Peter Sand - BIMCO Bulletin

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ECONOMY | Peter Sand November 2017 SHiPPing MaRket analYSiS Use tabs to navigate to pages Macroeconomics Dry bulk Tanker Container Macroeconomics A new normal gives the global shipping industry a better outlook for growth The wheels of the global economy are spinning faster and faster, demonstrated by growing output across the board, reaching pre-crisis growth levels in some advanced economies. The current state of the global economy can now be described as an accelerating cyclical upswing. It is essential that policymakers seize the moment and take advantage of this window of opportunity to undertake critical reforms. The International Monetary Fund (IMF) has released their final World Economic Outlook for 2017 and with that, they have also increased their expectations for global output by a 0.1 percentage point to 3.6% (by comparison the world output was 3.2% in 2016). Notably for the shipping industry, the projection for world trade volume has been revised upwards by 0.2 percentage points to 4.2% for 2017, a significant improvement from the 2.4% growth achieved in 2016. Peter Sand Chief Shipping Analyst at BIMCO Inflation and wage growth in many advanced economies remains subdued. For these economies to start normalising their monetary policies, inflation must experience upward pressure. One of the measures needed for higher inflation to materialise is growing wages. However, there are still signs that output will be squeezed further, and the labour market will continue to impede the recovery, before growing productivity will lead to higher wage growth, particularly in the United States (US) and European Union (EU). Q1-1990 Q2-2017 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10.0% 10.5% 11.0% Unemployment rate (inverted axis) 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% -6% Q1-1990 Q3-1990 Q1-1991 Q3-1991 Q1-1992 Q3-1992 Q1-1993 Q3-1993 Q1-1994 Q3-1994 Q1-1995 Q3-1995 Q1-1996 Q3-1996 Q1-1997 Q3-1997 Q1-1998 Q3-1998 Q1-1999 Q3-1999 Q1-2000 Q3-2000 Q1-2001 Q3-2001 Q1-2002 Q3-2002 Q1-2003 Q3-2003 Q1-2004 Q3-2004 Q1-2005 Q3-2005 Q1-2006 Q3-2006 Q1-2007 Q3-2007 Q1-2008 Q3-2008 Q1-2009 Q3-2009 Q1-2010 Q3-2010 Q1-2011 Q3-2011 Q1-2012 Q3-2012 Q1-2013 Q3-2013 Q1-2014 Q3-2014 Q1-2015 Q3-2015 Q1-2016 Q3-2016 Q1-2017 Q2-2017 Since the 1990s an unemployment rate below 5.7% has corresponded to nominal wage growth above the historical average of 4.3%. However, it is evident that there is currently something structural at play. In 2014 the US nominal wage growth was above the historical average for a short period, correlating to previous decades when the unemployment rate also surpassed the 5.7% level. While the unemployment rate has continued towards an historical low of 4%, the nominal wage growth has since reduced and currently seems to be doing the opposite of the unemployment rate. US quarterly nominal wage growth and unemployment Percentage growth United States Nominal wage growth (y-o-y) Historical average nominal wage growth since 1981 Unemployment rate 2 quarter lag (RH-axis) The subdued wage growth may reflect that the economy is not reaching its full potential, alongside the natural rate of unemployment. The declining unemployment rate and muted wage growth may reveal that unemployed resources persist in the economy, or structural changes in this post-crisis economy are hampering workers wages gain. Note: The right hand axis is inverted and unemployment contains 2 quarter lag Source: BIMCO, U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics US core inflation has fluctuated between 1.7% to 2.3% since the beginning of 2016 and with nominal wage growth between 0.9% to 3.8% during the same period, the average US worker will have experienced periods of negative real wage growth within the last two years. The US is however, showing strong growth in imports of containerised goods, indicating that consumer spending is growing despite the gloomy wage growth. The possibility of rising wages is encouraging for the container shipping industry, as higher wages translate into higher household income which promotes higher spending on consumer goods, all indicating additional room for growth in demand. The IMF has upgraded its projection for US growth