Shipping should shrug off coronavirus but escalation risks supply chain contagion

In the first of a two-part analysis on the impact of the coronavirus, Dr Adam Kent, managing director, MSI looks at the dry bulk and tanker sectors.

The impact of the coronavirus on the Chinese economy has already been severe and the scenarios for shipping range from a quick resolution to a long drawn out impact. In modelling the likely effects, MSI has analysed how the virus is affecting shipping sectors now and what the future implications of a further escalation might be.

Each sector has been affected to a different degree by the crisis so far, and each has a different set of vulnerabilities to escalation or prolonged disruption.

Vessel earnings in the tanker segment have already seen a negative impact and are exposed to continued disruption to oil demand. For dry bulk the Coronavirus has worsened an already-challenging environment.

The MSI risk matrix depicts how different segments will be affected by the status quo in which we expect that the disruption peaks over mid or late February and then restrictions to output and mobility are unwound thereafter.

We add a moderate escalation scenario in which disruption continues into March and there’s some restriction on port activity over that period of time, which again implies further downside risk to vessel earnings.

Lastly we model a severe escalation scenario in which the impacts last well into Q2 forcing a continued shutdown or increased shutdown of Chinese factory output or significant disruption to Chinese port operations. In that case the market should expect double-digit downside risk to vessel earnings in the different segments.

Dry bulk fallout

Turning first to dry bulk, the potential impact of the coronavirus is huge, given that China imports around 40% of global dry bulk cargoes.

Chinese industrial production and demand for dry bulk imports have already been severely hit by the virus, the result of extended factory closures and reduced worker mobility. Critically for dry bulk, however, those same disruptions also impact domestic production of raw materials, so to understand dry bulk import demand we need to examine the balance between production of goods and domestic inputs and to what extent imports are filling the gap.

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