Peter Sand - BIMCO Bulletin

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ECONOMY | PETER SAND February 2019 SHIPPING MARKET ANALYSIS Use tabs to navigate to pages Macroeconomics Dry bulk Tanker Container Macroeconomics Trade tensions and rising risks lead to slowing growth The International Monetary Fund (IMF) has revised down its predictions for global growth in 2019 and 2020. It forecasts growth to be 3.5% in 2019 and 3.6% in 2020. This means a dampening of global growth over the next two years, as growth in 2018 is estimated to be 3.7% The slowdown will affect both advanced and emerging economies. Growth in advanced economies in 2019 was revised down to 2.0%, from 2.1%, but the 2020 projection of 1.7% remains the same. The revision is not only because of lower expected growth for the euro area, but also because US growth is expected to decline. Growth in emerging economies in 2019 is now predicted to be 4.5%, revised down from 4.7%. The trade tensions will hit China and its neighbours, with lower growth as a result. The shipping industry should brace for slowing demand growth in 2019 Peter Sand Chief Shipping Analyst at BIMCO Seaborne trade of goods involved in the trade war In million tonnes, 2017 100 100 80 80 60 60 40 40 20 20 0 0 Europe Dry bulk Container Chemicals Gases Oil products US imports Chinese imports Growth is predicted to slow in the EU, with several of the major Source: BIMCO, US Census Bureau economies bringing it down. In Germany, the fall in growth from 1.5% in 2018 to 1.3% in 2019 is because of low domestic demand, lower industrial production on the back of new standards on car emissions, and the impact of the trade war on foreign demand. Italian growth in 2019 has been revised down to 0.6%, from 1.0%, because of high borrowing costs and weak domestic demand. Industrial action and the yellow-vest protests have also resulted in lower growth expectations in France for 2019, and the IMF now sees French growth as being unchanged from 2018, at 1.5%. At the time of writing, Brexit is less than two months away, but huge uncertainty remains over the terms of the UKs departure from the European Union. The withdrawal agreement was heavily defeated in the British parliament, but with no clear majority for any solution on the table. A delayed departure date, or a no-deal Brexit, is becoming more likely as the days pass. The actual effect of a nodeal Brexit remains unclear. Vehicles Million tonnes 120 Million tonnes The shipping industry feels the impact of this trade war, especially in the dry bulk market. While there were high container volumes on the front-haul eastbound transpacific trade lane in Q4 2018, this is unlikely to continue into 2019, given that companies have filled up their inventories and there is uncertainty over future tariffs. The US has now imposed tariffs on more than USD 250bn worth of Chinese imports and China has retaliated with tariffs on USD 113bn of imports from the US. 120 Risks are piling up, with warning signs emerging around the globe The manufacturing purchasing managers index (PMI) in the euro area fell throughout 2018, from 60.6 in December 2017 to 51.4 in December 2018. With the PMI for January coming in at 50.5, the start of a new year has not brought an end to this prolonged decline. We use the PMI as an indicator for where shipping demand is heading, because it reflects the condition of the related key manufacturing sector. After the US withdrawal from the Joint Comprehensive Plan of Action (JCPOA) and the re-imposed sanctions on Iran, Germany, France and the UK have announced the creation of a special-purpose vehicle named INSTEX. This will allow European businesses to avoid US sanctions and continue trading with Iran. European businesses have mostly followed the US sanctions to protect their interests in the US. US Growth in the US remains stronger than in other advanced economies, but is expected to fall to 2.5% in 2019 and 1.8% in 2020, according to the IMF. The longest government shutdown on record was suspended in late January, after 35 days. However, the government may shut down again on 15 February if negotiations fail for a permanent agreement to deliver funds to run the federal government in 2019. The direct economic impact of the shutdown was not the only effect. While federal workers were sent home, they were