Key implications for the shipping industry
There is a major power crisis in both Europe and Asia. This crisis is deepening and there is concern about its potential impact on the shipping industry. Experts argue that this crisis represents another unwelcome risk to the container supply chain. However, it also provides a potential boost for commodity shipping.
The United Kingdom is a microcosm of the crisis with regular media stories of panic-buying. Natural gas prices are also going up while some outlets have suggested the potential for sporadic protests due to the rising electricity bills as winter approaches.
Asian countries are doing no better. China and India have reported shortages in the coal supply chain causing utilities to become a luxury. Some Chinese provinces have gone as far as rationing power for critical factories.
A Shipping industry that is already in trouble
The past few months have been challenging for the shipping industry and the idea that there is a looming power crisis is not going to settle anyone. Shipping has already had to contend with the global supply chain rigidities that were brutally exposed by the Covid-19 pandemic. It is hard enough to get staff working without the additional burden of having to search for fuel.
Signs of the problems are everywhere. Energy commodity stockpiles were not rising fast enough to deal with the spike in demand that arose immediately following the easing of lockdown measures. The same story is being told for retail inventories in the USA.
There are many ways in which a power crunch of this magnitude can negatively impact the ocean shipping industry. It all starts with US imports of computerized goods from Asia. The energy crunch holds up the supply chain and creates delays. Higher rates are then reported for commodity shipping in niches such as oil tankers, liquefied natural gas (LNG), and dry bulk shipping. It is important to consider the specific effects on each of these niches.
How container shipping is bearing up
Container shipping remains vulnerable to any energy crunches. For example, Bloomberg reports that there are curbs on power usage due to tighter supply and emission restrictions. The affected areas in China include Guangdong, Zhejiang, and Jiangsu- all of which are provinces that are critical to container shipping, certainly as far as the Trans-Pacific trade is concerned.
Ting Lu of Nomura expects that the curbs will eventually reach the global markets. Some of the signs may include shortages of toys, textiles, and machine parts. All of these comprise the staple of the import trade in countries like the USA.
Meanwhile, the shipping industry is already showing signs of distress. A case in point is how Foxconn, the leading assembler of iPhones, had to halt production at its factory. Being a major supplier to Tesla and Apple, this is bound to have an impact on consumers. The facility in Kunshan in Jiangsu Province no longer had sufficient power to run. Comparable stories are being reported by Unimicron Technologies in Kunshan. This creates pressure on Apple which is a major buyer for the company.
Additionally, there are power outages which were reported by the New York Times in Guandong. This remains the heartland of the Chinese Southern Manufacturing Belt. Many factories located in Dongguan have not had sufficient electricity. Some manufacturers are barely keeping production going by using unreliable generators.
Possibilities of dry bulk shipping
It is important that the shipping industry is equipped to deal with the demand for bulk dry shipping. Clarksons Platou of Omar Nokta argues that some of the problems stemmed from the low capital that might have been available for investing in production. Hence, some built up a significant stockpile during the pandemic but all that has been used up by additional demand. Yet, it is not clear that there will be an investment plan that specifically targets production.
There are strict controls on thermal coal which is a key ingredient when generating power. Concerns about the environmental impact of this type of production have meant that investors are running away from any project with questionable credentials. It is not surprising that thermal coal supplies in India and China are now exceptionally low. Moreover, following the pandemic many factories consumed any remaining stocks. In India, the current low levels of thermal coal supplies have not been seen in the last 4 years.
In addition, China has further restricted domestic mines while there is also a ban on Australian imports as part of the quasi-trade war with that part of the world. A key indicator that experts have been watching is the Newcastle benchmark thermal coal price, which hit $205 per ton just this Monday.
Despite these challenges, there is an opportunity for dry bulk vessels which fall in the Panamax (maxed at 65,000-90,000 deadweight tons) and Capesize (maxed at 180,000 deadweight tons) categories. Capesize vessels reported a high spot rate of $69,000 per day while Panamax spot rates rose to $36,200 per day. Meanwhile, the demand for coal is exceeding estimations.
Impact on LNG shipping
LNG shipping is affected by shortfalls in natural gas. Hence, there are historically elevated gas spot prices. We can gain insight from the Japan-Korea Marker (JKM) which is the benchmark for Asia. It rose to $27.50 per million British Thermal Units (MMBtu). This price is nearly 200% of what it was the previous month.
For Europe, the benchmarks are , TTF Netherlands at $26.51 per MMBtu and the National Balancing Point (NBP) $26.23 per MMBtu. These two have the same trend that was demonstrated by JKM. In fact, TTF and NBP are reporting all-time highs. The U.S. Henry Hub price has risen to $5.51 per MMBtu, but this is nowhere as high as the rates in Europe and Asia.
Situation in the tanker shipping segment
Tanker shipping is affected by crude and product tanker rates which are still not breaking even. Some experts believe that the power product crises in Europe and Asia may kickstart the tanking shipping segment. According to Jon Chappell of Evercore, refined product inventories in the OECD are lower than they were prior to the Covid-19 pandemic. They are certainly less than the 5-year average. He anticipates that there will come a time in the future when there is less slack in the system.
The high natural gas prices were behind the Goldman Sachs estimate that Europe and Asia would be consuming up to 900,000 barrels per day more oil for power generation. These two regions would be seeking to substitute natural gas with oil. Gibson Brokers highlight the role of the chilly winter, particularly East of Suez where oil-based fuels would gain more prominence.
There is a power crisis that is gripping Europe and Asia. This has led to soaring prices for energy as well as shipping services. The industry can not afford further disruptions and challenges. It remains to be seen what alternatives will be found when producing energy in a climate where coal has been rejected as being environmentally unfriendly and there are natural gas shortages. It is possible that the boom for crude oil products will continue despite environmental concerns.