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Multipurpose & heavylift shipping to stagnate on coronavirus impacts

Drewry’s latest forecast for multipurpose and heavylift (MPV/HL) shipping confirms that if the coronavirus (COVID-19) outbreak is contained by 4Q20, the expected demand growth for breakbulk and project cargo will stay positive but remain very weak.

However, there are a number of caveats to this outlook and in its latest Multipurpose Shipping Forecaster report, Drewry presents three different scenarios, depending on how the virus outbreak and the global economy develops over 2Q20. These range from the fairly benign best case, where the global economy picks up in 2H20 and with it dry cargo demand, to a negative scenario where COVID-19 is not contained over 2020, leading to a global recession. The base case scenario is seen as most likely.

Base-case forecast

Drewry’s base case scenario starts with the caveat that a global economic recovery will not begin until 4Q20.

Any recovery that had been anticipated for 2Q20 and 3Q20 is now expected to be delayed as some of the pent-up demand will have vanished due to both the longevity of the crisis and the oil market crash. The two events (COVID-19 plus the price of crude oil dropping below $30/bbl) have resulted in predictions of wide scale unemployment and company bankruptcies, which when occurring together reduce investment and the collective purchasing power of the world’s population.

The other key driver for the MPV/HL sector is the competition effect and the continued encroachment by container and bulk carriers into the breakbulk and project cargo space. Drewry expects a U-shaped recovery in container demand over 2021 under our base-case scenario. However, this will be tempered with continued oversupply issues in this sector, resulting in little weakening of the market share taken by the container lines. It is also the case that once the switch has been made to containerisation, shippers and receivers are reluctant to revert due to the initial investment costs. It is therefore our expectation that market share is unlikely to revert back to MPV/HL vessels but the pace of loss of that share will be slower.

As a result, Drewry expects MPV/HL cargo demand growth to stagnate in the two years to 2021, growing at an average annual rate of just 0.3%.

High-case scenario

The best-case scenario has, in our opinion, the least likelihood of becoming reality. However – for the sake of completeness – it proposes a modest but positive GDP growth forecast for 2020. It expects container demand to be weaker in 2020 but nevertheless to show positive growth compared to 2019. Meanwhile, bulk demand is hardly expected to slow over the summer months and will show steady growth over the year.

This low probability, high demand scenario suggests that although the MPV/HL market share is unlikely to be regained, the encroachment by the competing sectors is significantly reduced so that it does not worsen over the period. This leads to more buoyant demand growth for the MPV sector over the forecast period.

Low-case scenario

For the low-case scenario, which we have to say has an increasing likelihood of reality, we have anticipated a global economic recession over 2020. Large scale unemployment and business casualties lead to increasing uncertainty across global markets and a prolonged downturn in freight rates in the dry cargo sector.

For the MPV/HL segment this is compounded by weak oil prices, which remain at below $30/bbl for the foreseeable future. Demand for this sector is further squeezed by the container and bulk carriers and market share drops further. This leads to a negative demand outlook for MPV/HL vessels.

Figure 1: Scenarios – assumptions and outcome

MPV/HL fleet

The only stable factor in our outlook is the stagnation of the MPV/HL fleet. The COVID-19 outbreak is likely to have a negative short-term effect on demolition activity as ships are facing long quarantine delays. However, going forward any suggestion of a global recession is likely to increase demolition candidates. Our forecast for this sector is modest, with most of the activity in the older smaller, less heavylift capable parts of the fleet. But we expect activity to increase by some 15-20% in comparison to previous years over 2020 and 2021.

On the other side of the supply equation, newbuilding activity has been weak in this sector for the last year and even our best case scenario does not expect this to pick up significantly. There is very little spare cash for this fleet and even less investment enthusiasm. The oil market crash is likely to negatively effect the project market in the medium term, and with it the demand for project carriers. Recent new orders (over 2018/19) have been weighted towards the more heavylift capable tonnage, but this is expected to wane.

Over 2020-21 we expect newbuilding deliveries to be beneath expected demolition tonnage by at least 100,000 dwt, leading to a small contraction in the fleet over this period.

Market outlook

The world is clearly a very different place than it was just three months ago (when our December 2019 report was published) and our forecast for 2020 rates is now some 2% below where it was then. Drewry forecasts that under its base-case scenario, average annual charter rates will remain at the same level as 2019. As at the end of March 2020, rates had already started to weaken, albeit not significantly, and are expected to continue in that vein over the summer.

There is limited volatility in this sector, due to the range of commodities carried and the vessel availability increased with other vessel types. This means there is little scope for improvement when the market is weak. Our expectation is that as demand picks up in 2H20, in particular for the bulk sector, there should be space to see some improvement in rates, which will continue into 2021.

Our low-case scenario (with higher probability than our best case) would see rates weaken further into 2021 and no recovery until 2H21.

Due to the elevated uncertainty surrounding our forecasts and our caveat that it is still too early to assess the demand shock with any degree of certainty, we urge our readers to treat these forecasts only as a broad guide to the likely direction of travel.

Figure 2: Multipurpose Freight Rate Index*

Figure 2: Multipurpose Freight Rate Index*

Detailed quarterly market analysis and forecasts for the multipurpose sector

An annual subscription to our Multipurpose Forecaster provides quarterly updated 5-year forecasts and market review and outlooks for the global Multipurpose and Heavy Lift shipping market.

Each quarterly report provides in-depth data and detailed analysis of the market, including:

  • Trade – analyses key drivers of MPV trade and project cargo demand, forecasts 5-year general cargo demand including detailed data on key breakbulk commodity flows and port volumes
  • Fleet – examines the Multipurpose and Heavylift fleet, the operators, demolitions, newbuilds, orderbook and 5-year fleet forecasts
  • Market – scrutinises the competing sectors of dry bulk and containers, market shares, supply-demand balance, freight rates, asset values, as well as 5-year market forecasts

Source: Drewry Maritime Research

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