Date: Thursday, July 1st, 2021
Source: Supply Chain Brain
Pandemic effects on global shipping — both negative and positive — are far from over. Worldwide cases have begun rising again over the past week, fueled by more contagious strains, including the Delta variant.
That’s bad news for the tanker shipping recovery and could also spur even more supply chain delays for U.S. importers of containerized goods, who are already grappling with COVID fallout at the port of Yantian, China.
More challenges for container supply chains
Multiple Asian countries that produce U.S. containerized imports are now seeing high infection rates.
Malaysia, a significant player in the furniture sector, has been under a strict lockdown since early June. The lockdown has just been extended.
A seven-day nationwide lockdown in Bangladesh begins Thursday. According to Panjiva, a division of S&P Global Market Intelligence, “The renewed spread and resulting lockdown will have an impact on industrial supply chains as factories will likely have to close and may suffer reduced productivity.” Levi Strauss (NYSE: LEVI) and H&M are among the retailers whose shipments could be affected by the Bangladesh lockdown, said Panjiva.
Cases caused by the spread of the Delta variant are also surging across Indonesia, another supplier of U.S. goods. The Red Cross said on Tuesday that Indonesia was “on the edge of catastrophe.” On Thursday, Indonesia announced a strict lockdown from July 3-20 covering the most populous islands of Java and Bali.
The situation is also worsening in Thailand, where a record number of daily cases and deaths were reported on Wednesday.
In China, restrictions at the Port of Yantian in the first three weeks of June will reverberate across U.S. import supply chains for at least another month. Amazon (NYSE: AMZN) is particularly exposed to Yantian fallout, according to Panjiva.
COVID-driven supply chain issues have been highly disruptive to U.S. importers’ transport timelines. Yet COVID has only been a negative for container shipping demand in the immediate aftermath of initial 2020 lockdowns in China, Europe and the U.S.
Since then, import demand has been robust and disruptions to supply chains have served to decrease effective capacity of ships and box equipment. For shipowners and operators, that has led to record-breaking freight pricing and charter rates. For cargo shippers, it has led to a one-two punch of exceptionally high transport costs and exceptionally poor service.
Tanker depression could last longer
The tanker shipping industry has been mired in a severe depression since Q4 2020. It is now entering the traditionally slow third quarter — and the variant-driven COVID resurgence reduces the chance of a recovery in the fourth quarter.
“Rising COVID cases [have] hit Asia’s transport fuel demand,” reported Argus Media. It said that the lockdown in Malaysia has already caused the deferment of some gasoline import cargoes and that Bangladeshi fuel oil imports could be curbed. Argus also noted that Indonesia, which is about to go into lockdown, is the largest gasoline importer in the Asia-Pacific region.
COVID is also causing more cuts to international air travel, a negative for jet-fuel demand. This week, Hong Kong halted all flights from the U.K. and Turkey halted all flights from Bangladesh, Brazil, South Africa, India and Sri Lanka.
Since the onset of the pandemic, the loss of jet-fuel demand has been the biggest headwind to tanker rates. “Demand for jet fuel in Asia is currently being dampened by outbreaks of COVID-10,” said Argus.
According to Alphatanker, “Much rests on the fortunes of the commercial aviation sector in H2 2021. Data have started to point to a gradual recovery, however, long-haul flights continue to lag. Our forecast assumes a modest recovery in kerosene [jet fuel] demand. We still consider kerosene this year’s largest risk to the demand forecast.”
Alphatanker warned, “Even under a best-case scenario of tanker demand increasing at a faster-than-projected clip, it will be very difficult for tanker rates to strengthen significantly by the end of this year.”
One reason is newbuilding deliveries. “This year has already seen 104 new tankers launched, totaling 14 million DWT [deadweight tons], broadly on par with the average number of deliveries in the first half of each year across 2000-20. Indeed, new deliveries have been one of the major reasons keeping tonnage lists low across the globe, which in turn, has fed into low hire rates and earnings.
“The second half of the year is expected to see deliveries accelerate slightly. Even accounting for delivery slippage, we project that another 121 ships totaling 13.1 million DWT should be delivered by the end of December,” said Alphatanker.
Even before the recent spread of COVID variants, the tanker rate depression had already been deeper and longer than many analysts had originally predicted.
As of Wednesday, Clarksons Platou Securities put spot rates for very large crude carriers (VLCCs, tankers that carry 2 million barrels) built in 2015 or later at $10,100 per day and rates for modern Suezmaxes (tankers that carry 1 million barrels) at $9,300 per day. To put that in perspective, Cleaves Securities calculates the all-in cash breakeven for such tankers to at around $28,000 and $21,000 per day, respectively.
Brokerage Fearnleys said of the current VLCC market, “The week gone by has been like watching paint dry … with limited ‘above board’ activity and rates under pressure.” As for Suezmaxes, Fearnleys said, “There’s a familiar feel to the market this week, and it’s not a good one. After yet another false dawn, rates remain in the doldrums.”