Peter Sand - BIMCO Bulletin


ECONOMY | PETER SAND June 2019 SHIPPING MARKET ANALYSIS Use tabs to navigate to pages Macroeconomics Dry bulk Tanker Container Macroeconomics Slower growth from unresolved trade tensions harms global trade volumes Peter Sand Chief Shipping Analyst at BIMCO Real GDP growth 2000-2024 Manufacturing PMI in the euro area has been contracting since February. It reached 47.9 in April close to the 47.5 mark registered the previous month, which was a six-year low. The numbers vary greatly between the euro area countries, with Greece topping the list at 56.6 (its highest level in almost 19 years), and Germany at the bottom at 44.4. Germany is the export engine of Europe, so such a downturn is bad news. Because of its dependence on exports, Germany has been hard hit by the slowdown in the global economy, which has reduced demand for its products. In particular, the slower growth in the Chinese economy is making itself felt in Germany. But Germany is also affected by the trade tensions between the US and the EU, as it is the largest European exporter of steel and aluminium products to the US, where they are now subject to tariffs. Other factors weighing heavily on the German economy include the disruption to automobile supply chains caused by new regulations on car emissions. The Global Manufacturing PMI (Purchasing Managers Index), reported by IHS Markit, registered at 50.3 in April its lowest level since June 2016. New export orders came in at 49.0 signifying a contraction for the eighth month in a row. This contraction has dragged global trade growth down. 10% Percentage change The slowing growth in advanced economies will especially harm global trade. According to the IMF, growth in advanced economies is projected to slow from 2.2% in 2018 to 1.8% in 2019 and 1.7% in 2020. Advanced economies have the highest trade-to-GDP multiplier, and this softening will therefore reduce global trade volumes faster than the forecast 4.4% 2019 growth in emerging economies will generate them. The combined result is a reduction in trade growth. The slowing global economy and escalation of the trade war pose major threats to global seaborne trade Year-on-year percentage change Economic growth around the world is slowing, and several governments including Germany, China and South Korea have announced stimulus packages to boost their economies. The International Monetary Fund (IMF) forecasts global GDP growth to slow from 3.6% in 2018 to 3.3% in 2019, before returning to 3.6% in 2020. 2015 2016 Industrial production 2017 World trade volumes Feb 2019 2018 Manufacturing PMI: new orders (RH-axis) Source: BIMCO, IMF The growth projections for Germany have been revised downwards by the IMF. In its latest update from April 2019, it projects 0.8% growth in 2019, down from 1.5% in 2018. The German government has announced plans for additional infrastructure spending. It will also support companies by reducing corporate levies and cutting red tape. A marked turn around will have to occur if the German economy is to meet the 1.4% growth the IMF forecasts for 2020. Germany is not alone in facing slowing growth. The IMF predicts growth of only 0.1% for Italy in 2019 and 1.3% in France. The deadline for Brexit has been delayed to 31 October 2019. While this removes the immediate risks of Britain leaving the EU without a deal, it prolongs the period of uncertainty, with no guarantee that the situation will be resolved before the new October deadline. Uncertainty is toxic for business investments, and the political effort consumes time that could be better spent removing trade barriers. Source: Chappatte, NZZ am Sonntag, In 2018, the total US trade deficit was at a record high at USD 891.3bn, with the largest monthly trade deficit on record posted in December 2018 (see chart). One reason was that US buyers increased their imports in the last months of the year, to avoid the then-threatened tariff hike on some Chinese imports that came into effect on 1 January 2019. Billion USD 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 Mar. 2019 The flash estimate for growth in the first quarter of 2019 came in quite high, at 3.2% (a flash estimate is one that the US Bureau of Economic Analysis (BEA) subsequently revises twice, following the receipt of more solid data). Growth in US international trade balance personal consumption expenditures, private inventory investment, 2018 - March 2019 local government spending, and a slightly reduced trade deficit in the quarter were important factors in that development. 