unable to fulfil their usual role in trade facilitation, making it harder for US importers and exporters to conduct business. Delayed releases of economic and international trade data at a crucial time in trade negotiations have also been part of the fallout. On the positive side, the US, Mexico and Canada have agreed a new trade deal, which replaces the North American Free Trade Agreement. The deal awaits ratification and the impact on trade between the three countries remains uncertain. Reducing its trade deficit with China is one of the main aims of the US in the ongoing negotiations to end the trade war but, in 2018, the tariffs had the opposite effect, with frontloading ahead of rising tariffs. In 2018, China reported a trade surplus of USD 323.3bn with the US, exports grew 11.3% year on year, while imports were only up 0.7% from 2017. Asia Source: Chappatte, The New York Times www.chappatte.com Growth in China remains high, and well above the global average, but the direction of it is clearly southbound. A tightening of financial markets and monetary policy, combined with the trade war, have led to slowing growth. The IMF reported 6.9% growth in 2017, declining to 6.6% in 2018 and 6.2% in 2019 and 2020. In response to this, the Chinese authorities have started, and are expected to continue, implementing fiscal policies to stimulate the economy and ease the pace of the slowdown. Dry bulk and tanker shipping sectors will be particularly harmed by a Chinese slowdown, and with overall imports falling in December these sectors are already being affected. Chinas official PMI was at 49.5 in January, up from the 49.4 in December, but still below the threshold of 50. A PMI of 50 indicates no change from the previous month, and anything below 50, a contraction. While Chinese exports remained high in Q4 2018, this was largely down to frontloading by US buyers because of anticipated tariff hikes, and Chinese manufacturing PMI so is unlikely to continue into 2019. The new orders index fell to 2018-2019 52.5 49.6 in January, the second month of contraction. 51.9 51.4 51 Index level Risks are piling up, with warning signs emerging around the globe. The next few months will prove very interesting for the shipping industry. The Venezuelan crisis and the new Brazilian president will probably influence South American trade, while the whole world will be watching closely for official announcements from China and the US regarding the outcome of trade talks. 51.5 51.5 51.5 51.3 52 51.5 51.3 51.2 50.8 51 50.5 50.5 50.3 50 50.2 50 50 49.5 49.5 49.4 49 48.5 48 49.5 49 48.5 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2019 48 The two countries agreed to put tariff hikes on hold during a threeManufacturing PMI Source: BIMCO, National Bureau of Statistics China month window, in the hope of coming to a satisfactory deal and stopping this trade war. If, however, no deal is reached, tariffs on USD 200bn worth of US imports from China will rise from 10% to 25% on 2 March, with a Chinese retaliation likely. Any escalation of the trade war will further harm the shipping industry, at a time when it is already struggling. The global manufacturing PMI fell to 50.7 in January, its lowest level since August 2016, with IHS Markit forecasting a relatively lacklustre outlook. New export orders for goods also fell in January, coming in at 49.4. The shipping industry should brace for slowing demand growth in 2019. ECONOMY | PETER SAND February 2019 SHIPPING MARKET ANALYSIS Use tabs to navigate to pages Macroeconomics Dry bulk Tanker Container Quick Facts Dry bulk shipping Uncertainty mounts against a backdrop of weaker growth in Chinese imports Demand drivers and freight rates The extent of the freight rate recovery in 2018 was limited when compared with initial expectations by a faster-growing fleet. Q4-2018 wasnt as strong as it often is either, but we now know that was merely the beginning of a sharp downturn. On top of that, in the first month of 2019, leading the way even further down was a massive lack of cargoes. By early February, the industry appeared to be paddling in quicksand. Peter Sand The November dip in Capesize freight rates was just an ill omen of what was to come. For the whole of January, there has been no support for Supramax, Panamax or Handysize freight rates; it is as if the market has turned back the clock by two years, touching at freight rate levels last seen in early 2017. Chief Shipping Analyst at BIMCO USD per day A major challenge is created because seaborne transportation is completely price inelastic. In other words, shipping cannot create higher demand through lower prices it is simply the servant of world trade. Only a continued focus on removing barriers to trade and lifting global economic growth can support the demand side of the shipping industry. 