Shipping credit outlook revised to negative: cash crunch worsens as Covid-19 disrupts trade

The credit outlook for container shipping companies has worsened as they grapple with today’s difficult operating conditions brought on by the Covid-19 pandemic, a global recession this year and likely subdued longer-term growth.

Scope Ratings has revised its outlook for the sector to negative, from stable in its early-February outlook, when the impact of the coronavirus outbreak was confined largely to China and other parts of Asia.

The global spread of the disease, further disruptions to international supply chains, and multi-country lockdowns over the past two months have drastically reduced demand for shipping. Volumes of containers shipped to and from Chinese ports fell steeply in the first quarter at the same time as the number of missed port calls rose sharply, indicating a lack of volume for scheduled port calls, according to analysis by the United Nations Conference on Trade and Development.

“Repairing the damage inflicted on the world’s logistics system will take time: a return to medium- and long-term trends in shipping and trade is unlikely before late Q3,” says Denis Kuhn, analyst at Scope.

“Longer term, the outlook remains gloomy considering the longer-lasting economic damage inflicted by the health crisis on government and corporate balance sheets and the strong correlation between global GDP and transportation-sector growth,” says Kuhn.

Scope expects the global economy to contract by around 0.5% this year, a deeper recession than the trough during the global financial crisis, when global output contracted by 0.1% in 2009 (see Scope’s Q2 2020 Sovereign Update). None of the world’s largest economies will escape the pandemic’s macro-economic and financial-sector impact. Scope forecasts an economic contraction of around 6.5% in the euro area in 2020, with growth in China of only 4%, a 3.5% decline in the United States and a 4% contraction in Japan.

“The slump in trade volumes translates into idle ships: multi-million euro assets incurring hefty costs but generating much less income,” says Kuhn.

“Some cash outflows are discretionary such as certain capital expenditure, dividends and share buybacks, but corporate overheads, as well as financing and fixed operating costs continue to drain liquidity, all of which are a particular problem for smaller players,” says Kuhn.

So-called blank sailings, in which ships sail without cargo in order to re-assign capacity from one route to another, are exacerbating operating losses and are more likely to be necessary for operators outside of the world’s three leading shipping alliances1. Even the 2M alliance partners MSC and Maersk are cancelling an unprecedented 21% of Asia-Europe capacity in Q2; other alliances and single carriers are expected to follow.

The shipping sector is facing a liquidity squeeze, prompting the European Community Shipowners’ Associations (ECSA) on 2 April to call for a “targeted rescue and recovery plan” for Europe’s maritime sector. One example of the measures already underway is the international maritime authorities’ relaxation of controls for IMO 2020 clean-fuel regulations to ease near-term cash outflows for operators by allowing them to postpone use of more expensive cleaner fuels or fitting cleaning technologies like scrubbers.

Uncertainties surrounding the scale, scope and effectiveness of government and regulatory interventions to support the industry make it difficult to judge the degree to which individual companies are at risk of going out of business. “However, since access to financing is crucial, the operators with a large diversified asset base have substantial advantages,” says Kuhn.

One silver lining for the sector is the prospect of more consolidation. “One of the biggest drags on the sectors’ operating profitability has been persistent overcapacity. This crisis may further accelerate the clearing out of excess capacity as weaker players are forced out of business with an even larger proportion of trade volume shared among the container alliances,” Kuhn says.

Kuhn also cautions against over-pessimism given the essential role the shipping sector has in keeping the global economy functioning as the main transporter of goods. “Production will ramp up again globally, though we do not expect volumes to climb to pre-crisis levels fast,” says Kuhn.

12M (Denmark’s Maersk Line and Swiss-based Mediterranean Shipping Co); Ocean Alliance (China’s COSCO and OOCL, France’s CMA CGM, Taiwan’s Evergreen); THE Alliance (Germany’s Hapag-Lloyd, Japan’s Ocean Network Express, Taiwan’s Yang Ming)