from 2.1% to 2.2% for 2017 and from 2.1% to 2.3% for 2018. Europe Monthly manufacturing PMI While Europe has been experiencing economic, political and institutional turbulence, it has shown its ability to manoeuvre with confidence despite the uncertainty, and demonstrated strong growth. There is an overall strengthening in the European manufacturing Threshold USA sector and it is now growing at the fastest pace since 2011. This strong manufacturing growth, combined with rising exports indicates that the growing output in Europe is being consumed outside of European borders and therefore the production uptick benefits both short and deep-sea shipping activity. Japan China 60 59 58 57 56 55 54 53 52 51 50 49 48 47 46 45 44 43 42 41 40 Index level 60 59 58 57 56 55 54 53 52 51 50 49 48 47 46 45 44 43 42 41 40 Sep. 2012 Nov. 2012 Jan. 2013 Mar. 2013 May 2013 Jul. 2013 Sep. 2013 Nov. 2013 Jan. 2014 Mar. 2014 May 2014 Jul. 2014 Sep. 2014 Nov. 2014 Jan. 2015 Mar. 2015 May 2015 Jul. 2015 Sep. 2015 Nov. 2015 Jan. 2016 Mar. 2016 May 2016 Jul. 2016 Sep. 2016 Nov. 2016 Jan. 2017 Mar. 2017 May 2017 Jul. 2017 Sep. 2017 Index level In September, several long-standing records were broken, most notably Germany achieving the highest manufacturing PMI (Purchasing Manager Index) in 77 months, likewise France attaining the highest manufacturing PMI in 77 months, and Greece turning the tables with a 111-month high PMI. September 2012 - September 2017 EU Source: BIMCO, IHS Markit/Caixin, IHS Markit, IHS Markit/Nikkei BIMCO continue to emphasise that an uptick shouldnt lull policymakers into a false sense of security, as comprehensive and co-ordinated action will still be required to support the current positive economic development. The IMF has upgraded its projection for the Euro Area by 0.2 percentage points for both 2017 and 2018. Therefore, the expectation is now for a growth of 2.1% in 2017 and 1.9% in 2018. This increased projection comes at the back of a further increase in the July outlook. asia Japan faces the same subdued wage growth as Europe and the US, while also experiencing a low unemployment rate. Despite this, the Bank of Japan has pledged to withhold its monetary easing until the 2% inflation target is reached. Though structural reforms are one of the three arrows in Abenomics, there has been little sign of such action. Labour market flexibility and labour supply need to be a key focus of such a reform, especially given an aging population. With the Japanese election brought forward these reforms may be postponed, but on a positive note, the anticipated rise in consumption tax has been confirmed. The IMF has upgraded its expectations for Japans economy by 0.2 percentage points for 2017 and a 0.1 percentage point for 2018, amounting to a growth rate of 1.5% in 2017 and 0.7% in 2018. This adjustment is driven by stronger global demand, and policy actions taken by the Japanese government to support the fiscal position. The pace of the expansion is expected to slow down in 2018. As Chinas GDP growth seems to have stabilised just below 7%, the focus of economic reforms on the way will be to rein in credit expansion, cool down the inflated housing market, while maintaining the current growth rate. If the new reforms reduce fiscal support which has supported the commodity markets it will most likely dampen the growth rate for commodities into China. 2017 has shown a new China, stepping up its focus to reduce emissions and smog by exchanging domestically sourced commodities for commodities extracted outside of China. This has been beneficial for the dry bulk shipping industry. For the demand side to reap the full benefits of this possible global upturn, globalisation must be embraced and the gains from open trade must be a key focus of the policymakers agenda, replacing any inwardlooking policies The IMF expects Chinas economy to grow by 6.8% in 2017 and 6.5% in 2018. Outlook As all indicators are pointing up, with a few exceptions, and the IMF is lifting its target for world trade volumes from 3.8% to 4.2% for 2017, the global shipping industry cannot ask for a better outlook for growth in this new normal world. While segments in the shipping industry may face gloomy or even dark prospects for future earnings, this stems from self-inflicted damage and not