A Kangaroo Shaped Recovery

Some readers may have listened to me discussing the post-Coronavirus trade scenarios with Richard Meade of Lloyd’s List on one of their recent podcasts. We discussed the possibilities of a V-shaped, U-shaped or even an L-shaped recovery. The more I consider the possibilities for the future, the more I feel certain that we will have a W or M-shaped recovery, one that looks like the track of a kangaroo jumping along the X-axis of a GDP chart.

Until a medical solution is found to Coronavirus, it won’t be possible to engineer a lasting economic outcome. Beyond any possible lasting immunity after recovery from infection, a medical solution requires a vaccine. A vaccine may not be available nearly as quickly as the politicians hope. Only one pandemic disease – smallpox – has been successfully eradicated globally, and that took nearly two decades of work led by the World Health Organisation, now hobbled by US derogation.

But let’s suppose that recovery from infection confers some immunity and that a vaccine can be distributed to billions world-wide at zero or near-zero cost to the individual. Then the focus will turn back to China. Having spent over USD 14 Bn on public health measures so far this year, China is now exporting equipment and expertise around the globe including to some of the poorest countries which rely on Chinese demand for their exported commodities and energy. A guilty conscience? It’s hard to conclude otherwise.

Some governments will want to punish China for allowing the outbreak to happen at all, let alone their censorship of whistle-blowers or the state’s slow early response to the outbreak. Some states have already indicated that their relationship with China will change. That punishment or change is likely to take economic form. But what might be done?

There is little point banning lending to China as its banks are now so powerful. Countries could ban foreign direct investment to China, but uneven application of such a rule would simply cede the market to competitors more comfortable with China’s performance in managing the outbreak. Trade ties to China could be cut, and Chinese investment in overseas markets could be prohibited or limited. Both options are already being touted by certain politicians. China may find that more impetus to the push-back against a number of its Belt and Road investments which increase its access to overseas markets around the world.

The political ramifications will take years to become apparent. The economic ramifications are not going to be simultaneous. Different countries have been exposed and infected at different times. Global economic performance will be uneven and patchy. Some countries and regions could be affected more than others. For instance, a joint communique dated 20 April from the African Union Commission, Afrexim Bank, Afrochampions and UNECA says that “Coming on the back of declining commodity prices, rising protectionism and heightened debt service burdens, the crisis threatens to wipe away decades of gains.” The communique quotes an UNECA study predicting a fall in pan-African GDP from 3.2% to 1.8% this year. Of greater interests to those of us involved in the shipping industry, the communique mentions a desirable restructuring of supply chains: “In particular, the Pandemic and the attendant challenges in sourcing critical medical supplies and equipment have highlighted the critical gaps in Africa’s productive and manufacturing capacities, as well as the need to build domestic, regional and continental value and supply chains.” Perhaps regionalism will replace globalisation as governments seek to build resilience and the ability to manage future essential isolation and closed border public health incidents.

In the near-term, from a shipping perspective, the economic impact of the virus will be variable. For instance, Saudi Arabia increased oil supplies by 2% just as global demand fell by 20%. Lower oil prices led to a tanker chartering frenzy pushing freight rates to dizzy heights. Some oil blends are now being sold at USD 3 per barrel or less in the US, reflecting the collapse in demand. At some point the tanker boom will run out of steam, presumably if/when oil storage economics turn against it before global oil demand can recover – if it ever does.

The negative shock to container demand is likely to disfigure the entirety of 2020 for the liner companies. Restructurings and insolvencies cannot be ruled out even among the largest operators. Any second-wave lockdowns would seriously disrupt attempts to get the market back to something like normality later on. Any longer-term restructuring of global supply chains could endanger the liner company business model based on ever-larger ships offering ever-greater economy of scale. The liners will be thanking their lucky stars that the fall in bunker prices is saving their cash flow as they manage supply to keep freight rates not far off their seasonal averages.

The bulker market will remain wedded to Chinese economic activity and thus should be the first to recover, reflecting China’s public health position. For instance, official statistics show that China’s crude steel grew 1.2% year on year to 234.5 Mn T in 1Q20, though the pace slowed from 3.1% on-year growth over January-February to -1.7% in March to 79 Mn T as companies were shuttered during lockdown. April data are expected to show a return to positive growth and the steel mills are expected to increase output to recover production losses from March as quickly as possible. With iron ore inventories at Brazilian and Australian ports looking very high, there is some validity to optimism for a revival of bulk carrier freight markets in the second half of 2020, even as the miners report lower recent freight volumes.

The Take Away

It’s going to take a while to sort this out, and the usual political shenanigans will interrupt the public health and economic solutions. One big difference between the inevitable recession the pandemic will cause and, say the 2008 global financial crisis has been the reaction of central banks and governments to guarantee liquidity. As things stand, there is little chance of a global credit crunch. Inflation is a distant prospect (but will be welcome when it arrives for negating the value of debt). So shipping falls back on its old certainties of the fundamentals of supply and demand. Manage supply to meet demand and survival, if not prosperity, remains a realistic prospect.

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