and strong prospects for further net fleet growth.

Therefore, prospects for a recovery rest mostly on the demand side.

In short, economists see aggregate demand as a function of Consumption + Investment + Government Expenditures + Net Exports (exports – imports).

Here in the USA, consumers drive about 70% of all economic activity. These consumers are real people many of which are experiencing hardships of an unparalleled nature in their lifetime.

These households are not experiencing a liquidity crisis or something that can be solved by Fed action. They are experiencing a solvency crisis through massive unemployment that has in some cases left households which were already reliant on two breadwinners without any bread at all. This cannot be remedied by the flip of a switch.

It is from this standpoint in which the container shipping situation must be viewed.

The meager bridge payments from governments are welcome but they are no substitute for traditionally secure employment which inspires consumer confidence and spurs demand for products.

Recent ISM manufacturing numbers out of the US confirm what many already knew. But instead of focusing on numbers, which were horrific, the sentiment is what’s important going forward.

According to the ISM, manufacturers were “strongly negative regarding the near-term outlook, with sentiment clearly impacted by the coronavirus pandemic and continuing energy market recession.”

Managers need clarity before speculative investment and production decisions are made. This is what allows for employment gains. Even when clarity is achieved the idea of a snap back for all industries is not realistic. There will be a gradual return for many which entails prolonged unemployment. Of course, in the short to medium run this implies a hefty pool of workers from which to choose – theoretically suppressing or even rolling back wages.

Again, these workers are the consumers on which the economy is most reliant.

All of this plays into a prolonged consumer downturn which in turn suggests a prolonged contraction for container shipping demand.

Let’s also acknowledge that demand for container shipping was already under pressure from a slowing of globalization (offshoring) which up till recently had been adding a healthy multiplier above global GDP growth since the 1990s.

As of late, protectionism and re-shoring have been political pillars for some politicians in key economies. This global economic crisis presents an opportunity to enhance support for these goals as economies with once healthy employment backdrops suddenly find themselves with millions upon millions of newly unemployed.

Until the bleeding stops and we see stability followed by plans for an economic recovery (ideally coupled with an organic recovery), container shipping will likely remain under pressure.