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Article: Spotlight on the impact of Covid-19 on the bulk carrier freight market
22 June 2020
The first six months of 2020 have been marred with uncertainty
for bulk carrier vessel providers and the freight rates they can
achieve, with the market having been significantly affected by the
impact of macroeconomic events on key supply and demand drivers.
Ongoing developments in the supply of oil have combined with a
steep drop in demand caused by the Covid-19 crisis, leading to a
softening of freight rates through the first two quarters of the
year.
Back in early March, the OPEC-led (Organization of the Petroleum
Exporting Countries) supply pact collapsed which temporarily ended
three years of cooperation and started a battle for market share. A
free-for-all ensued, with total production among OPEC members
increasing to an average of 30.25 million barrels per day in April
(bpd), up 1.61 million bpd compared with March. April's output
represented a 13 month high for OPEC. Producers ultimately agreed a
new cutback agreement from 1 May, however the dramatic oversupply
of product into the market in the preceding month, coupled with
demand for oil collapsing due to Covid-19 lockdown restrictions,
caused the oil price to tumble. In late April, the price of West
Texas Intermediate (WTI) crude oil for delivery in May fell briefly
into negative territory as concerns over storage availability
rattled the market.
As briefly mentioned above, the oversupply of oil barrels and
its impact on oil prices was compounded, concurrently, by an
enormous reduction in demand for oil due to the implementation of
lockdown measures imposed to stem the spread of Covid-19 globally.
Travel was greatly restricted, reducing the number of planes in the
sky and vehicles on the road, and significantly for bulk carrier
vessels, many ports around the world introduced lockdown and
quarantine measures of their own. In India, many ports declared
force majeure in late March as the country began its lockdown,
while China, the Philippines, Indonesia, Australia and South
Africa, to name a few, all banned crew changes and ordered
quarantine period for ships coming from ports belonging to
"countries at risk." These measures sparked nervousness among
charterers moving material due to worries over whether they will
have to pay for delays due to any coronavirus-related logistical
complications such as enforced quarantine periods.
Covid-19 lockdown measures led to a dearth of demand for bulk
carriers from charterers, and a comparatively high of supply of
available bulk carriers from vessel operators which, combined with
the drop in bunker fuel costs, led to a sharp decrease in freight
rates.
Impact of Covid-19 on key fertilizer freight rate
indications
As illustrated in the graph, in mid-March the freight rate for a
25-30,000 t bulk carrier travelling from the Baltic to Brazil was
indicated at $22-23/t. This is around the exact time when oil
production globally was increasing, leading to lower oil prices and
which ultimately translated into lower bunker rates for vessels,
thereby allowing operators to reduce their rates. Also, at this
time lockdown restrictions were beginning to be implemented by
countries all over the world, greatly reducing the demand for bulk
carriers as consumption of non-essential goods collapsed. While
grains and fertilizers were designated as essential goods and thus
largely exempt from lockdown restrictions, there had been concern
that export quotas out of former Soviet Union states for grains
could reduce demand for ships moving grains. At times of low demand
for vessels, rates will fall as operators try to entice business
through lower prices, and looking at the graph we can see this is
how it played out. At the start of April, the freight cost estimate
for the Baltic-Brazil route had fallen from $22-23/t in mid-March
to $16/t, before falling further as April progressed to as low as
$13/t.
A similar trend was witnessed in the chemical tanker space, with
demand and general activity reported to be greatly reduced mid
March as lockdown measures were being implemented. Fixing and
organising the logistics for many shippers and brokers was also
understood to be taking longer than usual per ship, partly due to
reduced worker availabilty in order to comply with new social
distancing rules.
The uncertainty in the chemical tanker market has continued into
June, with the timeline of recovery in post restrictions Europe
unclear. Many downstream chemical producers and manufacturers in
the automotive, household, yearn and textile and electronic
industries have high stock levels and will not be in a position to
move a significant amount of material until end-user demand
improves.
With countries beginning to move out of lockdown and loosen
restrictions, along with the gradual recovery of crude oil prices,
bulk freight rates have shown signs of recovery in recent weeks.
Vessel supply and demand looks to be rebalancing as counties open
up and try to return to as close to "normal" as possible. Looking
again at the Baltic-Brazil line in the graph, we can see that after
hitting $13/t again in mid-May the rate has been firming, last
reported at $16-18/t. This indicates that demand for bulk carriers
is recovering, allowing operators to achieve higher rates. Similar
trends can be seen with Vancouver-China and Middle East-China rates
also illustrated in the graph. Vancouver-China rates have recovered
to $15/t from a low of $11/t, while Middle East-China rates have
improved significantly to $21/t, up from $12/t in late April.
Nevertheless, the outlook for the bulk carrier shipping market
remains somewhat unclear and will be heavily dependent on how long
lockdown measures and travel restrictions persist. Demand for
transportation, which according to BP accounts for around 55% of
global oil demand, is not expected to rebound to pre-Covid levels
quickly. The impact of lower demand for transport will add to the
decrease in demand for fuel caused by diminished economic activity.
With demand for oil globally reduced, it is therefore not
unreasonable to expect that it may take some time for freight rates
over some routes to recover to pre-pandemic levels.
With the potential of a second spike remaining a credible threat
in some regions over the coming months, the freight market will
undoubtedly be keeping a keen eye on any future developments which
could throw the industry back into limbo.