The Day the Earth Stood Still


Governments around the world are taking extraordinary action to try to slow the spread of Covid-19, which now numbers more cases outside China than in China. The best place to monitor its spread by the way is this Johns Hopkins University website. I think we can be certain that the actual number of cases significantly outstrips the official number due to the haphazard and variable means for testing for the virus and controlling its spread.

The UK government for instance has turned the island of Great Britain into a vast petri dish, testing only individuals entering hospital with severe symptoms basis an assumption that 60% of the population will contract the virus, so they should focus their limited resources on those who fall severely ill and wait for ‘herd immunity’ to develop among the wider population. Anyone who falls ill is advised to stay isolated at home for seven days and to call the National Health Service only if they are not getting better on day eight. Otherwise the government is not yet proposing the kind of societal lockdowns that are now the preferred method of controlling the spread of Covid-19 basis the relative success of South Korea, Hong Kong and Singapore. Many Brits have taken matters into their own hands, have stocked up on necessities and are staying home anyway, taking their lead from other European States where daily life has come to a standstill.

I live under a flight path and the silence that has fallen in the last week has been welcome, as have relatively blue skies in which contrails have been conspicuously absent. Plenty of commercial flights are still taking place as you can see from the flightradar website. But a number of countries have suspended international air travel and a number of airlines are putting some of their aircraft into storage. American, Qantas, Lufthansa and Delta Air Lines for instance are moving many of their widebody aircraft into storage today. SAS CEO Rickard Gustafsson has told customers that most of its operations are being put on hold due to essentially non-existent demand for air travel.

Global commercial aviation traffic is down by about 11% compared to March 2019. That percentage is likely to grow as the virus spreads further. Airlines are, like shipping, typically highly leveraged and reliant on mostly spot demand for their services. Take away the demand and many will struggle to survive even for a quarter without state aid, repayment holidays, and the like. We may even see a spate of state-sponsored consolidation or outright nationalisations as a consequence of Covid-19.

Cheap and widely available personal transportation is a cornerstone of globalisation. Take it away and globalisation will suffer. If global aviation is restricted for a one-off period, then it will presumably recover; aviation analysts have drawn parallels to the period after 9/11. But if Covid-19 becomes a seasonal or even an indefinite and constant public health issue, authorities will have to take bigger and harder decisions about the ease of personal international travel.

I mention the aviation situation to draw parallels and comparison with shipping. Of course, state assistance is unavailable for most shipping companies as they sail under flags of convenience: no representation without taxation! And tanker owners at the moment will be shrugging off any concerns at least for a few days as freight rates have returned to levels last seen during the tanker wars of the 1980s. But restrictions on personal movement, such as the withdrawal of visas for individuals travelling from infected regions, will surely impact on shipping.

The most obvious impact is on the availability of crews. Crewing agencies are finding it more difficult to sign seafarers on and to get seafarers to their ships as well as finding it harder to repatriate those ending a stint. Meanwhile, stricter quarantine regulations around the world could become seriously problematic for ship operators if a crewmember should display Covid-19 symptoms, resulting in a 14 day quarantine extension. Shippers and charterers can declare force majeure in most cases but the owners will have little recourse except to their insurance policies or carefully worded charterparty clauses covering Covid-19 delays.

Beyond the direct impact of a Covid-19 outbreak on board a single vessel, the macro context is worsening by the day. Chinese state statistics have detailed the impact of Covid-19 on the economy in January and February, for which most statistics are combined to cover the Lunar New Year. Industrial output fell 13.5% year on year – its worst drop on record. Urban unemployment grew to 6.2%. Retail sales fell by 20.5%, fixed asset investment fell 24.5% and services output was down 13%. The official line is that the impact of the outbreak is short-term and manageable. But China relies on the rest of the world for demand for its output and may have to wait for the outbreak to fall away world-wide before anything like normality can be resumed.

This realisation - that the spread of the virus will prevent a V-shaped recovery - has spooked investors and stock markets have plummeted today. This was even after the US Federal Reserve cut interest rates to 0.00% – 0.25% on Sunday and announced USD 700 Bn of asset purchases, expanded credit lines and USD 200 Bn of assistance to commercial banks to ease household and commercial lending. In a statement, the Fed said that it is ready to use its “full range” of tools to provide liquidity to the markets. This includes co-ordinating with the central banks of the EU, UK, Japan. Canada and Switzerland to extend dollar-swap availability, keeping money flowing internationally.

A near 10% fall in EU and UK stock markets this morning suggests that investors are not convinced that increasing liquidity will do anything to restore lost demand as social isolation ravages consumer spending around the globe. With interest rates close to zero, the limits of monetary policy are being reached. Any increase in demand will now have to be created by fiscal policy: governments spending money on public goods and infrastructure, or (less likely) cutting taxes to try to stimulate consumer spending.

We may be in for a global bout of Keynesian economics as governments attempt to rebuild lost GDP and their own reputations for economic management. We are almost certainly facing a wave of personal and commercial bankruptcies and debt delinquency that will have to be covered by the insurers of last resort – the state. We are definitely in for an increase in government debt as states borrow from our assumed future prosperity to get us through the difficult days of 2020. The fiscal and monetary response to Coid-19 may will therefore sow the seeds of the next credit crunch and global recession.

THE TAKE AWAY

As recently as last Friday, I would have said that the effects of the Coronavirus outbreak would be confined to the first half of 2020 and that any lost economic activity could be recovered in the second half of the year. I would also have bet that falling commodity price would encourage China to buy up spot cargoes, as it did with iron ore in 2009, saving the Capesize market from catastrophe, and as it did in 2014, filling its Strategic Petroleum Reserve when oil prices were low and driving the peak of the last crude oil tanker cycle. But the common core assumption about the shock to our economy being temporary and manageable is looking rather shaky today.

A fall in global consumer activity impacts container shipping most immediately and painfully. The effect on tanker markets is currently being outweighed by oil producer chartering sprees to move the extra crude output, but how long will that last? And the effect on bulk carrier markets was mostly to extend the seasonal dip that combined with the end of the bulk carrier cycle in the first two months of this year. Now it looks like any rebound in demand for all shipping market sectors may come later and may depend on government sponsored infrastructure spending.

Expectations and assumptions will come under further pressure as time passes, but the trend so far is mostly for expectations to get worse and for the virus related economic slowdown to last longer. Not a good start to the week!

One final word: our personal well-being is more important than wealth. Wherever you are, I hope that you and your family can stay safe and well. Meanwhile, here is something to look forward to: when this is over, there is going to be one heck of a party.


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