0 Goods Following this, in the first two months of 2019, imports fell as Source: BIMCO, US Census Bureau Total: includes trade in goods and services inventories were full due to the frontloading. The inventory/sales ratio increased to 1.47 in December 2018 from 1.43 in November, and grew to 1.48 in February. This rising ratio indicates that inventories are growing faster than sales, reducing import prospects for containerised goods on the transpacific trade lane. After pulling out of the Trans-Pacific Partnership (TPP), the US is now looking to agree a bilateral trade deal with Japan. The US has a considerable trade deficit with Japan (USD 67.6bn in 2018), and following the opening of the Japanese market to EU exporters and TPP partners, US exporters may face significant pressure in maintaining their share of the Japanese import market especially for agricultural products unless the two countries can agree a deal that would allow US exporters the same access to the Japanese market as its EU and TPP partners. The escalation of the trade war hurt not only the US and Chinese economies, but also the global economy The flash Japanese manufacturing PMI in April shows a third month of contraction at 49.5, caused by weak demand both at home and abroad. Japan is somewhat caught in the middle of the US-China trade war and is also affected by the slowing Chinese economy, as China is its biggest trade partner. On 1 February 2019, the EU-Japan Economic Partnership Agreement entered into force. It removes trade tariffs between the two trading blocs, and simplifies customs procedures, to encourage more trade in both goods and services. Reducing barriers to trade benefits shipping. In March, South Korean exports were down for the fourth month in a row. The manufacturing PMI reached a six-month high in April, at 50.2. However, new orders continued to fall. In mid-April the Korean central bank cut its growth forecast for 2019 to 2.5%, which would be the lowest GDP-growth rates in seven years. On the back of the weakening economic prospects, the Korean government announced a stimulus package of USD 5.9bn. Parts of this package went to Korean shipyards and shipowners. Index level Recent stimulus measures taken in China to mitigate its slowing economy have apparently been successful, with economic indicators suggesting that economic activity has picked up. Chinas official manufacturing PMI rose to 50.5 in March, after being below 50 the threshold level since December 2018 [source: National China manufacturing PMIs Bureau of Statistics China]. Although it remained above 50 in April 2015 - Q1 2019 54 at 50.1 which indicates a month on month improvement the 53 fall compared with March suggests that the recovery may not be as 52 strong as the March data had indicated. Percentage change Asia Theshold Source: BIMCO, National Bureau of Statistics China, IHS Markit/Caixin Note: Ocial PMI is biased towards large, state-owned enterprises, whereas IHS/Markit/Caixin PMI is more focused on small and medium sized enterprises Outlook The escalation of the trade war hurts not only the US and Chinese economies, but also the global economy. Global trade is so interconnected that the effects are and will continue to be felt by many more countries around the world. Trade talks between the US and China have been ongoing throughout 2019. The original deadline in March was indefinitely postponed because of the progress being made in the talks. However, at the start of May, President Trump announced an escalation of the trade war, and increased the tariffs on imported goods from China from 10% to 25% on USD 200bn worth of imports. The Chinese response to this was higher tariffs (25%) on imported goods worth USD 60bn currently subject to tariffs of 5% to 10%. The shipping industry is reliant on global trade and will benefit from new free trade agreements. The slowing global economy and escalation of the trade war pose major threats to global seaborne trade. Dry Bulk: 24 May 2019 Total fleet size (change since 1 January 2019) 847.44 million DWT (+0.7%) Rate indices (change since 12 February 2019) BDI: 1066 (+78%) BCI: 1545 (+117%) BPI: 1304 (+117%) BSI: 778 (+71%) BHSI: 393 (+33%) Quick Facts Dry bulk shipping A struggling market gets all hyped up by Capesize volatility Demand drivers and freight rates Its been a rollercoaster ride for the dry bulk market in 2019. The market fell from slightly profitable levels in the first week of January, to hit loss-making lows during February, March and April that almost touched the all-time lows seen in early 2016. The Handysize, Supramax and Panamax segments all started to climb again after Chinese New Year in mid-February, but the Capesize sector lost all buoyancy. The combination of low Chinese iron ore demand and iron ore supply chain disruptions in both Brazil and Australia meant that freight rates hit USD 3,460 per day on 2 April. Since then, the Capesize market has climbed, touching USD 12,583 per day on 28 May. Peter Sand Chief Shipping Analyst at BIMCO During April, it was evident that the Baltic Dry Index (BDI) is dominated by Capesize shipping. The index rose 50% on the back of a 239% increase in rates for Capesize ships from a very low level whereas the three other segments only