[100320.EN.BIZ] Covid-19 Outbreak Could Delay Annual Ocean Shipping Contracts

WITH the fallout from the Chinese factory shutdown, unknown consumer demand effects from the coronavirus, volatile fuel costs due to the IMO 2020 regulation, high debt levels among carriers, a collapsing stock market, and to top it all off, the trade war isn't over yet, the degree of uncertainty within the US container shipping industry is now verging on the surreal.

In an interview with New York's FreightWaves, Jim Blaeser, a director in the transportation and infrastructure practice of global consultancy AlixPartners, questioned how annual shipping contracts could be negotiated with all these uncertainties.

He pointed out that talks between carriers and shippers on annual contracts often begin at the TPM conference in Long Beach, California - an event that was just cancelled due to coronavirus. "It really says something that we can't even get together to start figuring this out.

"It's going to be a wild year. I don't know how you can set a price today between a shipper and a carrier for a 12-month contract that anybody can feel they have any certainty on.

"Typically, if the market is pretty clear and frankly, if it is favourable to the shippers, the shippers will contract early," he explained. "They'll get contracts done in April. If they're not certain, they may not finalise contracts until June. This year, I can't imagine that anything will get settled until late May or early June - and a lot can happen between now and then."

That timetable implies some of the uncertainty around coronavirus and other issues will clear up in the next few months. "If the world continues to become increasingly uncertain, then all bets are off and we'd start to enter the territory where we're shipping off-contract.

"But even so, if you're a mega-shipper, your freight is still going to move. It's just a matter of with whom and what you're paying. It's not like the world ends in a stalemate if you dont have a signed piece of paper. And it's not like it would be totally unheard of. There is a spot market on the trans-Pacific and most of the European trades work on more of a spot-market basis anyway."

A pivotal timing question is: When will a return to normalcy for the Chinese export system lead to a catch-up period of increased freight demand? When that happens, the carriers would want to be in position to charge higher rates to compensate themselves for what they've lost.

"If you lose several weeks in a 52-week cycle, it's significant," said Mr Blaeser. "Shippers are going to be desperate to get their cargo moving and get their inventory levels back to where they need them and carriers will need to be opportunistic to recover their profitability for the year."

There is increasing confidence that Chinese factories and transport systems are normalising, but this headwind is being supplanted by demand risks in consuming nations such as the US as the virus spreads. "The more this [coronavirus] takes root here, the more were trading one problem for a different problem," said Mr Blaeser.

Source :HKSG.