SeaIntelligence’s Jensen says, despite Coronavirus, China’s recovery is inevitable but exporters to China will suffer.
Despite the impact of the Coronavirus slowing growth, it is inevitable that the Chinese economy will recover and create “a spike in exports and imports,” but in the short-term U.S. and other exporters to China will experience uneven demand, higher freight rates and a shortage of containers, maritime analyst Larsen Jensen predicted.
Also, smaller ocean carriers will be more exposed to cash flow problems than larger ocean carriers with deep pockets.
China Recovery Is Inevitable
In an interview with AJOT, Jensen, a partner at SeaIntelligence Consulting based in Copenhagen, said that China is slowly resuming production as the worst effects of the Coronavirus wane. The result is that China’s exports will gradually revive as well as its capacity for imports: “People in China and around the world have to work and have to eat and so nothing has fundamentally changed.”
Jensen said: “It is vital that people realize that the fundamentals of the global economy remain strong and that people shouldn’t panic. The old adage is still true: ‘the only thing we have to fear is fear itself.’”
He was referring to the exhortation made famous by U.S. President Franklin Roosevelt rallying the American people during the Great Depression of the 1930s.
U.S. Exporters Will Suffer from Higher Rates and Container Shortages
Jensen says he expects a gradual increase in economic activity that will see more container loads flowing to and from China: “The short-term problem will be that exporters to China will struggle with uneven demand, a shortage of empty containers and higher freight rates as ocean carriers rush to transport empty containers back to China to meet increased production.”
“The prioritization of shipping empty containers to China is vital because the higher rates per container are derived from transporting outbound goods. The carriers have their eyes on the prize …empty containers” he explained.
Conversely, “carriers will assess higher freight rates for the backhaul (i.e. on U.S. and other export containers)” as they reposition empty containers back to China.
Once the capacity for Chinese producers is back to normal, the container shortages and related ocean freight hikes should diminish, he said.
Smaller Ocean Carriers Face Cash Flow Problems
At the same time, smaller ocean carriers “will experience cash flow problems because they have not been able to invoice customers during the Coronavirus outbreak and when you can’t invoice, you can’t make money.”
Bigger Carriers Will Fare Better
The bigger ocean carriers are in the best position to weather the economic storm:
- They have deep pockets.
- The carriers were able to quickly reduce sailings so their exposure to the current downturn was minimized.
- They will have a pricing advantage as shippers struggle to find ships to transport their goods.
- The consolidation of large ocean carriers into a small number of alliances helped these carriers respond faster to the current economic downturn than in 2008: “After the 2008 downturn, it took the carriers months to reduce sailings whereas in 2020 it took days to blank sailings.”
Another silver lining for the ocean carriers is that shipper resistance to the carriers raising their rates to pay for lower sulfur diesel fuel, required by the 2020 International Maritime Organization (IMO) mandate, has dissipated: “you can’t object to paying higher rates when you can’t find ships to carry your cargo.”
Jensen says that he expects ocean carriers with the biggest business in the inter-Asia trade to suffer the worst from the slowdown in China because so much of that trade is China dependent.
Advice for U.S. Ports
Jensen advises U.S. ports, experiencing a container volume drop, to be patient and allow global economies to get back to normal.
