Russbroker Caribbean market review

Smaller ships suffer but not only due to Covid-19

Container Market

The Corona crisis was the all-dominating topic in early 2020. Firstly, feeder cargo volumes experienced their normal dip in February due to the Chinese New Year festivities. The prolonged shutdown in China however then leads to a much larger dearth in cargo than usual, as Chinese port TEU throughput figures in January and February were about 10% lower than the year before.

Once the coronavirus then hit the rest of the world and lockdown measures were implemented pretty much everywhere, intra-regional cargo volumes started to drop as well. Although the situation has improved in Asia and economic activity has restarted, a third “wave” of shrinking TEU numbers will occur starting at end of April as more than 250 regular sailings ex Asia are cancelled during the second quarter 2020 as a consequence of the globally very low consumption and production. As operators started to cut sailings and even whole services, surplus container tonnage began to build up. By the end of April about 70 ships in the size range of 500 to 2,000 TEU had become unemployed in the Atlantic.

Apart from coronavirus, the main theme in the Americas in early 2020 had been service upsizing. With anticipated, and early on also materializing higher fuel costs due to the IMO 2020 regulations, many operators tried to bring down their slot cost by increasing the vessel size deployed. Two main liner operators, for example, combined their West Coast South America feeder loops which allowed them to replace four ships (1,300 TEU, 1,700 TEU and 2x2 200 TEU) by two much larger ships (3,500 TEU and 4,000 TEU).

One Transatlantic fruit service, which had stretched all the way to St. Petersburg for years, was cut short. The ships now already turn in the Antwerp-Hamburg range, which allows for deployment of 3,500 TEU ships without ice class instead of using smaller 2,500 TEU ice-class ships needed to go into the Baltic all year round. Several 1,100 TEU and 1,300 TEU ships were also displaced by larger 1,700 TEU ships.

The 2,500 TEU geared segment was relatively quiet during the last couple of months. Stable rates of over US$ 10,000 began to give way in March as excess tonnage started to build up in the Mediterranean. More and more desperate owners were willing to position, and the traditional Caribbean trading bonus (compared to Southern European trade) has trended towards zero. As a result, rates fell below US$ 9,000$ by end-April.

In the Caribbean, the number of unemployed vessels were low. A few ships, which had been looking for fresh employment for months appear to be completely shunned by charterers. Although it did not help that there were barely any fresh requirements for such ships in 2020.

The 1,700 TEU ships fared relatively well during early 2020. Good demand and little available extra tonnage kept rates above US$ 9,000 throughout March. However, a few ships fell into spot positions by mid-April and both the sizes above, 2,500 TEU and below, 1,300 TEU are becoming comparatively cheaper, and rates for 1,700 TEU ships are also expected to give way.

In another attempt to reduce slot costs one Caribbean operator took two Bangkokmax newbuildings for its Suriname service on long-term charter. The ships had to ballast from Asia but as they are shallow draft they can take almost twice as much cargo as the 1,100 TEU ships previously serving this draft-restricted Paramaribo. A number of high-quality 1,800 TEU ships left the Americas towards China in order to pass their next class renewal at a much cheaper shipyard. The very good reefer intake and high speed of those ships, which is rarely honored with higher rates in Asia, led two of those ships to return; one to operate in the US to Central America fruit trade and one on the West Coast of South America.

The 1,300 TEU high reefer category, previously one of the most resilient segments suffered badly. Charter rates for those ships had been around US$ 9,000 by the end of last year and even higher for intensive reefer trade. But due to the aforementioned service upsizing the favor tipped in charterers' direction. More ships than requirements led rates fall to the low US$ 8,000’s in January, well before coronavirus had any effect in the Americas.

As competition heated up during March and April such ships had to fix under US$ 8,000. Another example where 1,300 TEU ships lost out this year was a seasonal East Coast South America service oriented towards fruit exports which had last year been run with two 1,300 TEU ships. This year the requirement was covered by two modern 1,700 TEU vessels which the charterer had on long term hire and positioned them from Asia instead of chartering in additional tonnage. Two ships which had been idle for some time eventually fixed some empty containers with destination Europe in order to try their luck on the other side of the Atlantic.

The 1,100 TEU vessels fared even worse than the 1,300 TEU ships. For the last couple of months, a handful of those ships had always been looking for fresh business. This overcapacity caused earnings to drop successively from around US$ 7,000 in January down to the low US$ 6000s by April.