35,000 35,000 30,000 30,000 25,000 25,000 20,000 20,000 15,000 15,000 10,000 10,000 5,000 5,000 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 Oct. 2017 Nov. 2017 Dec. 2017 Jan. 2018 Feb. 2018 Mar. 2018 Apr. 2018 May 2018 Jun. 2018 Jul. 2018 Aug. 2018 Sep. 2018 Oct. 2018 Nov. 2018 Dec. 2018 Jan. 2019 Feb. 2019 0 Chinese dry bulk imports the main driver on the demand side of the fundamental balance have exhibited weakness, growing by only by an estimated 2.5% in 2018. Minor bulks (minerals, metals, forest products, and so on) were among the positive drivers, while a massive headwind was blowing against grains, soya beans and iron ore. Capesize Panamax Supramax USD per day At the levels recorded on 31 January 2019, Handysize, Supramax and Panamax all had earnings of about $6,000 per day, whereas the 180,000 DWT Capesize ships earned only a little more than $11,000 per day. All of Dry bulk earnings them are operating at loss-making levels. 2015-2019 0 Handysize Source: BIMCO, Clarksons At the end of January, a devasting dam collapse in Brazil, in which more than 140 people died and 190 are still missing, has crippled the countrys iron-ore exports for the foreseeable future. Chinese dry bulk imports the main driver on the demand side of the fundamental balance have exhibited weakness On 30 January, Brazilian mining giant Vale reported that the event would have an impact on the annual production of 40 million tonnes of iron ore but that would be be partially offset by increased production elsewhere. Vale exported 390 million tonnes of iron ore in 2018. This is a developing story, but it will surely disrupt the Capesize market in a negative way, as long-haul Brazilian exports are substituted with shorter hauls most likely from Australia considering Asian imports only. On 6 February, Vale reported suspension of operations at a mine capable of producing yet another 30 million tonnes a year. All this is bad news for the standard Capesize ships, as volumes goes down and new VLOCs are launched rapidly throughout 2019. For every 10 million tonnes of exports to China that shift away from Brazil to Australia, nine standard Capesize ships will be out of work. If the 10 million tonnes of exports to China from Brazil are lost forever, another five will become redundant. Fleet news For the full year, BIMCO estimates a dry-bulk fleet growth of 3.1%, up from 2.9% in 2018. We predict demolition activity will remain low. Should our estimate of just 4m DWT exiting the fleet prove too low, an additional 10m DWT leaving will bring the fleet expansion down to 2%. This sensitivity shows that even a much higher level of demolition if freight rates stay low for an extended time may not be enough to create a turnaround. It may only make sure fleet growth stays on a par with potentially lower demand. 40 4% 30 3% 20 2% 10 1% 0 0% -10 -1% -20 -2% -30 -3% -40 -4% 2015A 2016A 2017A To be delivered p.a. 2018A 2019F 2020E Demolition 2021E Growth rate p.a. 5% 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 2019-2021 contains existing orders only and is estimated under the assumptions that the scheduled deliveries fall short by 10% due to various reasons and 25% of the remaining vessels on order are delayed/postponed. Brazilian soya beans exports to China Million tonnes, 2017-2019 11 90% 10 80% 9 70% 8 60% 7 50% 6 40% 5 30% 4 20% 3 10% 2 0% 1 -10% 0 -20% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Accumulated y-o-y growth The current level of deliveries forecast for 2021 (16 million DWT) and estimated on the back of the existing orderbook only shows that interest in placing new orders has been subdued since the middle of 2014. The only exception is the period September 2017 to January 2018 when freight rates were at their highest level for a long time. 50 Million DWT As the order book is no longer massive, global shipyards will tend to deliver newbuild ships closer to the scheduled dates than usual. Consequently, BIMCO has adjusted the slippage rate in its forecasts down to 25% in 2019 from 35% in 2018. 