Choppy Waters Ahead for Shipping Amid Mounting Global Risks
That shipping is a volatile business is hardly worth pointing out, but the coming months will likely see more of it than usual. Under normal circumstances, business cycles, seasonality, political developments and weather disruptions contribute to shifting fortunes throughout the year. However, in the months ahead, it is likely that the factors mentioned above could align and take volatility to the next level.
With the risk of sounding overly dramatic, the world and the global economy are at a crossroads, with many developments during the current year likely to be nearly binary in nature. Beyond several ongoing conflicts around the globe, national politics could provide additional challenges for the world. Two presidential elections have the potential to have an outsized effect on events. One has already taken place: Taiwan elected a pro-independence candidate, which raised the risk of a conflict with China. The other, in the US, is looking, at this stage, like a re-run of the election in 2020, with an uncertain outcome. On top of conflicts and politics, there is an increasing frequency of extreme weather and natural disasters.
Challenges Align for a Volatile Year
For shipping and commodities, all of the above have the potential to deliver disruptions to global trade flows. A combination of extreme weather and conflicts has put significant pressure on the cargo volumes transiting the world’s two most important canals. An extended period of drought has led to restrictions on the number of vessels passing through the Panama Canal and also on the allowed draught for crossings. To the east, while there are no disruptions affecting the Suez Canal per se, the attacks on commercial shipping at the southern end of the Red Sea are making the waterway less viable. Should the recent Taiwanese presidential election trigger a hostile reaction from Beijing, the South China Sea may see disruptions to shipping through the area. Hence, there are rising prospects for an increasing regionalisation of the global economy should disruptions prove long-lasting.
Beyond geopolitics and climate disruptions, the global economy is also having its fair share of challenges. While the US economy continues to surprise with its resilience in the face of higher interest rates, the world’s number two economy continues to struggle.
Continued Soft Chinese Growth to Mark a New Normal
Given China’s importance to dry bulk shipping, the early stages of the year could well set the tone for the coming months. Data and news emitting from China over the past few months have been sobering readings, with most suggesting that the world’s second-largest economy will continue to face challenges. The Chinese economy remains at a crossroads, with a return to the growth rates of yesteryear increasingly unlikely. Still, Beijing is widely expected to target an annual growth rate of around five per cent for a second consecutive year. Hence, stimulus-fuelled growth should continue to provide support for the demand for seaborne transportation.
For dry bulk shipping, the initial stages of the year are usually a case of wait-and-see as January and often parts of February are squeezed between the Christmas holidays and the Chinese New Year. Last year, an early timing kept the period short, but this year, the celebrations shifted nineteen days forward. Hence, Chinese demand for seaborne transportation of dry bulk commodities has remained depressed since the latter parts of December.
Based on previous seasonal patterns, demand for seaborne transportation of dry bulk commodities to China should stage a rebound in the second half of February as industrial activities pick up following the end of the Lunar New Year holidays. However, as highlighted in a recent Shipfix blog post, the recent soft Chinese demand for copper suggests that the rebound will be modest, at least initially.
Downward Pressure on Growth Amid Rising Uncertainty Could Offset Positive Developments for Tonne-Mile Demand
The early parts of the year are also the time when the dry bulk freight markets are awaiting the seasonal rebound in demand for transportation of agricultural commodities from South America’s east coast. This year, there appears to have been a false start to the season, with a surge in ordering activities in early January. Weekly volumes have since fallen back, but according to seasonal patterns, demand should stage a rebound next month and provide support for freight rates.
Dry bulk is likely to be one of the least directly affected shipping sectors, as many of its significant trade flows are not going through the canals. Still, secondary effects can be expected, and developments broadly favour dry bulk shipping.
The increasing length of the voyages for the container vessels from the Far East to the ports in Europe and on the North American East Coast will put pressure on the supply of containers and vessels, with freight rates stabilising on a higher level. The rising costs associated with container shipping and the potential for a shortage of available equipment could see shippers opting for bulk shipping instead. Bagged agricultural commodities and steel products are among the cargo types most likely to be candidates for a shift.
On the other hand, the rising geopolitical tensions and the mounting disruptions to global supply chains could weigh on economic growth should they prove longlived or worsen. Indeed, this was one of the downside risks highlighted by the International Monetary Fund (IMF) as they upgraded their outlook for the year ahead at the end of January. Still, assuming that IMF’s latest projection of 3.2 per cent growth for the year is broadly in line with the actual outcome, continued healthy flows of commodities across the oceans, combined with the limited access to the Suez and Panama Canals, should support tonne-mile demand and freight rates. Still, the mounting global risks suggest volatility will be a constant companion during the year ahead.
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