rose slightly or decreased. BIMCO now believes that the BDI cannot be used as a proxy for the dry bulk market as a whole, because of the weighting of the different ship types in the index. Changes to freight rates during April 2019 30 April 2019 674 1,011 2 April 2019 30 April 2019 Capesize 5 TC average 3,460 11,718 +239% Panamax 4 TC average 8,952 9,503 +6% Supramax 6 TC average 8,607 8,282 -4% Handysize 6 TC average 6,753 5,764 -15% (Index value) BDI This dates back to 1 March 2018, where the BDI was changed from an equal-weight index for Capesize, Panamax, Supramax and Handysize to a weighting of 40% on Capesize and 30% on each of the Panamax and Supramax time charter (TC) averages, and no longer including the Handysize TC average. (Index value) (USD per day) Knowing profits from losses requires insight into real USD per day earnings, which no index values can provide. In total, China has 56% of the worlds pigs, according to Statista. As much as a third (130 million) of all Chinese pigs may be culled Capesize Panamax Supramax Source: BIMCO, Clarksons, Baltic Exchange because of African swine fever, according to estimates by industry sources. From a dry bulk shipping perspective, this is a significant amount of lost soya bean tonne-miles, mainly from Brazil and the US. On the other hand, reefer containers may benefit from increased imports of pork to make up for the lost domestic production at an unchanged level of consumption. USD per day 2015 - May 2019 USD per day The negative impact on the dry bulk market from the ongoing outbreak of African swine fever in China is becoming clearer from the import data. The disease broke out on 3 August last year, and official reports about the extent of the problems are still muted but Chinese imports of soya beans have dropped by 14.4% (-2.8m tonne) in Q1-2019 when compared with Q1-2018. This extends the decline, as Chinese imports dropped by 7.1m tonnes in NovDec 2018 from the previous year. Ultimately, the combined development of the escalating trade war and African swine fever means that American exports of soya beans are unlikely to return to previous highs. 2 April 2019 0 Handysize BIMCO now believes that the BDI cannot be used as a proxy for the dry bulk market as a whole, because of the weighting of the different ship types in the index It is similarly relevant to monitor Chinese iron ore imports. These are down by 13.2m tonnes (-3.7%), while coal imports are up by 2.2m tonnes (+2.3%) in the first four months of 2019. This is happening while steel production grew by 20.9m tonnes (+9.9%) in Q-2019, year-on-year. The driving factor in this fall in Chinese iron ore imports is the move to use more scrap steel. Reports of declining iron ore stocks at Chinese ports appears to have spurred hopes for an increase in iron ore imports; however, we see those iron ore stock levels being an unimportant factor not a bullish sign. If anything, lower stocks is merely a sign of stocks matching lower import levels. Fleet news In the first four months of 2019, yards delivered 10m DWT of newbuilt dry bulk shipping capacity. The demolition of 3.9m DWT limited the immediate negative impact, but even a fleet growth of 0.7% harms the market, as cargo demand is seasonally low. Capesize accounted for 87% of the demolished capacity pushed out of the market, as freight rates fell and the outlook turned bleaker. Because of this unexpectedly dramatic start to the year, BIMCO revised its demolition forecast for 2019 up to 8m DWT from 4m DWT. Its worth noting that Panamax, Supramax and Handysize ships also operated at lossmaking freight rates levels for the first four months of 2019 without causing a rush to demolish. Therefore, the forecast is kept at 8m DWT. BIMCOs estimated fleet growth remains around 3% for 2019 and 2020, under the given assumptions. On 1 May, the orderbook stands at 96m DWT [source: Clarksons]. Its been unchanged at that level since February 2018, with around 100m DWT scheduled for future delivery. This is bad news. Chinese steel demand is following a downwards-pointing trajectory, according to the World Steel Association (worldsteel). The reason is the combined effect of overall slowdown in Chinas economic activity growth, and trade tensions with key trading partners. Worldsteel expects government stimulus in 2019 will give a boost to steel demand, before another slowdown in 2020. The knock-on effect of that stimulus is already being seen, with Chinese steel production growing by 9.9% in Q1-2019 compared with the same period in 2018. Chinese steel production is growing while iron ore imports decline at the same time because of greater reliance on scrap metal for steel production. BIMCO expects Chinese imports of iron ore to fall in 2019, which will be the second year of declining iron ore import demand. 