from lack of support and demand. This self-inflicted damage creates a fundamental imbalance causing supply to outgrow demand, the effects of which will last for several years in some segments if there is no focus on bringing down supply growth. For the demand side to reap the full benefits of this possible global upturn, globalisation must be embraced and the gains from open trade must be a key focus of the policymakers agenda, replacing any inward-looking policies. According to the IMF, the move towards protectionist policies is partly caused by depressed wage growth, as it increases scepticism towards the benefits of cross-border economic integration in public opinion. Lastly, it is essential that policymakers exploit the opportunity given by the cyclical upturn to undertake critical reforms. This provides a window to stave off any downside risk and to raise potential output. Structural reforms, combined with fiscal policies focused on growth, can boost productivity and labour supply. Dry bulk shipping Take good care of the recovery Demand Even without much support from Brazilian iron ore exports during August, capesize rates went from $10,000 to $17,000 per day. In September, those gains were retained until Chinese Golden Week in early October reduced trip chartering interest, dampened demand and lowered the freight rates. Not dramatically, but noticeably. Capesize ships have (as of 26 October) been in profitable territory (above $15,300 per day) since 11 August and panamaxes likewise, since 5 September (above $10,200 per day). Peter Sand Chief Shipping Analyst at BIMCO Handymax/supramax/ultramax owners and operators who fixed their ships after 21 August, have also seen freight rates covering, not just operational expenditures (OPEX) but also capital expenditures (CAPEX), leaving a slim return on investment. This has only happened three times- for more than two days in a row in the past two years. Finally, the handysize segment has, for the first time since April 2014, reached a freight rate level above $9,000 per day. This ongoing recovery is still in a fragile state - demand has increased but so has supply. This means only a slight fundamental market improvement. The return to permanent profitable freight rates is still way off. The transport demand for dry bulk cargoes in Q1-2018 is considerably lower than the volumes transported in Q4-2017, and thats the first hurdle to cross. Maintaining slow steaming is another prerequisite to hold onto the gains that have been achieved. At the centre of dry bulk demand, as always, is China; growing its seaborne imports of coal during the first nine months of 2017 by 18.7%, and its seaborne imports of iron ore during the first eight months, by 6.9% year-on-year. In total, this is a demand growth of 79m tonnes (27 + 52 respectively) for the two commodities year-to-date. Setting a new world record in steel production for the month of August of 74.6m tonnes, resulted in total growth of 5.6% for eight months production in 2017, compared with the same period last year. Another record was reached in September, when Chinese iron ore imports exceeded 100m tonnes for the first time. While this is much needed by the dry bulk shipping industry to get out of the doldrums of recent years, there may be a limit as to how far this can go. Imagine if steel production stalls, then iron ore imports are likely only to grow at the expense of domestically mined ore. BIMCO calculates that substitution of low-quality, domestically mined iron ore in China, for imported high-quality iron ore from Brazil or Australia, would have increased imports by 17m tonnes per month in the first eight months of 2017. Regardless of recent reports, about one in three Chinese iron ore mines being at risk of losing their mining licenses due to environmental issues, the output from Chinese iron ore mines is still up by 5% in the first eight months, year-on-year. One of the key risk elements in the equation is actual steel consumption in China. This ongoing recovery is still in a fragile state demand has increased but so has supply In addition to the strong growth that we have seen into China, US coal exports have certainly added to the panamax and capesize demand in the Atlantic since Q4 2016. From November 2016 to July 2017, we have seen a