LINER INDUSTRY’S MOST PROFITABLE PERFORMANCE IN SEVERAL YEARS
It took the worst global economic crisis we have seen in over a century for the liner industry to report its most profitable performance in the span of several years in 20Q2. The steep correction in trade volumes was met by even steeper capacity withdrawals, resulting in high vessel utilization of the trading fleet and pushing liner freight rates to 5-year highs.
Such unprecedented disciplinary actions helped boost liner revenues in the second quarter despite the drop in liftings, and in combination will lower OPEX (mainly due to low fuel prices) led to solid profits.
With trading activity resuming after the May plunge and with liner profits surging in 20Q2, optimism has returned in the liner markets. Maersk, the leading liner operator, has just reinstated its 2020 earnings guidance, which was suspended during the pandemic. Furthermore, the company claims higher year-long earnings today than what it had projected at the start of the year, before the crisis hit.
Concerns of double-digit corrections in containerized trade volumes for year-long 2020 now seem to be exaggerated.
Fears of a soft summer peak season in the main arterial lane of the Transpacific WB did not came to pass, at least through early-August.
In the US, e-commerce related demand and demand for new items (such as products to accommodate on-line schooling and new home-offices for people working from home, as well as Vocid-19 related safety items) have for the time being compensated for declines in demand for more traditional “back-to-school” seasonal items.
Most surprisingly, data recently published by the US Census Bureau show total sales in July climbing above January pre-Covid 19 levels. Besides surging e-commerce and grocery items, clothing and even car sales reached above January levels in July, while -on the other side- restaurant and bar related spending remained well-below year-start levels (but much improved since the May lows).
One can not reach conclusive decisions based on a single-month data. Economists still argue on the shape of the recovery, whether it is going to be V-shaped (quick and robust recovery in 2020H2), U-shaped (tardy and very slow improvement in 2020H2, followed but a strong rebound in 2021), or W-shaped (a brief recovery follows the April/May disaster, but we should now expect another down cycle to be followed by a slower and lengthier -but permanent- rebound in 2021). The economic repertoire includes several other options, but the three mentioned above are the most popular ones.
In our recently published 20Q3 Base Case analysis and outlook, we show that we expect containerized trade to reclaim its 2019Q3 peak levels in the third quarter of 2021 and -following a seasonal correction in 21Q4 – to permanently settle above these levels in early 2022.
Nevertheless, we acknowledge that no-one can ascertain the course of the virus. The US suffered a resurgence of incidents in early summer. And at a time when the second wave of Covid-19 in the US is seemingly getting under control (see chart below by the US Johns Hopkins, Coronavirus Resource Center), we see a worse resurgence hitting several European countries (Spain, France and – to a lesser extent- Italy) -see below chart by the European Center for Disease Prevention and Control, published in the Wall Street Journal). At the same time, virus incidents remain near peak levels in India and in Brazil.
It is for this reason that we maintain a relatively high probability of 30% for our Low Case scenario (which sees a second global economic and trade dip in 20H2/early 2021), even at a time when we consider a significant chance of 20% that actual economic and trade developments will better our Base Case assumptions (High Case scenario). It is noteworthy though that our Low Case probability of 30% stands much lower than in a long while (our previous releases had assigned much higher probability to our Low Case, up to 40% -45%), while the opposite is true for our High Case scenario (the 20% chance is higher than our 10% likelihood assigned to our High Case scenarios in previous releases).