No Way To Forecast The Severity of the Coronavirus Implications As Quarantine Continues

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  • Coronavirus outbreak causing markets to tumble and bringing shipping to halt
  • BIMCO’s Peter Sand says that the Intra Asian shipping route will bear the largest impact
  • Scrubber retrofitting would be hit
  • Chinese economy slow down will drive the oil market slump
  • US export boom to be hit  as the US-China Phase One Deal is likely to be delayed
  • The quarantine will further drag down the earnings in the coming days
  • In the long-run implications are difficult to predict as the virus continues to spread

The virus outbreak and the extended Chinese holidays have taken a toll on the shipping market, freight rates as trade are grossly affected in times of quarantine, reports Platts.

Knock-on Effect 

The coronavirus outbreak in China has forced several countries to resort to stringent quarantine checks in their battle to contain the spread and the measures are starting to have a knock-on effect on the global commodities shipping market.

  • Delays in loading and delivery of cargoes in the tanker, dry bulk and container shipping segments are being reported due to ships being forced to sit idle amid a lack of crew availability.
  • Merchant ships arriving in Australia were impacted by Canberra’s move to ban all personnel entering the country, if they have been to China on or after February 1.
  • All ships that have left China on or after this date will have to wait out the 14-day quarantine period.
  • In case, if a sickness is reported on board the ship, the Australian authorities will investigate and likely extend the quarantine for 14 more days.
  • Additionally, ships arriving at Australian ports are required to declare their last five ports of call.
  • The Australian port authorities will also delay pilotage services to ships that have transited directly from China and which have been at sea for less than the 14-day quarantine period.
  • Singapore, the world’s largest bunkering port, has had many resident Chinese nationals returning home from the Lunar New Year holiday.
  • Their return to work, which included crew on ships, workers at ports, shipyards and maritime technicians, is now being delayed due to health inspection and quarantine checks.

Crew Stuck in Transit

“A lot of crew are stuck as they cannot transit because nobody will accept them,” a source with a clean tankers’ owner told S&P Global Platts.

Such workers have job contracts with their employers and cannot be easily replaced either, the source said. Singapore has asked for all workers returning from mainland China in the last two weeks, to be put on a 14-day leave of absence.

QUARANTINE QUAGMIRE

Ship-operators in the dry bulk market are on the edge due to the 14-day quarantine rule in Australia, participants say.

“As such it is not a huge issue to not allow vessels to dock for 14 days since they left Chinese ports. To load out of east coast of Australia, most vessels ballast from north China and it may come down to one more day of waiting at most, which in this market is not a huge problem,” a ship-operator said.

In a scenario where a crew member gets sick, the extension of the quarantine to another 14 days would force the vessel to miss its laycan.

“A disponent owner or a ship-operator who has the vessel on time charter should be able to push it back to the head owner. But most of the BIMCO clauses are in favor of owners regarding force majeure, unsafe ports etc. and there is no wording to cover for sick crew,” said the ship-operator.

BIMCO Coming To the Rescue

BIMCO is the world’s largest international shipping association with more than 2,200 members.

While shippers can declare force majeure due to an epidemic onshore and charterers can declare that on ship-operators, the despondent owners, who are controlling vessels, doesn’t have such an exit clause.

Given the current scenario, most ship-operators would ask for certain clauses to be inserted even in a voyage charter party to have an exit akin to a contract getting cancelled if vessels miss laycan due to sickness etc., the ship-operator said.

BIMCO’s Peter Sand has highlighted the key impacts of coronavirus on shipping, reports Safety4Sea.  Here’s what he said.

Dragging Chinese Economy

Specifically, it is stated that the crisis will ‘put a drag’ Chinese economic growth in the first quarter of 2020, potentially taking a toll on annual GDP growth as well.

In addition, the downfall continued with the shutdown of the majority of the transport system, which consequently limited the consumption of oil, refiners have reduced crude runs across the board, while demand declined and is unlikely to return to boost shipping demand after the crisis is over.

The coronavirus also led to wide-spread factory shutdowns, followed by a slowdown of manufacturing and industrial production.

Intra-Asian Container Shipping To Be Affected

Peter Sand highlights that

The intra-Asian container shipping market, the largest in the world, will be the first trades to feel the fallout from the coronavirus if intra-Asian supply chains are disrupted. Secondly, the long-haul trades to North America and Europe will be affected.

