Because of its impact on world trade volumes, the coronavirus epidemic has had a massive impact on regular line shipping on and has heavily disrupted supply chains. What form will recovery take in the sector after the first worldwide wave of the coronavirus? Here is a first response based on three possible scenarios.
Although they are still groggy from the effects of the Covid-19 epidemic, our economies are starting to trace the outlines of the world after the coronavirus. What lies ahead for the container shipping sector? Although attempting to provide a response to this question is a highly risky exercise, so unprecedented is the state of economic and geopolitical uncertainty into which the crisis has plunged us, we propose three possible scenarios. We should say from the start that the most pessimistic of them, happily, also seems to us to be the one least like to become reality.
It is very like that the future will mix elements from all three scenarios but, whatever hypothesis we adopt, we expect global container trade to contract in 2020 and beyond, although the degree of contraction will vary according to geographical region. Growing political, commercial and diplomatic tension with China can lead under a best-case scenario to a rebalancing of trade and under a worst-case scenario to China finding itself relatively isolated for a period. The coronavirus epidemic is having an electroshock effect. States and major groups have suddenly become aware of their excessive dependence on China, which could result in an acceleration of the trend towards nearshoring and the search for alternative supply sources, along with radical changes in the organisation of life in society.
The market fundamentals before the crisis
Before talking about the different scenarios, let us describe the state of supply and demand as it was before the crisis.
On the supply side:
- Capacity was structurally greater than demand
- Three shipping alliances accounted for 80% of the market's needs
- Supply was mainly China-centred as it sought to meet the needs of the "world's factory"
- Ship speeds were being reduced
- Ships had been getting ever bigger over the previous 15 years in a drive to reduce costs per container carried
- An increasingly marked East-West distribution among shipping lines, with the East in the lead and China predominant
- Low levels of operational profitability and capital requirements which were becoming increasingly difficult to meet via banking pools, resulting in recurrent debt problems and direct or indirect state intervention
- An industry which had finally opted massively and collectively for energy transition via the adoption of cleaner fuels from January 1 2020.
On the demand side:
- The container, mainly the 40' high cube multimodal container, was the standard loading unit for 80% of the planet's shippers.
- The cost of transport was affordable despite the concentration of supply.
- There were two main sorts of shipper: those who negotiated directly with the shipping companies on the basis of minimum traffic volumes of about 50,000 teu per year, and those who handed over their cargoes to forwarders and logistics operators (third- and fourth-party logistics).
- Cost choices which always overwhelmingly favored the long-distance global model even though nearshoring had started to catch on in certain sectors looking for more secure supply lines.
- Huge investment by shippers in supply chain management and optimisation tools like those provided by SAP and Oracle, which integrated to a limited extent the shipping business and its relative volatility.
- The need to take account of disparate seasonal factors which varied according to the sector of activity.
- A slowdown in the growth of retail cargo volumes in recent years after 30 years in which retail had driven the explosion of growth in the container trades.
- Strong growth in demand for temperature-controlled transportation which was exceeding capacity.
Scenario 1: "Business as usual" with some adjustments…
Under this hypothesis, the recovery takes place on roughly the same basis as before the crisis. The shipping companies, which are already in a fragile state, continue to suffer. The imbalance between supply and demand, which was already very unfavorable to transporters before the crisis, worsens as a result of the lack of commercial and industrial activity during the lockdown period.
One can reasonably suppose that, under this scenario, companies would make even greater use of the policies they were already using to correct the imbalance. They could reduce capacity to the extreme by lengthening Asia-Europe transit times even more and using the Cape Route, while continuing at the same time with their blank sailing programmes. Capacity would only be restored if there was a clear recovery in demand. Is this deliberate, coordinated reduction in capacity compatible with competition rules? For the time being, the movement does not seem to have provoked much reaction, at least on the part of the European authorities. On the contrary, the consortia block exemption from which regular line operators currently benefit has been extended for four years. The conference era is not far behind us…
Mathematically speaking, with a marked recovery during the summer and a good second half, it is still possible to just about "save" the year under this scenario in which companies' yield management in the main force. This supposes that there is no major second wave of the epidemic, no further lockdown and that consumption returns to a level at least identical that of the previous year from mid-May on. If all these conditions are met, this scenario will enable the status quo to be maintained and a new Hanjin-style bankruptcy - a real risk today - to be avoided. The Top 10 shipping companies are locked into a logic of acquisition of mega container ships which prevents them from envisaging a reduction in overcapacity. As a result, their agility and adaptability have been reduced over the long term and they are showing themselves endemically incapable of responding to the need for speed expressed by shippers who want to catch up on the time lost at the height of the crisis.