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. To accommodate this fleet growth and retain a balanced market, the demand growth would need to reach 5% per year. We did have that level of demand growth in 2003-2007 and 2010-2014, but given the current developments in China, it is very unlikely to return anytime soon. For 2019, the US Energy Information Administration (EIA) forecasts coking coal exports to decline by 9m tonnes (16%) and Coking coal Thermal coal thermal coal exports to decline by 5m tonnes (10%). EIA bases its Source: BIMCO, US Energy Information Administration (EIA) projections on two factors: slower global economic growth, which will decrease the demand for steel; and European countries move away from coal-fired power plants. Because of the long sailing distance involved when coal is exported to Asia, its relevant to watch out for this swing factor in the market. The EIA estimates that total coal exports from the US reached 104.9m metric tonnes in 2018, up by 16.9m metric tonnes from 2017 (data has been converted to metric tonnes from US short tons). Of this, 53% was coking coal for use in the steel production industry and 47% was thermal coal, used for generating electricity. Thermal coal exports in 2018 were up to all regions, including Europe. The largest gains were seen in Asia, which benefitted the dry bulk industry the most because of the long sailing distance. India remained the No 1 importer. The country grew its imports by 53% to reach 10.5m tonnes in 2018. No 2 destination was the European gateway, the Netherlands, which grew by just 3.2% to reach 5.6m tonnes. Although Chinese imports only account for 0.7% of total thermal coal exports from the US, the 99.4% decline in Q4-2018 year-on-year was a clear sign of the ongoing trade war. Europe takes the lion share of US coking coal exports, at 44%. Europe was also the region growing the most in volume terms, and is up by 10.9%. The negative impact on the dry bulk market from the ongoing outbreak of African swine fever in China is becoming clearer from the import data What could stop the EIAs expected decline in US coal exports? Continued high world market prices. US coal exports are mostly affected by international coal prices. When exporters are stretched and prices go up, the US is the go-to country for global importers. In conclusion, BIMCO sees fleet growth outstripping demand growth in 2019 and 2020, making the near future look unappealing. Tanker: 24 May 2019 Fleet sizes(change since 1 January 2019) Crude: 438.61 million DWT (+3.0%) Product: 165.29 million DWT (+1.9%) Rate indices (change since 12 February 2019) BDTI: 665 (-16%) BCTI: 527 (-15%) Quick Facts Tanker shipping While we wait for 2020 to kick in, its all about politics Demand drivers and freight rates The tanker market is even more so than before all about geopolitics. Iran, Libya and Venezuela face export limitations because of sanctions and internal political troubles. At the same time, US exports of crude oil are growing fast because of pricing and politics. We have mobilised all of the countrys resources and are selling oil in the grey market, Irans deputy oil minister Amir Hossein Zamaninia is quoted as saying by state news agency IRNA, according to Reuters. Peter Sand Chief Shipping Analyst at BIMCO Among the main official buyers left, the main ones are China, India and Turkey. BIMCO doesnt expect that crude oil exports out of Iran will fall much more than they already have whether waivers are in place or not. Exports have Oil product tanker earnings averaged around one million barrels per day since US sanctions 2015 - May 2019 60,000 were reintroduced on 4 November 2018 (source: Lloyds List 55,000 Intelligence). BIMCO monitors other sources as well to verify what 50,000 45,000 is happening, as it recognises that data on issues such as this come 40,000 with a high degree of uncertainty. 35,000 60,000 55,000 50,000 45,000 35,000 LR2 LR1 May 2019 Mar. 2019 Jan. 2019 Nov. 2018 Sep. 2018 Jul. 2018 May 2018 Mar. 2018 Jan. 2018 Nov. 2017 Jul. 2017 Sep. 2017 The earnings of MRs and LR1s continued to decline as they fell back to loss-making freight-rate levels. In October 2018, the sharp drop in oil prices increased the demand for MRs and LR1s, which lifted earnings. LR2 tankers enjoyed a brief earnings increase in the second half of April, but are still far from the solitary peak at the end of 2018. An official US statement about deployment of an aircraft carrier group in the Middle East, specifically to respond to any attack from the Iranian regime, increased tensions to a new high in early May. USD per day USD per day 40,000 0 MR Source: BIMCO, Clarksons Crude oil tanker earnings A similar story can be told for the crude oil tankers. At the beginning of May, earnings for all crude oil tankers returned to the appalling loss-making levels seen in large parts of 2018. The exception was the VLCCs, which had a short-lived rise in earnings in the second half of February. In the oil market, global