monthly average of 6.4m tonnes of coal being exported from the US to a vast number of destinations like Japan, Egypt, Turkey, South Korea, China, Guatemala, India, Spain and Morocco. This is up by 61% versus the same nine months of the year before. Key export ports, mostly on the Atlantic side, are Hampton Roads and Baltimore, where panamax and capesize ships are used to export 60% of the total volume. In the US Gulf, Mobile dominates exports with shipments of coal in panamax. On the Pacific side, US coal exports are handled via Vancouver. The total tonne miles adjusted demand growth rate in 2017, is forecast to be 3.9%, the highest in three years. Supply The delivery pace has reduced significantly since H1-2017, but so has demolition activity. During H12017, 28m DWT was delivered, while 8.5m DWT was demolished. Whereas Q3-2017 has seen only 6m DWT delivered, and 3.6m DWT permanently leaving the active fleet. Demolition of handymax tonnage, has been dominant this year a natural reaction from owners operating in that segment, which has seen fleet growth around 5% pa for some time now, clearly outpacing all the other dry bulk segments. Contracting activity for the year so far, has as expected, gone up from the extraordinarily low levels that we experienced in 2016. While Q1 2017 was still quiet in terms of actual orders, newbuild interest was growing in the background. The larger segments are popular. Panamax and very large ore carriers (VLOC) account for 15 out of the 17m DWT ordered in total, year- to- date (until 2 October). Its worth noting that many of the VLOCs have been ordered against a long-term charter, most likely replacing existing long-term chartered VLOCs when they are retired. Later in October, another 5 VLOCs were ordered. For the first nine months of the year, the dry bulk fleet has grown by 2.7%, already a three-year high. BIMCO expects the fleet will end up growing by 3.1% to 16m DWT as demolition expectations are lower than the previously anticipated 19m DWT. In the future, expected fleet growth remains quite low based on the ships on order now and does not include orders not yet placed. 2018 could see the fleet grow by less than 1%. Outlook Should we look no further than China when it comes to dry bulk market demand? No, is the short answer - at least not in relation to steel production ingredients - iron ore and coking coal. In 2008, global iron ore imports were at 841m tonnes, out of which China took 436m tonnes (52%). In 2017, the global seaborne market is at 1,478m tonnes, out of which China takes 1,075m tonnes (73%). For thermal coal, a few other nations are worth taking note of, in addition to China. Those are India, South Korea and Malaysia. Additionally, the US seems to have re-established itself as an option in the seaborne coking coal market, providing long distance voyages into Asia. Ever since the outbreak of the global financial crisis in 2008, the dry bulk market has only had one growth area: Asia. All other regions of the world contribute with steady or declining imports. Note that European imports of: iron ore are down from 140m tonnes in 2008 to 117m tonnes in 2017 coking coal are down from 59m tonnes in 2008 to 46m tonnes in 2017 thermal coal are down from 156m tonnes in 2008 to 128m tonnes in 2017. For the current time and Q4 2017, selected seaborne trades from major exporters including iron ore, coal, grains, soya and steel products are expected to grow by 3.4% from Q3 2017 (source: SSY). Whereas, grain peaks in Q1 and Q3, and soya in Q2, the seaborne trading of steel products, coking coal, thermal coal and iron ore will all peak in Q4. After a bit of a downturn in the market during the first half of October (which was expected), demand lifted freight rates again. Its time to make the most of it, before seasonal low demand in Q1-2018 get the upper hand and push freight rates down. Q4 only delivers temporary upside as overcapacity remains an issue Demand The past couple of months have seen discussions about the rebalancing of the oil markets, only surpassed by discussions on the short-term effects of Hurricanes Harvey and Irma on the tanker shipping market. First things first. The global stocks of crude oil and oil products are being drawn down slowly, as the OPEC-led adjustments to global oil supply affect