For shippers, this scenario is not good news. Demand is being called on to adapt and continue to pay at least current prices for a less good service and longer transit times despite fuel prices being at an all-time low. In other words, shippers must take what they get. Their only choice is to go to companies which are in the least dire financial straits so as to reduce to the minimum their risk of suffering a break in their supply chains. This could lead, moreover, to the creation of a wider range of rail container services via the New Silk Roads as an alternative to all-shipping solutions. There has been a marked trend in this direction, moreover, since the start of the year.
It remains to be seen if all the shipping companies will continue to play the game. Some could be tempted to take a more client-orientated approach using differentiated services. Their room for manoeuvre will depend also on the direct or indirect aid they might receive from their home countries to help them weather the storm.
For the time being, this scenario, which we think has a 50% chance of being realized, seems to be the most likely one. It would involve a fall of -5% to -15% in container volumes worldwide, the reference value for the moment being -11%, according to the latest IMF projection, which has been adopted by the International Transport Forum. If this is confirmed, it would mean a further advances by China, which is quietly continuing to build up its port network in eastern and western Europe and on the African continent, which is consolidating its role as a distribution hub at Europe's southern entry points, alongside the New Silk Roads and the 17+1 initiative on the eastern European side. The next step could be a switch from FOB to CIF trade contracts for Western retail, enabling China to exercise control over these trade flows.
Scenario 2: a gentle break with greater use of nearshoring
This second scenario is based on Europe waking up to its vulnerabilities, as highlighted by the crisis, even if they were already present in latent form. This would involve a new political drive towards European regeneration, with some additional slowing of the Brexit process and the reestablishment of control over those European Union countries which have responded a little too eagerly to Chinese siren calls in their national partnership strategies.
We would see a certain amount of state interventionism in key trades, given that Europe has become aware of the importance of being independent in securing supplies of essential goods like medicines and high tech products but also in meeting the needs of certain low tech sectors like fossil fueled motor vehicles and textiles. On this basis, nearshoring, notably via the Maghreb and eastern Europe, which is already under way, will accelerate. To this can be added another realization regarding the importance of Western and African production to meet the needs of the Chinese market for foodstuffs, minerals, rare earths and fine petrochemicals.
All this would lead to a certain rebalancing of intercontinental trade, with added value going to Western and African export products, and the end of China's role as "the world's factory", and the China-centred global industrial model.
From the shipping point of view, this would mean a fall in demand and in long-distance transportation of container cargoes. Shipping activity would change direction, leading to growth in short sea shipping. This gentle break scenario would involve greater investment in the short term but would offer a greener outlook. It would also need to make massive use of roads and rail. It raises a major question, moreover. What should be done with all the ships of 20,000 teu and more, most of them nearly new and not yet amortized, as demand switches naturally towards 10,000 teu and 14,000 teu vessels? The major companies are going to need to think about scrapping.
For shippers, this will mean a major change which will bring better transit times and a better carbon footprint, as well as reduced dependence on conventional long-distance sourcing. In return, they will face higher direct costs, at least in the short term, as new trade flows are brought into being. This scenario, which we see as having a 35% chance of becoming reality in 2020, would only produce results in 2021-2022. The worldwide fall in maritime container volumes could reach 10-20% in 2020 and could be even greater in the two following years.
Scenario 3: Faster deglobalisation
Our final scenario is based on the hypothesis of an Atlanticist recoil, of which Europe could be a part, in the face of the designated enemy, China, as revealed in the photographic sense of the term by the coronavirus epidemic. The West could take the view that its lifestyle based on individual liberty is under threat and seek to distance itself from China and its ambition to establish its ideological and economic leadership over the planet. China would remain the key player in the intra-Asia region and Russia would remain neutral…or not.
We would then see a speeding up of deglobalisation, reinforced by an extremely high level of environmental awareness coming from the younger generation. The return to more fundamental and rational needs, which was learned during the lockdown, will be confirmed. We would also see a reorganization of territorial planning, encouraged by extensive use of working from home and a massive return to the countryside. Local development would rely on low-tech solutions.
This scenario would result in a massive worldwide economic recession and, with it, a very high risk of the development of populism and greater distrust of the authorities. If such a situation were to develop, the effect on shipping would clearly be dramatic. No major company could withstand such a scenario. All would be forced to undergo radical restructuring and to seek the protection of their home states to obtain business based mainly on the prerogatives of the state in the provision of transport links to islands and trade with friendly regions.
This catastrophic scenario, which would result in a 30-50% fall in worldwide shipborne container volumes, has not more than a 15% chance of becoming reality, according to us. But it cannot be totally excluded, as can be seen by the sometimes extreme claims which have been made in recent months by the United States and China.