2015A-2021E Million tonnes Preliminary data points show that 3.2m DWT was delivered in January 2019 the highest for a single month since January 2018. January is traditionally the month that sees the highest number of launches. Just three ship demolitions did little to counter the fleet growth of 0.3%. Dry bulk ship eet growth 2017 2018 2019 Accumulated y-o-y- growth 2017 (RH-axis) Accumulated y-o-y- growth 2018 (RH-axis) The deliveries scheduled for launch in 2019 includes: nine Valemax Source: BIMCO, ComexStat ships; 52 Very Large Ore Carriers (VLOC); 20 standard Capesize 133 Panamax; 122 Supramax; and 73 Handysize. A faster fleet growth in 2019, combined with a deteriorating market, means that a broadspectrum impact will be felt. No sub-sectors will be shielded from the way the market is developing neither from a growing fleet nor the synchronised freight rate movements. Outlook Calling a market turnaround to perfection is pure luck. But scouting for pillars that would support a higher level of demand makes sense. First up is the next Brazilian soya bean export season, which might come earlier this year, as harvest conditions have reportedly been favourable. As a result, we expect to see soya bean cargoes entering the market as early as the second half of February. The trade war disrupts normal seasonality, but if we see easing trade tensions, soya beans may well be exported from the US in the off-season. Owners and operators could end up splitting repositioning of open-spot ships between Brazilian and US waters and both may see exports increase within the coming weeks or months. Both trade lanes Brazil-China and US-China are long hauls that will underpin the market as cargoes start to flow. The issue is that Chinas insatiable appetite for soya beans is currently challenged by more than just the trade war; an outbreak of African swine fever has resulted in a massive culling of pigs and a government proposal to reduce the protein levels in pig feed. Nevertheless, we expect a solid import level to stick around. Second, we must rely on other regular seasons to deliver demand, such as higher iron ore imports to China as production picks up in March after the low tide around Chinese New Year in February. In 2018, world steel production rose by 77 million tonnes 57 million tonnes of which were produced in China and five million in India, as that nation overtook Japan as the worlds No2 steel producer. Notably, production also picked up by 5.1 million tonnes in the US and 3.8 million in Iran. Everything above must be considered against the backdrop of a weakening macroeconomic outlook. A backdrop that may be of such significance that even strong, regular dry-bulk seasonality may not be able to lift demand to an extent that brings back profitable freight rates. Photo (top): Lukasz Z / Shutterstock Dry Bulk DWT Handysize Handymax Panamax Capesize VLOC Valemax 10,000 - 39,999 40,000 - 64,999 65,000 - 99,999 100,000 + 200,000 - 350,000 380,000 - 400,000 No sub-sectors will be shielded from the way the market is developing ECONOMY | PETER SAND February 2019 SHIPPING MARKET ANALYSIS Use tabs to navigate to pages Macroeconomics Dry bulk Tanker Container Quick Facts Tanker shipping Geopolitics and overall fleet growth are the main drivers Demand drivers and freight rates US-Saudi politics and Chinese tradesmanship created a temporary recovery for the oiltanker market It was quite a bounce for a dead cat, as US-Saudi politics and Chinese tradesmanship created a temporary recovery for the oil-tanker market. Peter Sand Chief Shipping Analyst at BIMCO Crude oil tanker earnings 2015-2019 After deduction of operational expenditures (OPEX), bunker cost and capital expenditures (CAPEX), all crude oil tanker spot fixtures made in Q4-2018 were profitable. Oil product tankers were only seeing profitable spot freight rates in December. 