less than one-third of global production. An important part of it, no doubt, but it still leaves two-thirds of the rebalancing efforts out of OPEC-control. This includes OPEC members like Nigeria and Libya, both nations that have increased their output in 2017. Another significant producer that has scaled up its production in 2017 is the US. By mid-October OPEC called upon US shale oil producers to help reduce the supply glut, as they react to a slow rebalancing of the oil market. Chief Shipping Analyst at BIMCO US Gulf crude oil export spot xtures by size class January 2016 - September 2017 3,500 3,500 3,000 3,000 2,500 2,500 2,000 2,000 1,500 1,500 1,000 1,000 500 Aframax kMT Suezmax kMT 0 Sep. 2017 Aug. 2017 Jul. 2017 Jun. 2017 May 2017 Apr. 2017 Mar. 2017 Feb. 2017 Jan. 2017 Dec. 2016 Nov. 2016 Oct. 2016 Sep. 2016 Aug. 2016 Jul. 2016 Jun. 2016 May 2016 Apr. 2016 Mar. 2016 Recurring turmoil in Libyas giant El Sharara oil field means that the nation will stay a swing exporter, with a significant untapped potential until the unrest settles. Feb. 2016 0 500 Jan. 2016 Global oil demand is heading for a new all-time high at 98.7m barrels per day (bpd) in Q4 2017. Up by 1.9% from Q4 2016. Where is this demand coming from? Out of an incremental growth of 1.87m bpd, 1.06m bpd (57%) of that growth is coming from Asia, which is good for shipping. Particularly, if that demand is met by oil from African producers and not the relatively short-haul producers in the Middle East. 0.35m bpd (19%) comes from the Americas this may impact shipping only slightly, whereas a further 0.23m bpd (12%) comes from the Middle East with no expected effects on shipping at all. Peter Sand VLCC kMT Source: BIMCO, Charles R. Weber Company, Inc. In the US, the last week of August and the first weeks of September were largely impacted by this years hurricane season. The immediate effects were refinery outages, and disruption to the Colonial pipeline which provides large parts of the East Coast US with gasoline, jet fuel and other refined oil products. International shipping assisted to ensure mainland US continued to receive supplies of oil products and the US Jones act was suspended for two weeks. October 2013 - September 2017 2,250 2,000 2,000 1,750 1,750 1,500 1,500 1,250 1,250 1,000 1,000 750 750 500 500 250 Thousand DWT 2,250 250 0 Oct. 2013 Nov. 2013 Dec. 2013 Jan. 2014 Feb. 2014 Mar. 2014 Apr. 2014 May 2014 Jun. 2014 Jul. 2014 Aug. 2014 Sep. 2014 Oct. 2014 Nov. 2014 Dec. 2014 Jan. 2015 Feb. 2015 Mar. 2015 Apr. 2015 May 2015 Jun. 2015 Jul. 2015 Aug. 2015 Sep. 2015 Oct. 2015 Nov. 2015 Dec. 2015 Jan. 2016 Feb. 2016 Mar. 2016 Apr. 2016 May 2016 Jun. 2016 Jul. 2016 Aug. 2016 Sep. 2016 Oct. 2016 Nov. 2016 Dec. 2016 Jan. 2017 Feb. 2017 Mar. 2017 Apr. 2017 May 2017 Jun. 2017 Jul. 2017 Aug. 2017 Sep. 2017 In addition, the prolonged downtime at Gulf Coast refineries has reduced crude oil throughput in the US. A knock-on effect has been a large increase in seaborne US crude oil exports, at least if judged by recent spot fixtures (source: Charles R. Weber Company). More than 3m DWT of crude oil tanker capacity was fixed in September, surpassing the previous high in May, that saw 2.2m DWT engaged. Crude oil tanker demolition activity Thousand DWT As of 4 October, one refinery (capacity 225,000 bpd) is currently in the process of restarting after being shut down. Five other refineries (combined capacity of 1.8m bpd), also located in the Hurricane struck US Gulf coast region, are operating at a reduced rate. VLCC Suezmax Aframax 0 Panamax Source: BIMCO, Clarksons In China, crude oil imports continued to climb in September. During the first nine months of 2017, China imported 33m tonnes more of crude than the same period last year. BIMCO estimates that this equals a tonne-mile growth rate of 18% for Chinese crude oil imports alone. Supply In total, the demolition of crude oil and oil product tankers in 2017 has not been impressive. But focussing only on product tanker demolitions in August it reached a five-year-high at 472,000 DWT. For only the second time in seven years, more than 450,000 DWT was permanently removed from active trading. The demolition of two LR2 and five MR/handysize ships accounted for the greater part of this. For crude oil tankers, we have now experienced increased demolition for three months in a row (JulySept). August was particularly strong, with a level unseen since 2003. Amongst the demolished ships there were four VLCCs, three suezmaxes and four aframaxes. 