There is little doubt that COVID-19 has affected many, if not all industries, in a very short period of time since January 2020. Until now, most companies (and governments) have focused on reacting to this novel and existential threat; with the first wave of COVID-19 hopefully behind us, as we all grasp for fresh air, more thinking will go into how COVID-19 will be affecting certain industries and companies, and the way business is contacted, in the long term – as, the “new normal” likely will be quite different from what we all were used to. Previously, some of our thoughts on businesses coping with COVID-19 have been posted online on the VesselBot blog under the title “Dealing with COVID-19 and the Long-lasting Impact on Shipping”. In the current post herebelow, we endeavor to provide the view from 10,000-feet, the bird’s eye view, on COVID-19’s impact on the shipping industry by sector; it’s an expedient, broad encompassing view of the direct impact of COVID-19. [NB: We had contributed to a similar article in Freightwaves under the title “How Coronavirus ‘Stress Tests’ will Change Ocean Shipping”, posted back on April 14, 2020.]
However, the impact of COVID-19 on shipping (and many more industries) likely will be more fundamental and rather indirect; likely it will be in the form of changing business practices; i.e. given that traveling and frequent, close human interaction (including impact on crewing) will be curtailed for years to come, many business practices will have to be adjusted. There is a very strong likelihood that COVID-19 will be a great catalyst for implementing new technologies in the shipping industry. There have been many technology start-ups working on several facets of the shipping industry; COVID-19 likely will be the catalyst that will force companies to experiment and adopt such technologies, out of goodwill and out of necessity. Likewise, the EGS cause (Environment, Governance, Social) will also get a big boost, now we all have seen proof that (shipping) business and EGS go hand-in-hand. Recently, our blog had hosted a prescient article on EGS and shipping by Mr Yves Kallina (“COVID-19 and Shipping: Not a Time to Put Sustainability in the Backburner”); from investors demanding more accountability and immunity against threats from EGS-related business disruptions (and also making sure their portfolio companies will be best positioned to profit) to a more aware and engaged citizenry, COVID-19 may have a very bright silver lining. COVID-19 and new technologies for shipping is a very big topic and definitely our blog will have more in the future.
COVID-19 Implications by Sector in the Marine Industry
a) U.S. Domestic Shipping and the “Jones Act” Market
The domestic shipping market (“Jones Act”) market is by definition more insulated from the volatility in the world’s shipping markets, and its high barriers to entry make it overall disciplined market than the buccaneering attitude traditionally prevailing international shipowners; as such, the impact of COVID-19 likely to be less impactful than on international shipping. For sake of an easier analysis, we view four categories: a) inland and brown water shipping (mostly dry bulk and tank barges) b) coastal trade (mostly tank barges) c) ocean going Jones Act shipping, and d) offshore shipping in the U.S. Gulf. Inland barging so far has not as negatively impacted by COVID-19 as industrial growth numbers may suggest, mostly as dry bulk barges have been acting as substitute for trucking in the short term and tank barges keeping busy with refinery over-capacity issues; looking forward, as this sector handles grain barge shipments downstream the Mississippi River for export (that is China and Phase I of the trade agreement), China most definitely will only be buying a fraction of their promised U.S. agricultural quotas, thus there is little hope for a strong market this year. Coastal and ocean-going Jones Act shipping is mostly energy-driven (shale production and also gasoline consumption, thus consumer-driven), in the short and intermediate term share the good fortunes of storage usage and contango and arbitrage of the international tanker market, and almost enjoy 100% utilization; however, looking beyond the next six months, unless there is a robust recovery in consumer spending, these two segments likely to deflate as well. As far as the fourth segment, offshore, its fortunes are highly correlated to the price of oil and drilling activity, and as discussed later under “Offshore and Drilling Industry” for International Shipping, the prospects of the market likely to match the pessimistic scenarios, barring a completely turnaround of the segment for some unforeseen reasons. The silver lining with the Jones Act market, once again, is that there is limited shipbuilding capacity for high specification assets and their replacement cost is easily several-fold of international market shipping assets, thus limiting speculative orders and oversupply. And, if this is any comfort at all, the Jones Act market being highly correlated to the fortunes of the U.S. economy, it’s more reactive to domestic policies that are easier to understand and model than the international shipping market which, at times, seems to be a case study for the butterfly effect.