110,000 110,000 100,000 100,000 90,000 90,000 80,000 80,000 70,000 70,000 60,000 60,000 50,000 50,000 40,000 40,000 30,000 30,000 20,000 20,000 10,000 10,000 0 USD per day 120,000 0 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 Oct. 2017 Nov. 2017 Dec. 2017 Jan. 2018 Feb. 2018 Mar. 2018 Apr. 2018 May 2018 Jun. 2018 Jul. 2018 Aug. 2018 Sep. 2018 Oct. 2018 Nov. 2018 Dec. 2018 Jan. 2019 Feb. 2019 Earnings for oil product tankers followed suit, peaking in December. Rates for LR2 and LR1 tankers reached USD 32,000 per day, but those for MRs disappointed because they only reached USD 20,000 per day. 120,000 USD per day The tanker market has made the most of a solid and much needed boost that was ignited by falling oil prices, which started in early October. Prices were pushed down by all-time high Saudi Arabian crude oil production that peaked at 11.1m barrels per day in November. Earnings for all sizes of crude oil tankers touched USD 50,000 per day as they peaked in late November and early December 2018. VLCC Suexmax Aframax Source: BIMCO, Clarksons When it comes to time charters, its been an almost non-existent market as the bid-ask spread between charterers and owners rate expectations have been impossible to bridge in a such a poor market. Massive change is not likely to happen any time soon and this goes for both oil-tanker sectors. Oil product tanker earnings Oil product tankers benefited as global refiners increased throughput and refined oil products were shipped and stored at different facilities around the world. But oil product tankers did not get the full benefit of the falling oil prices because Chinese crude oil imports (link to news story of 31 Jan) - which grew massively in Q4 - went, to a large extent, into strategic petroleum reserves as well as to independent Chinese teapot refiners storage. The crude oil wasnt immediately refined, so no products were produced for exports. Increasing crude oil production in the US is likely to be a positive factor in the tanker market in 2019 December exports of oil products from China are normally seasonally strong, but they dropped 5% in 2018 compared with December 2017. Chinese oil product exports were up by 12% from 2017, while imports grew by 12.8%. One of the significant and developing oil tanker trades in 2018 was US crude oil exports, which went from one record to the next. The most recent data we have is from October, when they reached 8.6m tonnes. The conclusion is that US crude oil exports recovered extremely well finding alternative markets fast to limit damage from the trade war with China, which stopped buying US crude oil from August 2018, having bought 22% of all US export in the previous seven months [See: www.bimco.org/ news/market_analysis/2018/20181106_no_us_crude_to_china_in_september?pn=1 ]. 5.0 4.0 4.0 3.0 3.0 2.0 2.0 1.0 1.0 0.0 0.0 Exports Jun. 2018 Jun. 2017 The crude oil tanker fleet grew by 0.8% in 2018, as very weak demand growth brought down freight rates and caused demolitions to hit an eight-year high. For 2019, BIMCO expects high fleet growth to become a problem again, forecasting 3.4% fleet growth for the full year. Million DWT 5.0 Dec. 2018 6.0 Dec. 2017 6.0 Dec. 2016 7.0 Jun. 2016 Fleet news 7.0 Dec. 2015 As expected, it has been difficult to assess the impact of the US sanctions against Iran. Exports out of Iran have come down, but it has been more than offset by increased production and exports elsewhere in the Gulf region mainly by Saudi Arabia in Q4-2018 as geopolitics ended up in the driving seat and Saudi Arabia flooded the oil market. Million DWT Despite many rumours, China has not imported any crude oil from the US since then. Nevertheless, five VLCCs and one Suezmax are reportedly heading for China with US crude oil. According to AIS data sourced from VesselsValue.com, only the Suezmax tanker is currently bound for China, with four of China oil product imports and exports monthly Million tonnes, December 2015 - 2018 the VLCCs headed for Singapore and going to South Korea. 