Impact

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.

Oil prices on a downward slide

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

Container shipping profitability impact

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.