10% 8 8% 6 6% 4 4% 2 2% 0 0% -2 -2% -4 -4% 2013A 2014A 2015A To be delivered p.a. 2016A 2017F Demolition 2018E 2019E Growth rate p.a. 10 Million DWT But is it too little and too late? No and No! Throughout the year, BIMCO has remained confident that the poor freight markets would eventually result in increased demolition interest. The reason for a pick up now is grounded on the growing belief that this downturn will last longer than first anticipated. In terms of newbuild interest, we had owners shy away from the demolition market in the earlier part of the year, they were attracted to the newbuilding market instead as optimism was still solid. Ordering of crude oil tanker tonnage was particularly high. However, September proved that the second half of the year surprisingly reflected the first half. No less than nine VLCCs were ordered that month for delivery in 2019 and 2020, bringing the total number of new VLCC orders for 2017 up to 41 units. Oil product tanker eet growth Growth rate (RH-axis) Source: BIMCO estimates on Clarksons raw data A is actual. F is forecast. E is estimate which will change if new orders are placed. The supply growth for 2017-2019 contains existing orders only and is estimated under the assumptions that the scheduled deliveries fall short by 10% due to various reasons and 35% of the remaining vessels on order are delayed/postponed. While newbuild orders will only affect the market one to two years from now, deliveries in 2017 are already deeply affecting the fundamental balance in a negative manner. Crude oil tanker fleet growth Outlook BIMCO expects that the lossmaking freight rate levels that we saw during October, due to maintenance at oil fields and oil refineries, will be somewhat reversed as we enter the peak season for oil tankers, which runs from November to January. This should benefit both oil product tankers and crude oil tankers. For crude oil tankers, we expect rates to go up, but not to reach the highs of the previous peak season in 2016/17. The market fundamentals are too weak for that to happen. We are seeing the highest oil demand ever, but also a fleet growth of almost 5%. For oil product tankers, we expect a bigger tailwind to lift rates. However, the market remains fragile. Global oil stocks, built up in 2014-2016 must be drawn upon for tanker demand to normalise again. There is still a lot to do on that account despite erroneous statements of a near-balanced oil market. The immediate future of Kurdistan Regional Government (KRG) sour crude oil exports to several European refiners via the Kirkuk-Ceyhan pipeline into the Mediterranean Sea is uncertain. In response to the Kurdish referendum (25/9) on possible independence from Iraq, the governments of Iran, Turkey and Iraq have issued statements of potential actions that may affect KRG exports, if implemented. Longer sailing distances are always welcome, but what the tanker market needs most right now is more tankers engaged in floating storage operations Before the conflict, KRG exported 600,000 barrels per day (bpd), going to Italy, Greece, Israel, Croatia, Spain and Sweden. At the end of October, exports amounted to just 200,000 bpd. This is the highest global oil demand ever but its also a large and growing fleet The likely alternative to KRG crude oil, would be Russian exports out of the Black Sea. But Iraqi Arabian Gulf exports could also step in, as the oil grade is similar. No clear signs of who is going to yet. In Asia, the busy part of the Pacific typhoon season is still here, with most landfalls happening in China, Japan, Vietnam and the Philippines. So far, the typhoon season has passed without devastating key infrastructures or potentially affecting shipping. Nevertheless, extensive weather routing to ensure a safe voyage is being widely applied. In total, US crude oil exports were up 59% year- on- year, for the first seven months of 2017. This equated to more than 900,000 bpd being exported, up by 340,000 bpd. While the main receiver of it, Canada, dropped its imports by 69,000 bpd, seaborne transports increased. Exports during the