8.0 8.0 Imports Source: BIMCO, Banchero Costa If the scheduled order book is anything to go by, newbuild deliveries will be dominated by VLCCs coming into the market at a steady flow. Note that BIMCO always expects the scheduled order book to fall short by 10%, in addition to a sector-specific slippage rate of 25% for the oil tankers. For crude oil tankers, the size of the order book is 50 million DWT, with close to half of this expected to be launched in 2019. Crude oil tanker eet growth 2015A-2021E 6% 25 5% 20 4% 15 3% 10 2% 5 1% 0 0% -5 -1% -10 -2% -15 -3% -20 -4% 2015A 2016A 2017A To be delivered p.a. 2018A 2019F Demolition 2020E 2021E Growth rate p.a. BIMCO similarly expects higher fleet growth for the oil product tanker sector, primarily on the back of much lower demolition activity. Nevertheless, the fleet is only set to grow at a level that should be manageable if demand growth picks up. In the case of demand staying as weak in 2019 as it was in 2018, any fleet growth will naturally be too high. Million DWT For 2018, fleet growth was quite diverse; the Aframax grew by just 0.3%, VLCCs growth was on a par with that of the overall fleet, at 0.8%, while the Suezmax fleet grew by 2%. 30 Growth rate (RH-axis) Source: BIMCO estimates on Clarksons raw data For 2018, fleet growth was quite diverse, with MR/Handy growing A is actual. F is forecast. E is estimate which will change if new orders are placed. The supply growth for 2019-2021 contains existing orders only and is estimated under the assumptions that the scheduled deliveries fall short by 10% due to various reasons and 25% of the remaining vessels on order are delayed/postponed. just 0.8%, LR1 growth on a par with overall fleet at 1.8%, and the LR2 fleet growing by 4.1%. As can be seen from the freight-rate developments where LR1 and LR2 perform well and MR not so Oil product well, fleet growth for individual sub-sectors doesnt matter much. It is the overall fleet growth for the tanker fleet whole sector that matters. growth The hardship in the oil product tanker freight market has resulted in placement of limited newbuilding orders a situation that will help the market recover and, eventually, become economically sustainable. From 2018-2020, fleet growth will stay below 4% per year. Currently, the order book for oil product tanker has dropped below 13m DWT for delivery in 2019-2021. To put this into perspective, almost 10m DWT was delivered in 2016 alone. Outlook The oil market is notoriously linked to geopolitics. Most recently, the political situation in Venezuela creates turmoil in the region and particularly affects crude oil exports. The newly set up US sanction targeting Nicols Maduros regime will most probably limit the imports of crude oil into US gulf refineries. In addition, some oil product imports may be affected, but BIMCO does not expect it to affect majorly the overall market. Alternative suppliers of the lost barrels include neighbouring Canada and Mexico, in addition to the preferred shipping choice: the Middle East. Heavy sour crude oil is at stake here; while the US is now the top oil-producing nation in the world, it primarily produces very light, sweet crude oil, which is not a substitute for the Venezuelan crude oil quality. Increasing crude oil production in the US is likely to be a positive factor in the tanker market in 2019, benefiting crude oil and oil product tankers. According to the US Energy Information Administrations Annual Energy Outlook 2019, US crude oil production will continue to grow every year until 2027. It will be almost solely tight oil - that is, of light sweet quality. The swing factor this year will be China. Having grown its crude oil imports continuously over many years and by a massive 10% in 2018 2019 is set to be weaker as sustained macroeconomic headwinds slow down imports. As always, the origin of imports to China matter a lot to the tanker shipping sector. Crude Oil Tankers DWT Aframax Suezmax VLCC 80,000 - 119,999 120,000 - 199,999 200,000 + Product Tankers DWT Product MR/Handy LR1 LR2 10,000 - 29,999 30,000 - 59,999 60,000 - 79,999 80,000 - 120,000 ECONOMY | PETER SAND February 2019 SHIPPING MARKET ANALYSIS Use tabs to navigate to pages Macroeconomics Dry bulk Tanker Container Quick Facts Container shipping The many pitfalls in the coming months will decide the fate of the year Demand drivers and freight rates The long-haul mainlane trades, which are critical for the overall health of the container shipping market, are in for what could become a tough year with several pitfalls. Trade tensions between the US on one side and China and Europe on the other, are coming in on top of a tendency for traditional consumers of containerised goods in the West to show signs of being saturated at least in Europe it seems. If this tendency is here to stay, very real problems will prompt liners to rethink their strategy not just cause, yet another update of