refinery throughput fell by 1.5m barrels per day in March compared with February. The throughput reached a low point in March, but the International Energy Agency (IEA) expects higher throughput in the coming months through to September. Higher throughput is obviously positive for oil tanker demand. US exports of nished petroleum products The current maintenance season for refineries is more extensive and longer than usual. The extension is likely to indicate an effort to reduce the corresponding maintenance period in the autumn, to capitalise on an expected increase in demand caused by shippings switch to low-sulphur fuel. US export of oil products fell by 2.0% in Q1-2019, which was a result of either low export demand or reduced throughput in general. Jan Feb Mar Apr 2015 May Jun 2016 Jul Aug Sep 2017 Oct 2018 Nov Dec Thousand barrels per day Thousand barrels per day 2015-2019 2019 Source: BIMCO, US Energy Information Administration (EIA) It also looks like unplanned outages and accidents in the US, which limited refinery throughput in March, may already have reduced export a bit in February. US exports remain a solid driver of demand for oil-product tankers, despite most of the export destination being shorter haul to South America and Europe. Fleet news Why do we focus that much on fleet growth? Because its working against a market recovery and its the only fundamental factor that shipowners can affect. Oil-product tanker fleet grew rapidly in the first four months of 2019. In total, 3.4m dead weight tonnes (DWT) was delivered in that period. That level is a 10-year high, in volume terms, and matches the influx of 2010-11 and 2015-16. Oil product tanker eet growth The fleet growth of 1.9% was made up of 14 LR2 tankers, 27 MRs; a couple of handfuls of LR1s and Handysize tankers also entered the active fleet. 2015A-2021E 8 8% 6 6% 4 4% 2 2% 0 0% They all represent a front-loading of new tonnage this year, and as half the expected deliveries have already taken place, BIMCO expects the pace of new deliveries to slow down from here. Source: BIMCO estimates on Clarksons raw data This front-loading of new tonnage combined with a seasonally low demand from February onwards has only made earnings drop further. 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. Crude oil tanker fleet growth The crude oil tanker fleet grew by 3% in just four months (Jan-Apr). The market got 13.2m DWT of new tonnage, with a limited offset from one million DWT sold for demolition. The participants in the market seem to have very high expectations for a recovery, as the fast fleet growth is only countered by insignificant demolition activity. BIMCO is not so optimistic. In terms of the number of ships, the market gained 25 VLCCs, 21 Suezmax and 15 Aframax, while one Aframax and three VLCCs left. Currently, 16 of those Suezmax tankers trade in clean cargoes illustrative of the dynamics of the oil tanker fleet. You cannot be too rigid in your fleet analysis, as these ships can shift between dirty and clean cargoes, depending on market conditions. There are, fortunately, few new orders for oil tankers. Only 4.7m DWT of oil tanker capacity has been ordered from 1 January through April. The total oil tanker order book was reduced by 10.3% in the same four months. The obvious oversupply of capacity in the market means that no new orders are needed. Despite BIMCO estimates for 2020 and 2021, fleet growth is expected to slow, as few new orders have been placed. Outlook The politics are what matters. A business-as-usual scenario in the oil market is only delivering a steady, but not high, demand growth for the oil tanker market. Any upside to the tepid demand growth in 2019 is coming from the IMO 2020 regulation again, politics and trades affected by sanctions. Oil majors are regularly announcing the specs for the range of new compliant fuels they offer to the industry, to comply with the 1 January 2020 deadline fuel that, once produced, must be distributed. The change in tanker demand because of the fuel switch remains to be seen. Sailing distances matter a lot ASIA NORTH AMERICA EUROPE Pacic Ocean Atlantic Ocean AFRICA SOUTH AMERICA If US sanctions on Iran shifts oil exports to South Korea from Iran and to the Gulf of Source: BIMCO, AXSMarine Mexico, it will have a positive effect on the market. Every VLCC cargo that departs from the Gulf of Mexico for South Korea instead of from Iran is a 150% gain in ton-miles demand. Indian Ocean AUSTRALIA As an example, a VLCC sailing at 12.5knots spends 54 days sailing 15,000Nm (+5% sea margin) from Houston, US (largest crude oil export port) to South Korea (Busan) while it takes only 22 days sailing from Kharg Island in Iran to South Korea. Another potential upside to the crude oil tankers would be a resolution of the US-China trade war one that would restart Chinese imports of US crude oil. China grew its crude oil imports by 