KBRA Releases Research – Coronavirus (COVID-19): Challenges Ahead for Container ABS

Kroll Bond Rating Agency (KBRA) releases research on how the coronavirus (COVID-19) pandemic is impacting the marine container industry.

The global spread of COVID-19 is impacting multiple aspects of global trade, including shipping. China is the world’s largest exporter of goods and accounts for 40% of the container shipping business. In 2019 alone, the U.S. imported approximately $452 billion worth of goods from China. Factory shutdowns in that country, as well as the curtailment of production because of quarantines implemented to slow the virus, resulted in supply chain disruptions that led to containers accumulating at various ports. In addition to supply shortages from factory closures, many municipalities outside of China have initiated lockdowns resulting in a decline in demand and consumer spending. As a result, many freight sailings have been cancelled (also known as blank sailings) through May. Now that employees are returning to work and factories are restarting in China, retailers in the U.S. are closing and not taking deliveries, creating further issues.

Although shipping volume has decreased, there is reportedly a current shortage of available containers in the industry. The earlier shutdown in China caused a shortage of port workers, causing a dislocation where containers were unloaded at less popular ports that are atypical stops for major shipping lines. Now the shipping lines have containers anchored at ports with no customers to fill them, as the ships are not returning to the aforementioned ports, and it can cost as much to transport an empty container as the container itself. Additionally, in the U.S. many retailers have closed stores and have stopped taking deliveries, so containers are not moving inland and are piling up at West Coast terminals. Combined with the increase in blank sailings, this has caused substantial logistical challenges. The availability of marine containers at major ports outside of China, located in Hamburg, Rotterdam, Antwerp, and Long Beach, are at the lowest levels ever recorded. According to mid-March research from Bloomberg News and World Maritime News, there are reports of exports running behind as much as two months, as China cancels sailings. This stress on the supply chain is extending delivery wait times and increasing costs along the way, including container per diem rates.

The expectation is that as the logjam clears the supply chain disruptions will dissipate. This should result in the shortage eventually turning to surplus as supply exceeds demand, but there is significant uncertainty regarding the long-term economic impact that this crisis will have on the global economy. Historically, dry container boxes have more volatile lease rates as they carry manufactured goods subject to shifts in economic cycles. Reefer containers, on the other hand, are historically less affected by slowdowns in the global economy as they typically carry necessities such as food. While these patterns are expected to repeat themselves, the current situation surrounding COVID-19 is unprecedented.

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KBRA is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and is a certified Credit Rating Agency (CRA) with the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA. Kroll Bond Rating Agency Europe Limited is located at 6-8 College Green, Dublin 2, Ireland.

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