the network. Peter Sand Chief Shipping Analyst at BIMCO Lower demand on mainlane trades is also likely to have an impact on the part of intra-Asian trade lanes that benefits from exports to Europe and North America. February is a slow month and this year will be no different. The only real question will be, to what extent? Growth in the first 11 months of 2018, was the slowest recorded in the past decade for intra-Asia at 3.8% (Source: Clarksons), except for 2015 when the global market was hurt by a weak demand growth rate. Shanghai Containerized Freight Index West Japan East Japan Singapore Jan. 2019 Dec. 2018 Nov. 2018 Oct. 2018 Sep. 2018 Aug. 2018 Jul. 2018 Jun. 2018 May 2018 Apr. 2018 Mar. 2018 Feb. 2018 Jan. 2018 USD/TEU 0 Dec. 2017 0 Nov. 2017 50 Oct. 2017 50 Sep. 2017 100 Aug. 2017 100 Jul. 2017 150 Jun. 2017 150 May 2017 200 Apr. 2017 200 Mar. 2017 Will intra-Asian trade lanes, supported by the regional demand for container shipping continue growing at a pace that will be high enough? In addition to the freight market, the time-charter market also demands attention. Not only because the misery of 2016, when rates were hugely loss-making and demand was very limited, is behind us, but because 6,500 TEU and 8,500 TEU ships are experiencing improved interest from operating liners. Why? They fit well in solidly growing northsouth trades, delivering scale and flexibility into any nonmain trade lane. Moreover, we havent seen many new ships of that size built in the past five years. And, note too, current charter rate levels are still loss-making for these ship sizes. 250 Jan. 2017 Freight rates on many intra-Asian trades have been steady throughout 2017-2018, which is very positive in a market that is growing at continued slower pace. However, the big question remains: how steady will they continue to be when extra-Asian trades weaken? 250 Feb. 2017 USD/TEU 2017-2019 Korea Source: BIMCO, Shanghai Shipping Exchange 6-12 months time charter rates 25,000 22,500 22,500 20,000 20,000 17,500 17,500 15,000 15,000 12,500 12,500 10,000 10,000 7,500 7,500 5,000 5,000 2,500 2,500 0 If we compare the development in charter rates with the data on idle containerships, it becomes interesting, as a relationship seems to exist. USD per day 25,000 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 Oct. 2017 Nov. 2017 Dec. 2017 Jan. 2018 Feb. 2018 Mar. 2018 Apr. 2018 May 2018 Jun. 2018 Jul. 2018 Aug. 2018 Sep. 2018 Oct. 2018 Nov. 2018 Nov. 2018 Dec. 2018 Jan. 2019 USD per day 2016 - January 2019 TEU 700 TEU 1,700 TEU 2,700 TEU 4,250 TEU 6,500 0 TEU 8,500 Source: BIMCO, Harper Petersen & Co. Units idle breakdown by size range, 2014 - January 2019 140 120 120 100 100 20 0 0 2014 2016 TEU 500-999 TEU 1,000-1,999 Jul Jul Jul 2015 2017 TEU 2,000-2,999 TEU 3,000-5,099 2018 Jan 20 Jul 40 Jan 40 Jan 60 Jan 60 Jan A fleet growing at too high a pace as was the case in 2018 has never done anything to boost the profitability of a shipping market. 80 Jan Fleet news 80 Idle vessel count 140 Jul The sequence is this: charter demand picks up; reactivations start; and, as the idle fleet comes down, the apparent shortage of open ships for hire lifts charter rates. However, there are no clear signs yet of a significant reactivation trend or the opposite that could trigger rates to move in the time-charter market. Idle containership Idle vessel count What lies ahead? Some support to charter rates where the idle fleet is already low (ships with a capacity above 5,100 TEU) and, in the case of a noticeable reactivation among the sub-5,100 TEU sectors, time-charter rates could be lifted there too. 2019 TEU 5,100-7,499 > TEU 7,500 Source: BIMCO, Alphaliner Looking into 2019, BIMCO is forecasting a 3.4% container-fleet growth rate, assuming demolition levels remain low. Should the initial demolition level, set at 100,000 TEU, turns out to be twice as high, fleet growth will be reduced by 0.5% to 2.9%. Expect this to happen only in the case of slow-growing demand and low freight rates. Looking into 2019, BIMCO is forecasting a 3.4% containerfleet growth rate, assuming demolition levels remain low The scheduled order book for 2019 deliveries stands at: 19, 19,000+ TEU ships; 30 11,800-15,300 TEU ships; ZERO 3,621-11,800 TEU ships; and 129 ships with a TEU capacity of less than 3,621 TEU. BIMCO expects a 20% slippage rate