After what has been described as a »status quo year« by market observers, the car carrier market has been seriously hit by the Covid-19 crisis in 2020 and there is no evidence of a quick demand recovery
Sustained chartering activity throughout most of 2019 kept the size of the idle fleet in check but was not sufficient[ds_preview] to raise charter rates in a sustainable manner. Despite rationalizing and optimizing their fleet deployments and being generally more selective in terms of cargo, operators were unable to break free of the deadlock of low freight rates. »With no remarkable gains on the freight side and with overall lower cargo volumes due to declining global car sales, 2019 turned out to be a status quo year,« shipbroker BRS wrote it its annual review.
BRS identified continued geopolitical and trade tensions, intensifying social unrest, and recurring climate-related natural disasters, as downside – »plus the possibility of a ›black swan event‹«. BRS therefore expected to see more demand-side volatility for the car carrier sector in 2020. The black swan event came in the form of the corona virus and broad containment measures have impacted producers, consumer markets and thus shipping. Intelligence firm AlixPartners expects European vehicle sales in 2020 to stay 32% below the previous year’s level. Global sales could be down by 20mill. cars globally and down 44mill. over the next three years. While AlixPartners predicts a V-shaped recovery in the US and China by 2025, Europe will take a longer road.
Carriers trying to adjust
Japanese carrier NYK Line tells HANSA that, due to the decrease of production and sales of vehicles all over the world, the transport volumes decreased sharply by 60 to 70%. »We dealt with this situation by decreasing the number of sailings, scrapping old vessels, slow steaming and drifting,« NYK said. The carrier expects it will take two or three years at least for the market to recover and reach the level seen before the pandemic. »We suppose some will refrain from buying luxury goods like vehicles but some will buy their own vehicles to avoid public transport.« NYK wants to deal with any situation by adjusting the fleet.
Likewise, Japanese competitor MOL already reported a decline in transports of completed cars and shipment delays for the latter part of the fourth quarter of 2019 caused by the Covid-19 outbreak. Scandinavian carrier Wallenius Wilhelmsen has taken a range of actions to adjust capacity, reduce costs and protect its cash position through this turbulent phase. »Combined with our strong financial situation going into this, I am confident that we will see through this crisis,« said Craig Jasienski, President & CEO. In the very near term the company expects being impacted by a sharp drop in volumes driven by measures taken globally to fight the pandemic. »The current drop in volumes has created excess capacity in the industry, which is likely to persist for some time and delay any rate improvements. Measures taken to recycle, lay-up, idle and slow-steam ships will go some way in countering this effect,« WWL’s Q1 report stated.
The third Japan-based carrier K Line already saw year-on-year car volumes decrease because of the rationalization, for example cancellation and realignment for some unprofitable trades including other-than-Japan trades, even though stable cargo movements were maintained in the trades from the Far East. As a result, the overall business recorded a year-on-year decrease in revenue but turned a profit by tackling to improve its profitability including improvement in the vessel operation efficiency, a recovery in freight and optimization of the fleet allocation.
Based on the forecasts received from customers, carrier EUKOR sees a »substantial drop in volumes compared to normal operations«. »We are now seeing most factories in the world, including Europe and North America, re-opening. However, production is starting at very low levels and we are still lacking a proper production overview of units to be shipped from all the cargo origins. Therefore, the number of sailings have been reduced to match volume forecasts, meaning less frequency and longer lead time. This will continue to put existing standard performance levels and metrics temporarily on hold.«
Demand down
According to a recent report by VesselsValue, demand for vehicle carriers is down significantly since the onset of Covid-19. A look at global daily updated cargo miles of the fleet (billions of CEU / nautical miles) shows that there has been a double dip effect of Covid-19. An initial fall in the very early stages in January was followed by a small recovery through February and March, then a significant decline from the middle of March through to the present shows. »This implies that the later lockdown on the West had a much more significant downwards effect on demand than the earlier lockdown in the East (i.e. Western car demand is a main driver of this market). Concerning, there is no evidence of a recovery with vehicle carrier demand remaining at multi year low levels,« the intelligence firm says.Global daily CEU miles in January were typically 5% to 10% lower than January 2019.
However, figures at the end of May were almost 40% lower than same days in 2019. Comparing the whole 2020 period so far vs. the same period of 2019 shows that overall CEU miles are down 18%. Japanese exports using vehicle carriers »may give a slight reason to be optimistic«. Although demand has fallen in February, the last few weeks of May 2020 show the beginning of a recovery. »This recent upward movement is too short to be considered a true trend but if it continues it could mark the bottom of the market as of middle of May,« VesselsValue says. Total CEU demand out of Japan in 2020 so far is 22% below that for the same period on 2019.
Germany, U.S., China, Japan…
Figures for transports from Germany to global destinations show a spike up in demand through March, followed by a steep decline in early April and then the possible beginnings of a recovery. Total CEU demand out of Germany in 2020 so far is 45% below that for the same period on 2019.For US exports the data shows a gradual but continual decline in demand for vehicle carriers for US exports. Total CEU demand out of the US in 2020 so far is 23% below that for the same period on 2019. Demand out of South Korea is down 22% year on year so far, with a very small recent uptick.Looking at the effect of import demand for vehicle carriers, the global to China trade shows a very different trend. Demand for importing vehicles shrank sharply in January 2020 but then staged a rapid recovery through March and April as Chinese lockdown eased and importers tried to catch up on missed volumes. However, demand is still down 14% year on year so far.
Demand for Vehicle Carriers coming into the US has significantly fallen over the period and showing no signs yet of a recovery. Year on year demand so far is down 24%. Demand for vehicle carriers coming into the UK has been volatile. Year on year so far demand is still down 15%.Global demand is down 18% year on year so far. Some markets (Japan exports and China imports) are showing faster recovery than others (US exports and UK imports). However, there is still a long way to go to get back to pre Covid-19 demand levels, and until that happens, or there is significant increase in vessel scrapping, the vehicle carrier market will remain challenging.
