Indian Shipping Industry: Tiding over the Corona crisis

Shipping Industry
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As the Nation comes together to slow the spread of the novel coronavirus, the government has taken the drastic step of suspending all visas for entry into India and restricting the arrival of people from abroad. These steps were taken under the directions of a Group of Ministers (GoM) under the ambit of the 1897 Epidemic Disease Act under which the government can detain people or vessels that come from abroad. This has also affected supply chain of goods which includes necessary supplies for public interest. The guideline for all the ports, Major and Non-Major of the Shipping Industry have already been issued by the Director General of Shipping for dealing with COVID-19 pandemic including strict instructions to maintain proper hygiene and sanitation in their facilities.

Maritime transport is a critical infrastructure for the social and economic development of a country. It represents the pace, structure and pattern of development of water transport in the country. The Ministry of Shipping encompasses the shipping and port sectors which include shipbuilding and repair, major ports, national waterways and inland water transport.

To establish the criticality to India of its ship-and-port infrastructure (Maritime), one has only to look at the sharp rise over the years of the country’s ‘Merchandise Trade-to-GDP’ Ratio.  Various studies show that the average of Trade-to-GDP Ratio has risen in the period from 2000 to 2018, when compared to the decadal average from 2001 and 2010. This implies that with the passage of time — the concomitant increase in trade in ‘services’ notwithstanding — more goods are moving by sea than they were before. This has very significant maritime ramifications for India.  On the one hand, our merchandise trade (EXIM) now accounts for some 35% of our GDP.  On the other, 95% of this merchandise trade by volume — and 77% by value — is seaborne. India has an extensive 7,500 km coastline with 12 major ports and just under 200 minor ports, of which 140 are functioning. In addition, approximately 18 percent of India’s population (7.65 Billion) lives in 72 coastal districts. It comprises 12 percent of India’s landmass.

With international transport at the forefront of trade and dependent on travel and human interaction, the shipping industry has been impacted materially both directly and indirectly from the outbreak of COVID-19. Shipping is the life blood of the global economy and without it, intercontinental trade, the bulk transport of raw materials, and the import/export of affordable food and manufactured goods would simply not be possible but, since coronavirus has started, it has disrupted shipping which has affected global trade.

Impact on Global Shipping Industry

On 16th March 2020, Moody’s changed the Shipping Industry Outlook to ‘negative’ from ‘stable’ in the wake of the coronavirus outbreak. Moody’s expected the supply-demand balance to tilt toward oversupply for the container shipping and dry bulk segments, especially in the first half of this year. The situation is more positive for tankers at the moment given the recent sharp drop in oil prices.

Operations of shipping companies and related industries, including terminals, ports, etc., have been affected due to personnel being advised to refrain from traveling or reporting to work. Lower demand for commodities and raw material, and thus need for shipment, has pushed freight rates lower. Several shipping companies have started warning about reduced earnings visibility and weak future earnings results. Cruise, travel, and related industries, i.e. conferences, etc., have also suffered, and it’s noteworthy that North America’s largest container line conference, Trans-Pacific Maritime TPM2020, was cancelled, literally on the eve of its opening.

There do not seem to be any segments of the shipping industry so far, immune to COVID-19. There have been headlines about cruise ships not being allowed to port, and placed under quarantine for weeks. Commodity vessels, such as dry bulk and tanker vessels have seen lower demand and lower freight rates. There have been reports that Very Large Containership Vessels (VLCVs) are leaving Chinese ports filled to just 10 percent of their capacity.  With lower demand, crude oil prices have collapsed, which will further exacerbate the bad state of the offshore drilling industry. The shipbuilding and ship repair segments have collapsed; shipping finance and ship brokerage have also been affected as they involve travel and also require some momentum and enthusiasm, which presently are in low supply. The shipping legal profession has been pouring over charter parties and exploring the possibility of whether COVID-19 can constitute force majeure, a variable with innumerous implication to the charter market.

Given that freight market for dry bulk vessels and offshore drilling assets has already been weak for a while, it will not be surprising seeing COVID-19 catalyzing the filing for bankruptcy protection this year by a few financially unstable companies in these sectors. On a brighter prospect, a slow down for shipping finance and building new shipping activity can be welcome news by keeping tonnage supply from expanding.

Impact on Indian Shipping Industry

The coronavirus has had a major impact on the usually lowest-priced intra-Asia trade lanes, which typically meet much of the equipment repositioning for the region. According to domestic market research company ICRA, the COVID-19 outbreak has had an adverse impact on Indian export-import trade, given the scale of bilateral trade between India and China.

With a flurry of blank sailings in the offing and much lower inbound volumes, Indian shipping industry leaders generally expect container volumes to take a major hit during March and April due to the COVID-19, but anticipate a strong turnaround thereafter, subject to the crisis easing.

From JNPT/Mundra to Shanghai, average spot rates have increased to $150 per TEU and $200 per FEU from $100 and $150, respectively, around mid-February. Rate levels have also surged on the return, to about $650 per TEU and $850 per FEU from $400 and $500 three weeks ago. There have been complaints of shipment delays between India and China, there are serious concerns regarding the overall earnings of Indian shipping companies in the first quarter of 2020. There has been a sharp drop in the dry bulk cargo movement since the third week of January 2020, as the shutdown in China has meant that ships cannot enter Chinese ports. Capacity utilization at major Chinese ports has been 20 to 50 per cent lower than normal and more than a third of ports said storage facilities were beyond 90 per cent full, according to a survey conducted by the Shanghai International Shipping Institute, a Beijing-backed think-tank. The effects on the shipping industry are likely to prove lasting.

On the whole, the impact of COVID-19 is a negative for the Indian shipping sector and any recovery will be dependent on the demand recovery in the Chinese industrial segment, following the abatement of COVID-19. In turn, the reduced economic activity could result in a slowdown in bulk consumption and indirectly also affect bulk imports like coal, crude, and other commodities. Ports that have a significant exposure to the affected cargo categories could see an impact on their cargo volumes in the near term.

Conclusion

As the virus continues to spread, it remains quite difficult to forecast the medium- to long-term implications, yet the short-term consequences are clear: demand and freight rates are dropping. Full effect of the outbreak is still to be assessed as situation remains dynamic and Chinese mainland ports start work in a restricted manner with reduced workforce, same with India. Currently shipping sector is facing headwinds due to loss of trade which has resulted in daily hire rates being pulled down to below OPEX levels and this is more seen in the dry bulk trade. For Ship-owners, the situation is more drastic and additional incentives to have a greater share in coastal movement or imports may offset or allow a breathing space till the time economy improves.

India imports huge volume of components and raw material from China. Disruptions in supply of these items will not only impact the export manufacturing and assembly industries but also have an impact on the shipping and port sector as well, as ports account for nearly 95% of EXIM trade by volume in India.   

The port, port ecosystem, water transport and their supply chain partners are to be considered essential businesses and critical infrastructure as the nation comes together to slow the spread of COVID-19, these infrastructure has a role to play in protecting public health, safety and supplying necessary goods and facilities. If water transport ecosystem is disrupted, it will have a direct adverse impact on not only the other transportation functions but also the nation’s public living and economy as a whole. Hence, Maritime transport and its Supply chains – along with transportation, delivery and logistics networks – need to be sustained throughout the duration of this global pandemic to ensure that health care and medical supplies can reach hospitals and patients; essential supplies, services and food can get to families; and essential components can get to factories, distribution networks and consumers.


This article has been authored by Dr Abhijit Singh, Executive Director, Indian Ports Association.

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