for the container shipping order book the lowest among the main shipping sectors. At the turn of the year, the containership fleet had reached 22 million TEU territory. Ten years ago, it stood at just over 12 million TEU, corresponding to a compound annual growth rate of 6%. Highest in the first half, lowest in the second half and indicating an industry that slowly, but decisively, that has moved into an era of lower fleet growth one that matched the lower demand growth much better. As we know, overcapacity is only controlled when demand exceeds supply and a new era of slower fleet growth has been eagerly awaited. At the same time, we cautiously observe a renewed interest in Ultra Large Containerships with orders up from nine units in 2016 to 36 in 2017, and reaching 40 in 2018, plus many sub-3,000 TEU ships. In total, more than two million TEU of new capacity was ordered during 2017-2018. Outlook 2015A-2021E 1,750 14% 1,500 12% 1,250 10% 1,000 8% 750 6% 500 4% 250 2% 0 0% -250 -2% -500 -4% -750 -6% 2015A 2016A 2017A 2018A 2019F 2020E 2021E Growth rate p.a. This gloomy outlook seems certain for 2019 and is likely to be extended, if consumer behaviour does not change dramatically from that experienced in the past four years, the exception being 2017. (Demand growth on the Far East to Europe trade lane: 2015: -3.2%; 2016: 2.9%; 2017 4.5%; and 2018 (estimated) 2.2%). Container ship eet growth 000 TEU European containerised imports look likely to be stuck with demand growth of no more than 2% for years to come. That means the long-hauls into northern and southern Europe, where Ultra Large Containerships are perfectly suited to reap the benefits of economies of scale, will suffer unless cascading is accelerated. To be delivered p.a. Demolition Growth rate (RH-axis) All the US east coast ports are now fully equipped with cranes to Source: BIMCO estimates on Clarksons raw data cater for Ultra Large Containerships. As a result, we saw strong A is actual. F is forecast. E is estimate which will change if new orders are placed. The supply growth for 2019-2021 contains existing orders only and is estimated under the assumptions that the scheduled deliveries fall short by 10% due to various reasons and 20% of the remaining vessels on order are delayed/postponed. import growth into the US via this route in 2017 (10%) and again in 2018 (8%). More cargo is likely to follow this trend, away from the more crowded options of the US west coast. Despite this, BIMCO forecasts overall imports into the US will be lower in 2019 when compared with 2018. The higher growth rates are expected on North-South trades, highlighting South America and imports into Africa as places where volumes but not so much freight rates could improve in 2019. Nevertheless, the dominant theme of 2019 will be the sharing of the higher costs that are expected in various forms towards the end of the year, as the starting line for the IMO 2020 sulphur cap approaches. These increased costs will come either as a result of purchase of fuels, which are more expensive than Heavy Sulphur Fuel Oil (HSFO), or because of investments in abatement technologies that will allow carriage and consumption of HSFO past the 1 March and 1 January deadlines. Unless these costs can be passed on to the end consumer through the whole supply chain, profit margins in the container shipping industry will be reduced everywhere; a failure to recover the extra fuel costs in full may even result in outright bankruptcies in the container shipping industry. The ability of the container shipping industry to pass on these increases depends greatly on its negotiating power and a fundamentally strong freight market. The annual contracts for transpacific cargoes normally running from May to April are negotiated soon. An IHS survey of shippers (asked in Q4-2018) shows they expect higher freight rates, but tough and difficult negotiations lie ahead, as markets have weakened somewhat since then. The outcome may not be as good as liners would hope for, if spot rates fall too much in Q1-2019, which they will if demand does not pick up substantially after Chinese New Year. Container TEU Intermediate Neo-Panamax Post-Panamax 3,000 - 7,999 8,000 - 14,999 15,000 + European containerised imports look likely to be stuck with demand growth of no more than 2% for years to come