How will Coronavirus affect Dry Cargo Shipping in 2020

When trying to assess the impact of a black swan event like Coronavirus, there is little initial data. We’ve not seen anything like this before. We can compare to other viruses, like SARS or Spanish flu but nothing has had this impact in our interconnected world.

This article will try to assess dry cargo demand changes and make a prediction… gulp! It is difficult to do but its worth trying to establish a base case and we can monitor it throughout the year to see how we get on.

Useful Data Sources

In the opening paragraph I alluded to the lack of information so far. The conclusive data will be the customs data for recorded imports and exports for each country. Until then we only have the Baltic Dry Index (BDI) and other `on the ground’ indicators.  

The BDI is not really much use as an indicator in a falling market when it was already low. A surplus of vessels is the obvious situation, so rates are at rock bottom and vessel profit margins are squeezed. More useful indicators are what’s happening on the ground in China. Capital Economics website show some interesting graphs. It seems most factories and manufacturing facilities have virtually stopped. Coal power consumption has fallen 30% in February. Daily car journeys have fallen from 80 million a day to 15 million. Although these events are fairly normal for Chinese New Year, its not normal to continue throughout February. It indicates most people have not returned to work.

As approximately 30 percent of global dry bulk trade is with China, this will obviously make a huge dent to demand for all types of vessels. Factories are no longer making steel, pushing the Capesize down. Panamaxes are no longer taking as much coal. Handysize and Supramax’s which bring all the other essential raw materials like grain, forestry, ores and minerals will also be affected.

A Template for 2020

So, what template do we have to predict the future? Well, the Vale dam disaster last year provides some good reference points to build a base case.

The Brumadinho dam disaster happened on 25th January 2019, a similar time of year to the outbreak of covid-19, twelve months later. When the dam slipped exports of iron ore from Brazil fell by approximately 50% for many months after the incident. This was a great opportunity for the Australian miners who picked up the slack in Q2. The interesting thing to note for dry cargo shipping is the distance from Australia to China is approximately 3000 nautical miles. Compare this with the 10,600 nm from Brazil and in effect you have an immediate sizeable demand shift which moved the market.

The impact of this for global iron ore trade was a 13% fall, QoQ, in tonne miles ™ for the first quarter. The second quarter bounced back by 9% in volume but only 3% in tonne miles. This was due to the shorter distances. By the third quarter tonne miles grew a further 11% because all the Vale mines were back on tap. In real terms it was just a 3% growth in volume but the distance made the difference. As a result, the Baltic Cape Index recorded the highest level for nine years with a TC average rate of $38,000 in September.

Why is this event interesting? Well, I believe it can provide us with interesting template for the year ahead. The timing with the Chinese New Year was a coincidence but a useful one. The natural cycle of the year plays into our hands, from an analytical perspective.

So, we know that China closing its doors in February is going to have a dramatic effect. The government are encouraging people back into work as this article is written in early March. New cases of covid-19 are declining. The State’s hard enforcement tactic seems to be working. We can therefore expect people to return to work throughout March and activity bouncing back in economic terms in the second quarter.

Virus experts seem to suggest that the natural northern hemisphere summer will slow the spread. This means with the containment strategy being deployed, it’s reasonable to believe this episode will close to disappear in the summer and return next winter. A vaccine will likely be ready in nine months to one year so it’s reasonable to expect a few round of outbreaks and containment during the winter months next year.

Baseline Prediction

Based on the emerging story so far and using the iron ore template from last year, with little real data to back up assumptions, here is our prediction for the dry cargo market.  I’d estimate a 15-20% fall in Q1, followed by a 15-20% rise in Q2, followed by a further 5-10% rise in Q3, followed by a 5% fall in Q4, assuming the virus re-establishes itself.

Its important to note the overall effect of this event for the year. If the virus spreads to more countries and sections of society locks down, loss of income will affect peoples spending power. This in turn means they will buy less and the raw material demand will decline. Based on this assumption, we’d expect to see a 3-7% fall in dry cargo demand in 2020.

We’ll monitor this prediction throughout the year and obviously in such an event driven situation its impossible to say with any real certainty how things will pan out. Do note, early April will be an interesting month when we get the first customs datasets for February. Then we can start to measure the true effect of this episode.

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