Coronavirus or 2019-nCoV is a virus emanating from Wuhan, China. It has been identified from a relatively acute burst of pneumonia cases and is quickly turning into a major crisis globally. The number of cases has surged in the past weeks. According to China’s National Health Commission, as of end January 28, there have been 5,974 confirmed cases, including 132 deaths. The virus breakout came just ahead of the Lunar New Year holiday when around half a billion people were expected to travel across China and abroad. Meanwhile, the World Health Organization (WHO) has said that it will send international experts to China as soon as possible to increase understanding of situation and guide the global counter-epidemic efforts.
The last couple of weeks have seen heavy selling of global stocks, especially those with high-profit exposure to China. While it is too early to make any comparison between the current coronavirus outbreak and any previous epidemic, we look at some of the historical precedents for context. Looking at the development of share prices during the Middle East Respiratory Syndrome (MERS) outbreak in Saudi Arabia (2014) and South Korea(2015) and two major instances of Avian Flu or H7N9 (2013, 2016-17), it shows no major or inconclusive impact on major container shipping stock prices. At maximum, the economic impact of infectious diseases may last for one or two quarters, in our view.
Source: Drewry Maritime Financial Research, CapitalIQ, Share prices indexed to 1 Jan 2013, share price as of 28 January 2020
Most of the shipping stocks fell in the third week of January after the breakout of the corona virus caused multiple casualties in China. Nonetheless, we expect limited impact on container shipping companies in the longer term. However, if the severity of the outbreak increases, industrial production and retail sales could be affected, leading to rising inventory on ports. In addition, some carriers have warned of a temporary shortage of containers because, 1) Chinese New Year has been extended in China, 2) a shortage of customs and port labour could hold containers. Meanwhile, our overall view remains unchanged towards the stocks under coverage. If the situation is well managed and contained and depending on economic impact and valuations, we may consider revising our fair values. For now, the shock to demand and the macro environment would more likely be short term rather than the long term.
While the true impact of coronavirus is unclear, the weakening oil prices will have a risk-mitigating impact. Oil prices have been under pressure in the last two weeks due to concerns that a spread of the coronavirus could lead to low demand and high inventory in the short
term. With bunker fuel prices strongly tied to crude oil pricing, the coronavirus crisis may bring some respite to carriers.
Looking at the Brent futures curve, as of 28 January 2020, average Brent prices show a declining trend during 1H20. We believe the recent oil price reduction will reflect only partially on the 1Q20 numbers (as there is a lag between the commodity price changes and its actual impact on bunker fuel) and will have a more profound impact in 2Q20 should the severity of the virus extends for a longer term. If the crisis persists, the overall bunker costs will end up being lower in 1Q20 than last year as a result of the decline in crude oil prices.
Note: Future prices as of 28 January 2020
Source: Capital IQ
While the onset of 2020 has not been as great as expected, we do believe that the year will mark something of a turning point in carriers’ fortunes. Better trade sentiment and a thaw in the trade war in form of tariff rollbacks between the US and China and higher freight rates should result in an industry EBIT of around USD 4.5bn (Refer to the latest Drewry’s Container forecaster 4Q19). While this would still be some way off the USD 6bn mark achieved in 2014, it will allow carriers to make a small profit if they can keep a cap on costs. Indeed, there are several caveats to this more positive view for 2020, with the latest outbreak of coronavirus and the full impact of IMO fuel regulation being the key.