first seven months to China were up by 168,000 bdp, exports to Japan up by 19,000 bpd, Korea up by 30,000 bpd and Singapore up by 31,000 bpd. In addition, the shorter trans-Atlantic destinations like the United Kingdom, saw an increase of 52,000 bpd, Netherlands increased by 34,000 bpd and Italy increased by 18,000 bpd. This is the highest global oil demand ever but its also a large and growing fleet. This makes the oil tanker market a constantly changing environment. Longer sailing distances are always welcome, but what the tanker market needs most right now is more tankers engaged in floating storage operations. With Brent and Dubai crude futures pricing being in backwardation and the West Texas Intermediate (WTI) crude in a slim contango for the next 12 months, a comeback for floating storage seems farfetched for the time being. Container shipping Testing the strength of the market makes spot rates drop Demand What have we learnt from the most recent peak season? Volumes on all trades grew at healthy levels in line with our full year forecast for global container demand growth rate being at the same level as global GDP growth. BIMCO anticipates that the global trade-to-GDP multiplier for total container shipping demand in 2017 and coming years will hover around one or slightly above, at best. Year-todate, we have seen a multiplier of 1.39. Peter Sand The overall level is one thing, but individually, we may see both higher or lower multiples for different Chief Shipping Analyst at BIMCO regions. Noticeably, US and European imports have been strong in 2017. This has benefitted the utilisation of ships deployed on those long-distance trades, temporarily easing cascading pressure. Cascading pressure that for many years now has eroded profitability on secondary and tertiary trades. On these trades, Europe to North America strong demand growth has been overwhelmed by massive supply 2016 - 2017 by month inflow, resulting in falling freight rates. 500 15% 14% 13% 12% 11% 300 9% 8% 7% 200 6% Growth rate 10% Thousand TEU Demand growth on intra-Asian trades grew by 4.2% in the first eight months of 2017 (source: CTS). Total European imported volumes grew by 4%, to reach 21.2m TEU. Growth on the Far East to Europe trades was strong at 5.4%, accounting for little more than half of all European TEU imports. 400 5% 4% 100 3% 2% A better economic performance recently seen in Europe, as discussed in the macroeconomics section of this Shipping Market Overview & Outlook, has benefited container shipping at large. Head haul transatlantic from Europe to North America, grew as much as 7.9%. Overall, the global container volumes went up by 5% year-on-year for the first eight months. 1% 0% 2016 2017 r r De ce m be be No ve m r Oc to be r be Se pt em Au g us t ly Ju Ju M ne ay il Ap r ar ch M ar y ru Fe b Ja nu ar y 0 Acc. Y-o-y growth 2017 (RH-axis) Source: BIMCO, CTS The average spot rates for US and Europe bound routes have dropped by 22% since the end of July. In fairness, prices on so-called contract volumes have held the CCFI (China Containerized Freight Index) up quite well, while spot rates have dropped. The CCFI is down 8% since the end of July, the CCFI being the better indicator for developments in liner profitability. Because of the liner companies interest in testing the strength of the market, they deploy tonnage into the trades until the freight rates drop! Only by doing that, can they reveal the true strength of demand With demand growing briskly, why are spot freight rates falling significantly on all those trades? Because of the liner companies interest in testing the strength of the market, they deploy tonnage into the trades until the freight rates drop! Only by doing that, can they reveal the true strength of demand. Despite running regular service cuts around Chinese Golden week in early October, an event which brings down demand - freight rates kept falling. During the months of May through to September, we have seen the idle fleet drop further to reach 495,000 TEU by 2 October 2017. Now that we are entering the winter season where the transported volumes always go down from Q3, the management of deployed capacity on individual trades and throughout the entire network will be essential to limit losses. Supply It has been a steady year in