Ocean shipping will be able to ride out a global recession: report

SIGNS of an impending global recession are piling up with a world map littered with potential economic and geopolitical crises

23 August 2019 - 19:00

SIGNS of an impending global recession are piling up with a world map littered with potential economic and geopolitical crises.

Ocean shipping is inordinately exposed to global recessions, given how worldwide slowdowns curb seaborne trade. The events of 2008-09 crippled ship owners and were felt for years thereafter and some would say they're still felt today.

What if the signals turn out to be correct, not a false alarm, and another global recession ensues? How would ocean shipping be impacted this time around?

This risk was addressed in a new report by Clarksons Platou Securities, authored by shipping equity research managing director Frode Morkedal and analysts Erik Hovi and Henriette Vevstad.

Clarksons Platou is not lowering its base-case scenario. Nonetheless, given its admission that 'investors are presently unlikely to subscribe fully' to its base view, it's estimating what it believes could happen if global GDP growth turned out to be 2 per cent in 2020, as opposed to the current consensus forecast of 3.3 per cent.

What's clear from the new report, as well as from other data and information sources, is that if there were to be another global recession, consequences for ocean shipping would be different versus 2008-09 because the industry and its markets have changed.

Liner shipping has been radically transformed over the last 10 years. Liners have consolidated via ownership mergers and commercial alliances, and average vessel size has dramatically increased, with newbuildings delivered over the past decade dominated by ships with capacity for 10,000 TEU or more.

On a positive note, consolidation provides lower operating costs and the bulk of the orderbook has already been delivered. Container shipping's ratio of the orderbook to on-the-water tonnage was 50 per cent in 2008; it's now down to just 11 per cent.

The bad news is that all of those consolidation transactions and newbuilding orders were expensive, equating to higher debt loads.

Clarksons Platou estimates that the multiplier of container trade to global GDP growth was 1.2 in 2018. In other words, if GDP grew 1 per cent, container trade would grow 1.2 per cent.

If there is another financial crisis, the silver lining is that container shipping is less wedded to GDP growth than it used to be. In 2005-08, the multiple was around 2; in the early 2000s, it was as high as 4.

Nevertheless, Clarksons Platou warns of a 'real risk of stagnation in container trade' in a recession scenario and projects that 'based on historical regression (analysis for the years 2009-18) if world GDP growth slows to 2 per cent, container trade could be flat and even contract.'

The report did cite important differences with the 2008-09 crisis that could make any future recession less impactful. It noted that 2009 data was influenced by 'a total freeze in letters of credit for several months' and 'this is not likely to be repeated in a normal cyclical slowdown', meaning that 'the regression results could overstate the downside potential'.

Most of the US-listed container shipping companies are vessel lessors, not liner companies, so a key issue will be how a recession affects charter rates, reports American Shipper.

Under its base case, Clarksons Platou predicts container ship vessel demand would increase 6.7 per cent in 2020. Under a recession scenario, it still sees vessel demand growing, albeit by only 1 per cent.

It believes vessel demand will be supported by slower speeds (decreasing effective vessel supply) as operators seek to conserve on fuel as a result of IMO 2020.

'IMO 2020-related slow steaming is a saving grace for vessel owners and we believe the effects of this event should help avoid a collapse in earnings (in the case of a recession),' it said.

While it doesn't predict a collapse, it does foresee a significant charter earnings reduction in a recession scenario. For 4,400-TEU ships, it currently expects rates to rise from US$11,000 per day this year to $14,600 per day in 2020. In a recession case, it sees 2020 rates falling back to $8,800 per day.

For 8,250-TEU ships, its base case is for rates to rise from $25,900 per day this year to $33,900 per day in 2020; in a recession, it estimates 2020 rates would fall to $22,600 per day.

The tanker shipping landscape is also dramatically different than it was when the global financial crisis struck. If world GDP growth were to slow to 2 per cent in 2020, Clarksons Platou estimates that oil demand growth would decline from 1.3 million b/d to 700,000 b/d, 'leading to substantial inventory build and oil prices in the $40-per-barrel range'. The investment bank believes this would spur OPEC to 'cut at least 700,000 b/d to sustain oil prices at mid-$50/barrel levels.'

Once again, IMO 2020 consequences are expected to mitigate some of the hypothetical recession fallout.

Clarksons Platou's base case is for rates of very large crude carriers (VLCCs), which carry 2 million barrels of crude oil each) to rise from $35,000 per day this year to $60,000 per day in 2020, driven in part by IMO 2020. If there's a recession, it believes rates will still increase, but minimally, to $40,000 per day. 'This would be a disappointment for most investors,' it acknowledged.

The dry bulk sector is finally starting to recover after a slump that has been ongoing, with a few brief exceptions, since 2008.

If there were a global recession in 2020, the big difference for dry bulk versus what happened in 2008-09 involves asset prices and charter rates.

The global financial crisis followed an unprecedented boom for dry bulk. In 2008, rates for Capesizes (bulkers with capacity of 100,000 deadweight tons, DWT, or more) hit a high of $190,000 per day, and asset values for such ships soared to $150 million. Today, Capesize rates are around $29,000 per day. A Capesize newbuild costs $51 million and a 5-year-old Cape $30 million.

In other words, should the bottom fall out yet again, there's less room to tumble.

Clarksons Platou estimates that demand for seaborne bulker tonnage would increase by 4.3 per cent in 2020 if there is no global recession and by only 0.9 per cent if there is one. Barring a recession, it believes average Capesize rates would rise from $16,200 per day this year to $18,300 per day in 2020. If there is a recession next year, it estimates that Capesize rates could sink back to $12,600 per day.

On a positive note, Clarksons Platou opined that 'potential rates are only slightly below most owners' cash breakeven rates and hence no major financial difficulties are expected' in the case of a global recession. It maintains that 'IMO 2020 is cushioning the effects from a potential recession, thus avoiding a major financial stress.'


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