In the meantime, the majority of the shipping players have already published their preventive measures, including restriction or cancellations of voyages adding to low demand. However, it is reported that if countries stop producing goods, then short-term alternatives will not exist.

On the contrary, medium-term alternatives will rise fast though, meaning alternative producers of the goods, just as we have seen as an effect of the ongoing trade war between the US and China.

Measures to tackle the virus

Many countries have already issued measures to curb the virus spread from seafarers, with the most important steps being:

  • Declaration on health
  • Temperature measurements
  • Information on sick or deceased crew or passengers
  • Information on previous port calls
  • Information on crew or passengers’ travel history – i.e. if they have been in China within the previous 14 days as a minimum

The virus illustrates just how dependent the world has become upon China with many supply chains deeply embedded into the country
… Peter Sand added.

Scrubbers Effect Anticipated

For the time being, the shipbuilding sector doesn’t seem to have been impacted from the virus yet. However, BIMCO expects that in the coming months the sector will be affected, mostly on retrofits of scrubbers, ballast water treatments systems etc. as well.

Dry Bulk Market 

Dry bulk shipping rates have extended its rout over the past two months, driven largely by seasonality and the newly implemented IMO 2020 Sulphur Regulation, which has sent fuel oil costs soaring. Chinese imports of dry bulk commodities are the main driver for the dry bulk market and with a slowdown of industrial production in the short-term, the outlook for Q1-2020 is not shaping up particularly well. Freight rates will stay low, until Chinese merchants get back into the market for the usual commodities, such as grain, coal and iron ore.

The traditional dry bulk low season is usually in Q1, and the market tends to rebound post-CNY. Yet, with the coronavirus not under control yet, the slump will inevitably be more protracted. The Capesize index fell into negative territory on 31 January 2020 and has continued its descent to reach -133 index points on 4 February 2020.

Quarantine Will Drop Earnings Further

If large parts of China remain under quarantine, it is likely that earnings will continue to drop across the dry bulk segments.
In addition, tanker shipping has certainly felt the heat in the past week, partly from the virus, but also with the lifting of US sanctions for a lot of Chinese-owned oil tankers. A lot of the oil tanker business is carried out in the spot market and freight rates have already seen substantial changes.

As China is the largest crude oil importer globally, a shutdown will bring with it a transitory slump of crude oil imports and accompanying refinery cuts in run rates.

US-China Phase One Deal

Peter Sands poses the question of “How does it affect the US-China “Phase One” agreement?”

The Phase One deal was signed in the mid-January between US-China, with the latter pledging to buy an additional USD 200 billion of US goods over a two-year period, of which a lot of energy and agricultural products will be seaborne.

It remains questionable whether these purchases, will ever see the light of the day, and the virus outbreak could prove to be an additional hindrance to this Chinese pledge. White House economic adviser Larry Kudlow has said that the “export boom” of US commodities will be delayed as a result of the virus.

No Way To Forecast Implications

He concludes that as the virus continues spreading, there is no way to forecast the medium to long-term implications, yet the short-term consequences are clear: demand and freight rates are dropping.

FREIGHT MARKET IN FRIGHT

Coronavirus scare has further deteriorated the health of the freight market, which was already reeling from the impact of IMO 2020 0.5% sulfur regulation that required ships to run on the expensive cleaner fuel.

“I was expecting this epidemic to lend some support due to vessels being held up, but that does not seem to be the case, a freight market source said.

The situation is such that the Baby Capesize dry bulk ships, which usually gets traded above the freight rates done on post-Panamax class ships, are going at cheaper levels.

“People are undercutting each other if they can get some cargo to move away from the Pacific basin [which is being impacted by the novel coronavirus scare],” the source added.

The market is also starting to see premiums on Capesize ships loading from east coast Australia narrowing due to the current happenings. Typically, Capesize ships ballasting from South China to east coast Australia have a “positional” advantage given that it’s a shorter ballast compared with ships coming from North China.

  • The fixtures done from the east coast Australian port of Hay Point to Qingdao fetches a premium of 40-50 cents/mt over the Western Australia to Qingdao route.
  • But with many ships expected to head to east coast Australia from North China to pass the 14-day quarantine period, the premium is expected to shrink, market watchers say.
  • A Capesize ships takes 11-13 days to ballast from North China to Western Australia.

In the gas segment, given that the LNG shipping market is currently on a longer side, participants aren’t too concerned about a potential tightening of tonnage as a result of this measure. It takes around eight days for an LNG tanker to return from China to Australia.

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Source: Platts, Safety4Sea

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