8.1% in Q12019, and only a very small amount came from the US. This is, in fact, an increase, as the Chinese cut their US crude-import completely in August 2018. The effect of an end to the trade war on the markets would be similar to those of US-Iran-South Korea, because of the proximity of China to South Korea. After rapid growth in 2017, when annual US oil-product exports grew by 12.5% (372,000 barrels per day), exports grew by only 3.3% in 2018. Of the incremental growth in 2018, 44% (156,000 barrels per day) was distillate fuel oil (15, or below, parts per million [ppm] sulphur content). The US distillate fuel oil is exactly what the shipping industry needs to burn to comply with the sulphur limit that takes effect from January 2020. If US refineries can further optimise their production towards distillate fuel oil which would then be redistributed around the world to bunker hubs it would be another positive factor for tanker demand. Growth rate p.a. 10% Million DWT The LR2s are mainly used on the medium- to long-haul routes out of the Arabian Gulf, with naphtha for the petrochemical industry going either to North Asia or west, towards Europe. Container: 24 May 2019 Total fleet size(change since 1 January 2019) 22,262.52 million TEU (+1.1%) Rate indices(change since 2 February 2019) CCFI: 802.72 (-10%) SCFI: 723.93 (-23%) Quick Facts Container shipping The many pitfalls in the coming months will decide the fate for the year Demand drivers and freight rates The number of boxes being shipped around the globe by sea grew 0.5% 191,000 twenty-foot equivalent units (TEU) in the first quarter of 2019 compared with the same period in 2018. The growth figure is massively below those of earlier years, where the global demand in Q1 2017 grew by 6.6% and in Q1 2018 by 3.6%. The timing and impact of Chinese New Year always affects business during the first three months of the year this is a first glimpse at the real trend, as we now have three months of data to smooth the seasonality and not only two. It is very positive to see demand growth on these long-haul trades, Europe 2018 US West Coast 2018 US East Coast 2018 Europe 2019 US West Coast 2019 US East Coast 2019 even though spot-freight rates on the Far East to Europe did not Source: BIMCO, Shanghai Shipping Exchange improve. Instead, the rates followed the same path as last year, holding steady in January and February and falling through March and April. At USD 743 per TEU on 24 May, spot-freight rates are at SCFI from loss-making levels for the carriers, despite a lift in rates in May. Spot rates on trades bound for the US Shanghai to East Coast and West Coast are up by 7.7% and 22.7% respectively on average for January through April, Intra-Asian ports compared with a year earlier. USD per FEU Shanghai to North America These are the data: outbound volumes from the Far East are up by just 64,000 TEU (+0.5%). This figure is positively affected by +273,000 TEU (+7.1%) into Europe and +84,500 TEU (+2.0%) into North America. Chief Shipping Analyst at BIMCO Shanghai Containerized Freight Index USD per TEU Shanghai to Europe A growth rate as low as 0.5% is a critical issue for an industry used to much higher growth double digits for many of the years between 1999 and 2007, growing by an average of 10.2%, and coming down to an average of 4.3% between 2012 and 2018. Having said that, the underlying numbers reveal a somewhat confusing demand picture. Peter Sand 0 The positive developments should be seen against a drop of 189,000 TEU (-10.1%) into the Indian SubContinent and Middle East, and 87,000 TEU (-9.9%) into South and Central America from the Far East. Volumes on the intra-Asian trades fell during Q1 (-0.2%). The drop is a sign of weakening volumes in the supply chains and, ultimately, the result of fewer new export orders received by Asian manufactures in recent months something that will impact outbound volumes in the coming months. Fewer export orders mean less transport of semi-finished goods between the Asian countries. So the freight rates on intra-Asian routes going from Shanghai to Japan, Korea and Singapore are increasingly relevant to keep an eye on, to spot the knock-on effect on the regional semi-finished goods market and they are mostly moving sideways or slowly in decline. By 24 May, spot-freight rates for the year from Shanghai to Japan were steady and spot-freight rates for Shanghai to Singapore cargoes experienced a slow decline. Spot-freight rates from Shanghai to Korea became the first, but probably not the last, to lose ground, as these dropped in the second week of April. Rates on this trade went down by 19.5% during April, losing a little more ground in May. Fleet news The active fleet grew by 1.1% during the first four months of 2019, if measured by capacity. The average capacity of a demolished ship in 2019 is 2,179 TEU per ship, up from 1,790 TEU in 2018, highlighting the bad start to the year for the sector. 