VIDEO: Bunker demand to drop 2.3% in 2020 on pandemic, further downside risks possible

Man Yiu Tse

31-Mar-2020

SINGAPORE (ICIS)–Analyst Man Yiu Tse discusses the coronavirus impact on shipping and bunker fuels in the following video and analysis article.

  • The coronavirus pandemic has deeply disrupted the global economy
  • Trades and shipping impacted by supply disruption, curbed demand
  • Global seaborne trade in ton-mile expected to drop 1.1% in 2020
  • Global bunker demand expected to fall 2.3% in 2020 with further downside risks

The coronavirus pandemic has disrupted the world in a way not seen in recent history.

Nations have announced unprecedented stimulus packages to support businesses and people, underscoring how gravely the economy has been hit.

Consumption is deeply impacted amid the economic crisis. Global trades and the shipping market are therefore exposed, and bunker fuels demand is expected to drop 2.3% in 2020, with further downside risks as the pandemic continues to evolve.

Shipping demand has been hit from the outset of the coronavirus outbreak in China, as supply was disrupted and demand curbed amid extreme measures of city lockdowns and movement restrictions.

In January-February, China recorded 1,399bn ton-km of seaborne trade, excluding Hubei province, down by 14.5% year on year, according to China Ports & Harbours Association.

Several indicators in January-February published by the National Bureau of Statistics (NBS) further revealed the extent of the shock in the second largest economy. Even online retail sales fell by 3% year-on-year during the same period.

There were expectations of a recovery as China, the epicentre of the coronavirus in January and February, showed positive signs of successfully containing the spread. But it was not to be as the rest of the world has subsequently succumbed to the coronavirus, not least Europe and the US where the number of confirmed cases and fatalities is quickly rising.

Lockdowns and social distancing measures implemented around the world to flatten the curve have adversely impacted, in particular, service sectors such as tourism and hospitality, as well as consumer goods manufacturing. Oxford Economics observed that the auto sector has seen its most extensive factory shutdowns since World War II.

The disruption in economic activity has dealt a great blow to the labour market. China’s unemployment rate in February rose by 1 percentage point to 6.2% from December last year.

In the US, the Department of Labor reported a record number of 3.3m unemployment claims filed in the week ended 21 March. The UN warned that up to 25m people could be out of work in its worst case scenario.

Consequently, a sharp drop in consumer spending in the near term, especially in non-essential goods such as electronics and clothing, can be expected.

Oxford Economics forecast that global industrial production will fall sharply in the first half of 2020. If history is any guide, Oxford Economics observed that in the past 200 years, short recessions have typically been followed by strong recovery. Hence, a strong rebound in global industrial production in the latter half is expected, ending the year with a 2% contraction, as movement restrictions end, business operations and consumer spending return to normalcy, and massive policy stimulus kicks in.

Based on the economic fundamentals, ICIS expects that seaborne trade in ton-mile will contract by 1.1% in 2020, before rebounding by 5.1% in the following year.

This translates to a 2.3% drop in bunker fuel demand to around 221m tonnes in 2020, and a 3.8% recovery in 2021 to 229m tonnes. Prior the crisis, ICIS had expected bunker fuel demand to grow by 2% year on year in 2020.

That said, there is a great degree of uncertainty of how this pandemic will evolve and its magnitude of impact on the economy.

The risk of a deeper negative impact is high as the pandemic spread continues and persists for longer. Considering Oxford Economics’ coronavirus downside scenario, ICIS expects bunker fuel demand to drop by 3.3% in 2020. And it could be worse if the economic condition deteriorates.

Meanwhile, there are also other underlying downside risks at play to keep in mind such as growing anti-globalism and US-China trade tension that is not fully resolved which will put a damper on bunker demand growth.

Click here to view stories and content on the coronavirus and analysis on its impact on chemical markets

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