Low bunker prices also impacted the value of more fuel-efficient ships or even left charterers to completely neglect those vessels as one modern eco-ship had been idle for six weeks and counting until the end of April. Similarly, to the 1,300 TEU ships, there had been a net outflow of ships from the Caribbean towards the Mediterranean. The last four 1,100 TEU newbuildings, specifically tailored to the needs of Caribbean trade, and now all in service allow the one operator to completely forego charter ships and run its entire network with own tonnage.

Sub 1,000 TEU ships also were not spared by the general rate decline. Despite two geared 700 TEU ships being temporary out of order due to sales and repair procedures market levels for those ships fell from mid/high US$ 6,000 to the low 6,000s. Two gearless 700 TEU ships also positioned towards Europe soon after their charters ended as the more "exotic" gearless ships were expected to have even more trouble securing fresh employment. A new express service with a very small 350 TEU ship between only two ports, inaugurated in January, was made redundant again only two months later by the addition of an extra port call within a longer loop run with 3,000 TEU ships.

In addition to the lower earnings, charter periods have become extremely flexible as the large tonnage overcapacity allows operators to put the risk on the owner and fix periods of up to 1-12 months. Some charterers nowadays even do not fix any charter for a fix minimum period of more than one month or demand special coronavirus exit clauses.

New infrastructure will increase carriers' options and will probably also increase the use of larger and gearless ships. Willemstad, for example, received new gantry cranes in February (not yet in use) and Paita in Peru decided to lengthen its pier in order to allow neo-panama container vessels to call at its terminal. Such an expansion, as seen on the West Coast, could reduce the need for feeder ships if the port would be directly incorporated into some mainline East-West services. The scrubber economics, which had already been less favorable in the Caribbean than in other areas of the world from the start, have been brought down hard by the Covid-19 crisis and the ensuing crash in oil and bunker prices. The price difference between low-sulfur fuel and regular HFO stood at about US$ 300 per ton in mid-January. By mid-April, the spread had come down to a meagre US$ 50; ruining all calculated scrubber investment payback times. For charterers who agreed to a fixed minimum scrubber premium, the total cost of a scrubber-equipped ship can even be higher than for one without the extra exhaust gas cleaning system.

Macroeconomics

The world economy has been severely slowed down by the coronavirus crisis and the ensuing lockdown in many countries. At the moment, forecasts are even more uncertain than usual, but the International Monetary Fund (IMF), for example, expects in its base scenario an economic decline of 3% in 2020 followed by a positive recovery of up to 6% in 2021. This scenario however assumes a return to normality in the second half of 2020 and at the moment many worse outcomes are unfortunately still possible. World trade is even more affected by this situation; the IMF predicts a contraction of minus 11% for 2020 and the World Trade Organization (WTO) expects a decline of between minus 13% and minus 32%.

The GDP figures for Central America and the Caribbean are a bit below the global averages with an expected decline of around 3% this year and an improvement in 2021 of only 4%. South America's numbers are even worse with minus 5% in 2020 and plus 3.5% 2021. If those predictions come true, the economic output at the end of 2021 will still be well below 2019 levels.

The Caribbean is also affected on multiple levels. Already high state debt levels leave little room for financial stimulus and social security measures. Some commodity-dependent countries face the double effect of falling demand and prices. In addition, tourism has come to a complete stop. As however this segment accounts for at least 25% of GDP and jobs, for some even up to 40% and 80% respectively, in ten Caribbean countries the effect on the overall economy can be severe – depending on how long travel bans last.

The WTO also predicts some of the world strongest trade reduction for Central and South America. Exports this year are forecasted to shrink between 13% and 31% while at the same time exports are expected to decline between 22% and 44%. The only moderating aspect with respect to shipping is that the reductions are about evenly split due to a decline in volumes and prices.

Sale and Purchase of Container Tonnage in the Caribbean

Generally, ship prices continued their downward trend from the end of last year. After the banks pushed lots of tonnage into the market at the end of last year and thereby driving down prices, some ships slated for sale in early 2020 had been withdrawn from the market or never been offered at all as the coronavirus crisis caused prices to drop to such levels where even the banks were no longer willing to sell.

Sales activity for Americas-related tonnage was very low during the first quarter of 2020. A few more geared 700 TEU were sold or are still up for sale and at least one 1,100 TEU ship trading in the area, almost always appears to be for sale. Prices for the very common CV1100 design, and with 15 ships trading in the Americas also a usual sight in the area, are deteriorating particularly fast. For example, 15-year-old vessels of this type are now closing in on scrap price levels. On the newbuilding front nothing appears to be on the horizon at the moment, which is designated for America’s feeder trade.