2015A 2016A 2017A 2018A To be delivered p.a. 2019F Demolition 2020E 2021E Growth rate p.a. In March, Chinese leasing capital provided full financing of (yet another) full string of ultra large container carriers (10 ships 15,000 TEU) for the already crowded Far East to Europe trade lane. The 10 ships represent a 40% jump in the estimate for deliveries in 2021. Container ship eet growth 000 TEU Within fleet news, ordering activity is the most interesting. Of the 53 ships that have been ordered year to date, 14 have a capacity between 11,000 TEU and 15,000 TEU, and 39 have a cargo capacity between 653 TEU and 2,500 TEU. 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 20% of the remaining vessels on order are delayed/postponed. Our forecast is now for the fleet to grow by 3.1% in 2019. This would be the second-lowest fleet growth on record. At the beginning of the year, BIMCO expected a small amount of capacity to be demolished. That amount is now predicted to double to 200,000 TEU on the back of much weaker than expected freight rates across the board for the year so far. Only smaller ships will leave the fleet, as the larger ships are still comparatively new. Even though the market may stay unprofitable, sentiment, more than freight rates, has improved enough to disincentivise owners from scrapping; even a sluggish demand outlook will not cause massive scrapping. Recently, the idle fleet has come down rather sharply. According to Alphaliner, the capacity of the idle ships amounted to 292,943 TEU on 29 April down from 908,479 TEU on 4 March. There has been no effect on time-charter rates yet, but these are the steps we watch out for: charter demand picking up reactivation starting up idling fleet coming down. In due time, this chain of events will lift time-charter rates if the market actors are patient. Rates for ships with a capacity of 4,250 TEU and less have been flat this year, but down 20-30% from the pinnacle of June 2018. Rates for 6,500 TEU and 8,500 TEU ships also peaked in June, and slumped in October and November 2018. The time-charter rates for 6,500 TEU are now at USD18,000 per day (-5%), whereas rates for 8,500 TEU ships sat at USD26,000 per day in late May. The rates for those two segments moved up only a little since mid-February, as ships of that size were increasingly being left idle in January and February. Outlook Overall, BIMCO has low expectations for demand growth in 2019. A protectionists approach to global trade as mentioned in the article on macroeconomics and a high sales-to-inventory ratio in the US set limits for how strong peak-season import will be. To get an early indication of how well the peak season on the long hauls in 2019 will perform, we watch the intra-Asian trades closely. As discussed earlier in the report, we have started to see some weakness. This is the downside risk for which we are watching out. The global demand for a three-month period peaked in May through July in 2018 (see chart). Intra-Asian volumes tend to peak before the long-haul volumes do, as many of the semi-finished goods are in transit to final production stages just before the peak export season out of Asia starts in July. Jul Growth rate Million TEU The peak season for transported volumes is July to September for the Far East to Europe and North America trade lanes. Global demand Source: BIMCO, CTS In Europe, sanctions against Russia still reduce the already lower transhipped volumes in North Europe ports. Weaker economic activity, especially in Germany, limits overall demand growth in the region. As the idle fleet comes down fast, its important to note that it is not a response to fast-growing demand it is merely the result of fleet managers responding to margins that improve from highly negative to only slightly negative, which apparently prompts action among the owners We saw the same happen two years ago, when average operating margins went from -9.3% in Q2-2017 to -1.3% in Q4-2017. At the time, it was a repeat of the same dynamics in H1-2014. Going by this reasoning, the next cycle has just been trigged, after quarterly margins in 2018 of: -3.1% for Q1; -3.8% for Q2; +0.6% for Q3; and +1.2% for Q4 (source: Alphaliner). The correlation is striking and simple: reactivation of idle ships limits the upside to higher operating margins. Just as margins reach positive territory, the balance tips and another downturn begins. Ship owners and operators fleet management, much more than the changes in demand for container shipping, triggers these cycles. During 2011-2018, the main container carriers posted an average operating margin that was negative in 19 out of 32 quarters. Photo (top): jimmux / Shutterstock As BIMCO forecasts weak demand growth for the coming quarters, the container shipping industry is set to return to negative margins. Connect with BIMCO Facebook Twitter Linkedin YouTube