b) International Shipping
i. Cruiseship Industry
For the average person, COVID-19 came to their lives via TV images of cruiseships in Far East in early February with thousands passengers onboard and in search of ports of refuse. Since then, effectively the entire world cruiseship fleet has been idled either under state mandates or “voluntarily”, with the Port of Miami, the hub for Caribbean cruise excursions having run out of docking space. Cruisehip liner companies have shifted to a cash preservation mode and have been even postponing planned drydocks and maintenance, which sounds counter-intuitive for not utilizing the idling time of their ships to get done with maintenance; it would appear that hard cash preservation is preferable to utilizing idling time, at present. Several major cruiseship liner companies have looked for US government “bailout” help, but given their foreign incorporation and registry of their ships, the optics was just too bad to accept. The truth of the matter is that brand-name cruiseship liner companies have large balance sheets and are capable of borrowing more – and a few already have been issuing new bonds and drawing down on lines of credit – and they easily have a year’s time for cash burn. As bleak as the situation is with the cruiseship industry, the truth of the matter is that this is a very resilient market (after all it bounced back from 9/11 with vengeance and outperformed commodity shipping). Expecting a staggered and localized recovery of the tourism industry, boutique and luxury cruiseship companies as well as riverboats and locally focused cruising will be the first one to recover, before brand-name companies with their megaships will be comfortable enough as destination for the “cattle class” cruising business. However, middle market cruiseship companies with little brand recognition likely to phase existential crises, and already a couple of smaller operators have approached alternative capital providers for financing at a high cost of capital.
ii. Offshore & Drilling Industry
The offshore and drilling industries, both domestically in the U.S. Gulf (USG) and Gulf of Mexico (GOM) and also internationally, had been plagued by chronic vessel oversupply, under-utilization and low daily rates for several years now. 2019 was a year of a hopeful and slow recovery that eventually was pushed into 2020. The precipitous drop for energy demand due to COVID-19 and also, and probably more surprising for its timing, the OPEC oil price wars, have driven oil prices to their lowest levels in several decades. For the foreseeable future, there is minimal hope for a recovery in the offshore and drilling sectors, but again, the baseline for asset pricing and daily rates have been set so low, that there is little room for disappointment; the impact on this market segment is mostly felt in betrayed expectations for a 2020-recovery, and being especially detrimental to a few players in the industry that were low on cash and high on hope for a recovery in 2020; but, again it’s known that hope is not a strategy proper. Most likely, there will be restructurings and bankruptcies in this space, and already Diamond Offshore – a Houston-based drilling company with fifteen drillships under its ownership – filed for Chapter 11 bankruptcy protection on April 26th, 2020. Hornbeck Offshore had preceded them by a month for their filing.
iii. Tanker Market
Several of the drivers in the offshore and drilling markets are active in the tank market as well, but with a twitch: indeed, demand for energy products (crude oil, petroleum products, natural gas, liquefied petroleum gas) has collapsed due to COVID-19, and the expectations have been fair for this market segment. On the other hand in a world awash with crude oil and petroleum products (combination of low demand and oil price wars between the Saudis and Russia), finding a place to just store excess inventory has been proven to be a life line: by some measures, world daily oil production is 90 million barrels per diem while world oil demand is just 75 million barrels per diem; until there is an equilibrium, the oversupply implies seven VLCC (Very Large Crude Carriers) supertankers per diem just to store the excess crude oil; crude oil oversupply has permeated the supply chain, and to a certain extent, there has been excess gasoline, jet fuel (anyone is flying these days?) which means that petroleum product tankers are also benefitting from a strong market. VLCC daily rates stand at approximately $150,000 pd now and have ranged between $250,000 pd a couple of weeks ago and $30,000 pd a couple of years ago. It's a great bonanza for shipowners with open tanker tonnage in the market for the moment, but again, there is limited actual demand for multi-year tanker charters. For tanker owners, enjoying each day or month at a time and hoping that the contango and storage story will outlast the period for a COVID-19 recovery is still a profitable strategy, at least temporarily.
iv. Dry Bulk
The international dry bulk market as pure commodity shipping has been plagued by a prolonged tonnage oversupply and with barely profitable rates for almost five years now. Demand for raw materials and commodities (ranging from grains to steel products to iron ore) will continue as they are fundamental materials for daily life, but the rate of the demand will be driven by COVID-19’s recovery scenarios; likely certain commodities, like grains, to be more in demand than other commodities, like iron ore, all being equal, but still the market will mostly be driven by tonnage oversupply, lack of differentiation and all the characteristics of what economists call perfect competition. Lack of shipbuilding activity likely to benefit the industry from continued excess shipbuilding and tighter and costlier financing will force smaller owners to leave the market.
Parting Thoughts
One should be expecting gigantic implications from COVID-19 that yet we have to fully comprehend. Implications will range from personal choices and lifestyles to certain industries having to fundamentally re-evaluate their value proposition. For transport industries such as the marine and shipping, whether domestically or internationally, it’s hard to see any existential threats as shipment of products, commodities and people will have to exist post COVID-19; on the other hand, under scenarios of a global recession of epic proportions or scenarios whereby more services can be provided remotely, one has to be more cognizant of the lurking risks of a changing environment. Likewise for capital providers and financiers and also for service providers in the marine space, sorting carefully through the risks and planning a moderate course may be the distinguishing factor between a good and a bad deal.