The coronavirus outbreak has undoubtedly had a knock-on impact on commodity demand with rates in the dry bulk sector seeing corresponding falls. Braemar ACM expects two scenarios depending on how the outbreak progresses and its impact on bulker rates.
Braemar suggests two scenarios where China can either have a V-shaped or a U-shaped recovery in economic activity, which would in turn determine shipping rates.
DRY bulk shipping margins are likely to remain poor in the absence of optimism for commodity demand and signals of a weakening Chinese market because of the impact of the coronavirus outbreak, according to Braemar ACM.
While activity in China’s tertiary sector is rebounding, travel restrictions have kept construction and manufacturing activity muted, having a knock-on impact on the commodity markets.
“Though it is tough to isolate the effects of the virus from the many bearish factors that have hit freight in recent weeks, such as iron ore supply issues and the seasonal effects of Chinese new year, it has added to downward pressure on rates,” the shipbroker said.
The Baltic capesize average over February so far is down by 61% year on year, hovering at below $3,000 per day for most of the month.
Rates on the smaller sizes, which are less exposed to Chinese demand, have shown signs of recovery this week, but are still being weighed down by poor fundamentals.
While the situation is evolving day by day making it difficult to predict exactly how the story would develop, Braemar paints two scenarios where China can either have a V-shaped or a U-shaped recovery in economic activity, which would in turn determine shipping rates.
Braemar analyst Nick Ristic noted that if China can get its population back to work relatively quickly, a V-shaped recovery in economic activity and shipping rates can be expected, led by ‘pent up’ demand in the Chinese economy.
This, however, relies on cases of the virus falling by enough for China to relax travel restrictions, easing labour shortages and supply chain bottlenecks.
“There are also hopes for a fresh round of stimulus spending to offset losses in economic activity this quarter, which could provide a meaningful demand boost in the medium term,” he said.
But the outcome is now looking increasingly likely that it is a slower U-shaped recovery in economic activity, as the number of cases and death toll continue to increase around the world.
And even when industry resumes at full capacity, Mr Ristic says that the pent-up demand will first have to absorb the high stockpiles of semi-finished goods within China before it is felt as a boost in demand for raw materials.