The coronavirus pandemic will permanently change ocean shipping, but how? The short answer is: It depends on how long the outbreak lasts. A 2020 plunge and 2021 snapback is one thing, a multi-year global depression punctuated by geopolitical chaos is another.
For the long answer, FreightWaves interviewed industry veteran Basil Karatzas, founder of Manhattan-based Karatzas Marine Advisors & Co., a firm specializing in consulting, ship-finance advisory services, brokering and appraisals.
In general, Karatzas believes the pandemic will create stress tests for multiple aspects of the industry and the results of these tests will set the future course.
Asked how the coronavirus could affect future vessel demand, Karatzas answered, I think the probability of a catastrophic scenario is rather small. It seems more likely to me that there will be a deep worldwide recession in 2020 and a V-shaped recovery in 2021.
Even under this scenario, he pointed out that coronavirus fallout is coming after the trade war, and if people think, The world is not smooth anymore, whether because of tariffs or COVID-19,’ and we have nearshoring and deglobalization, it raises the question of whether all those Triple E’ [ultra-large container] ships make sense in the new world.
Karatzas continued, You have to believe that the impact of COVID-19 will be negative [for shipping demand]. That’s logical. On the other hand, there will be a lot of experimentation and disruption of existing supply chains and establishment of new supply chains, and this should have a positive effect [on vessel demand] in certain market segments in the intermediate term.
Pre-coronavirus, shipping was heavily focused on plans for International Maritime Organization (IMO) regulations to promote decarbonization by 2050. Uncertainty over those future IMO rules reduced future vessel supply by disincentivizing new ship orders; owners were concerned that newly ordered 25-year assets would be rendered prematurely obsolete by yet-to-be-written regulations.
The dearth of newbuilding orders continues, now driven by the coronavirus. Ordering for the next several months is pretty much out of the question, primarily due to practicalities, said Karatzas.
Yet another coronavirus-induced evolution will involve shipping contract language.
The interpretation of force majeure clauses vis-à-vis coronavirus is ambiguous and will be litigated. Future shipping contracts will be written with more clarity on the assumption that outbreaks may recur.
I am not a lawyer, but I believe that this will be fine-tuned in charter contracts going forward, said Karatzas. That will have an effect on the underlying financing by increasing the risk premium. COVID-19 is a low-probability, high-impact event the world has never seen before. People will ask: What prevents a more evolved form of the virus that has even bigger consequences from emerging next year?
If contract language heightens financing risk, it should theoretically elevate the interest rate on debt financing and the required returns on equity investments. A higher cost of capital implies that freight costs should increase to compensate the ship owner.
2020, All Rights Reserved, FreightWaves, Inc