terms of newbuild deliveries into the container shipping fleet. As nine months have already passed, we have seen 898,000 TEU delivered. BIMCO expects 1.1m TEU to be delivered for the full year. This is more than the 905,000 TEU that was delivered in 2016, but it is likely to be on a par with 2018-deliveries. Perhaps most importantly, deliveries will be lower than any year since 2008. So, what makes the difference in between years? The short answer is the level of demolished capacity which is leaving the active fleet for good. After the new all-time high of 654,000 TEU in 2016, the improved market was set to reduce demolition. For the first nine months, we have seen 356,000 TEU sold for demolition. The main differences from 2016, are that the demolished ships have become older again (up from 19 to 21 years on average) and they have become smaller in size. 2016: Average size 3,373 TEU Average year built 1997 (19 years old) 2017: Average size 2,891 TEU Average year built 1996 (21 years old). In total, this brings BIMCOs fleet growth forecast for 2017 to 3.3%. Container ship eet growth 1,500 12% 1,250 10% 1,000 8% 6% 500 4% 250 2% 0 0% -250 Sale and purchase activity has been extensive in the containership sector too. The reason being the same as in the dry bulk sector. A disparity between second-hand prices and newbuild prices has made fleet expansions in the second-hand market significantly more attractive. 750 -2% -500 Growth rate p.a. Following two years of next to nothing being ordered, September broke the trend. Orders of nine and 11 units of 22,000 TEU were placed at South Korean and Chinese yards in September. So why are we seeing new orders in a market haunted by overcapacity? One reason could be that chartered-in ships are redelivered upon yards delivery of the newbuilds. 14% Thousand TEU 1,750 -4% -750 2013A 2014A 2015A 2016A To be delivered p.a. 2017F Demolition 2018E 2019E -6% Growth rate (RH-axis) Source: BIMCO estimates on Clarksons raw data A is actual. F is forecast. E is estimate which will change if new orders are placed. The supply growth for 2017-2019 contains existing orders only and is estimated under the assumptions that the scheduled deliveries fall short by 10% due to various reasons and 30% of the remaining vessels on order are delayed/postponed. Outlook We have seen profits returning (at least for a while) on several trades, but the market is still very challenging and many trades are still delivering lossmaking freight rate levels. The same goes for the charter market where the lift in the run up to 1 April- when the new alliances were launched - has only slightly reversed and still remains a far cry from past highs. Containership contract activity June 2014 - September 2017 400 350 350 300 300 250 250 200 200 150 150 100 100 50 50 0 Post-Panamax Neo-Panamax Connect with BIMCO Twitter Panamax Feeder Source: BIMCO, Clarksons Bearing in mind that freight rates are still dropping in mid-October, so striking the right balance must be a priority to stop declining profits. The rates on key trades have once again become so low that any profits have evaporated. Facebook Intermediate Linkedin YouTube StockStudio / Shutterstock Thousand TEU 450 400 Thousand TEU 450 Jun. 2014 Jul. 2014 Aug. 2014 Sep. 2014 Oct. 2014 Nov. 2014 Dec. 2014 Jan. 2015 Feb. 2015 Mar. 2015 Apr. 2015 May 2015 Jun. 2015 Jul. 2015 Aug. 2015 Sep. 2015 Oct. 2015 Nov. 2015 Dec. 2015 Jan. 2016 Feb. 2016 Mar. 2016 Apr. 2016 May 2016 Jun. 2016 Jul. 2016 Aug. 2016 Sep. 2016 Oct. 2016 Nov. 2016 Dec. 2016 Jan. 2017 Feb. 2017 Mar. 2017 Apr. 2017 May 2017 Jun. 2017 Jul. 2017 Aug. 2017 Sep. 2017 For the coming months, volumes will decline seasonally until February. During that period however, the fleet is expected to continue growing. Handling this will also be a recurring seasonal challenge. 500 0 The fragile recovery needs assistance and some caretaking. Overcapacity will remain an industry challenge for years to come and keeping sailing speeds at present levels will be critical for the recovery to stay on track. In this regard, its worth noting that many of the existing very large containerships and those on order, seem to fit Far East to Europe strings of 9 to 11 ships, as opposed to the string size of seven-nine ships before slow steaming was widely implemented. 500