The debt-laden shipping industry has in recent months been sailing in treacherous waters.
At a time when the industry was facing headwinds, mainly triggered with the introduction of IMO 2020 and the US-China trade war, other pressures had to be met by the already struggling industry, this time, stemming from the unprecedented COVID-19 outbreak, the latter severely impacting the demand for goods.
To mitigate the environmental impact posed by emissions released from vessels, burning fuel containing a high level of sulphur content, the IMO 2020 regulation, came into force. To comply with the said regulation, the options were two-fold: vessels had to be either retrofitted with scrubbers - posing a one-off capital expenditure or start burning fuel containing a significantly lower amount of sulphur content; capped at 0.5 per cent. The latter option, contributing to a substantial increase in bunker costs, leaving international shipping companies no option, but to partially shift the incremental bunker costs onto the consumer through surcharges, pushing freight rates up, thus partially compensating for the lower margins.
The slight relief from the increase in freight rates was however short-lived, as the COVID-19 pandemic started to take its toll.
Albeit taking longer to feel the pinch, on the back of shipping restrictions, mainly brought about by lockdowns imposed by governments to mitigate the spread, when it did, the impact on the industry was severe.
Mitigating the said impact on operating margins was the unexpected breaking up of the OPEC+ agreement, which sent global oil prices and consequently low sulphur fuel, which initially weighed on operational costs, into a tailspin.
Consequent to the substantial headwinds the industry faced, few expected it to remain afloat.
Against all odds, the shipping industry, expected to be in a perilous state given such a backdrop, navigated the crisis surprisingly well, demonstrating considerable resilience and reporting improved year-on-year operating results.
The surprising, yet optimistic results achieved by the majority of shipping companies, have been a result of: stringent capacity deployment through blanked sailings, lower-than-expected bunker fuel price, and ultimately a less severe decline in global trade volumes than previously anticipated.
In an attempt not to trigger a supply-demand imbalance that could negatively impact the freight rate, and ultimately hurt profitability margins, shipping companies at the peak of the pandemic announced blanked sailings. A blanked sailing is a shipment that has been cancelled by the carrier. Cancellations typically involve a vessel skipping one port or the entire string.
By reducing supply, shipping companies, through the system of alliances and consortia in the shipping industry, managed to compensate for the drop in demand, holding the freight rate, initially feared to witness a significant drop.
Following the scheduled peak in April, blanked sailings employed by the shipping alliances that enable slot-sharing and vessel-sharing agreements started to decline, portraying an uptick in demand, consequently pushing the freight rate even higher.
Indeed, management capacity, coupled with the considerable drop in bunker prices and other cost-cutting initiatives implemented to mitigate the strain, proved crucial in mitigating revenue pitfalls, despite the decline in volumes.
Albeit on a year-on-year basis, volumes pointed substantially lower, the COVID-19 pandemic and the resulting economic recession is seemingly leaving a less severe impact on global trade than previously anticipated. Notably, the drop in volumes initially thought to revolve around the 15 per cent levels, have now improved, with forecasted declines expected to lie between the 5 to 10 per cent levels, when compared to 2019. Shipping companies, more exposed to China and its more benevolent economic scenario, have indeed benefited, with forecasted declines expected to be lower than the figures stated above.
When considering forward-looking industry metrics, comprised of a widening spread between freight rates and bunker costs - allowing for better profitability margins, and improved volumes, we see a clear positive trend. Unless something goes wrong in the last quarter that will negatively impact the positive momentum recently witnessed, shipping companies shall indeed come out of 2020, achieving better-than-expected financial results, when compared to the previous year.
Albeit the positive momentum, high uncertainty regarding the pandemic and economic recession, their effect on global trade demand, and thus the sustainability of earnings and financial performance, do remain.
Disclaimer: This article was written by Christopher Cutajar, credit analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.
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