Peter Sand - BIMCO Bulletin

Economy

ECONOMY September 2019 SHIPPING MARKET ANALYSIS Use tabs to navigate to pages Macroeconomics Tanker Container Dry bulk Macroeconomics Low growth persists amid trade tensions and a slowdown in global manufacturing Global economic growth continues to slow with recession warnings sounding in many corners of the world, none of which points to high global trade volume growth for the time being. The Global Manufacturing PMI (Purchasing Manager’s Index) reported by IHS Markit, has been under the threshold level of 50 in every month since May, reaching 49.5 in July, indicating four months of contraction. At 49.3 the index reached its lowest level since October 2012 in July. Global trade volumes of manufactured goods also continued to contract in July with lower production and fewer new orders signalling that this trend is likely to continue at least over the next few months. The new exports sub-index fell to 47.5 in August from 48.3 in July, as international trade volumes fell at their fastest rate since late 2012 (Source: J.P. Morgan). On the back of increased trade tensions in many regions of the world, as well as slower than anticipated growth, the IMF in July updated its growth projections for the global economy in 2019 down to 3.2% (down 0.1 from April), while forecasting an increase to 3.5% in 2020 (down 0.1 from April). This update came before the most recent escalation of the trade war between the US and China in which the US has announced tariffs on USD 300 billion worth of Chinese imports and the Chinese have responded with tariffs on USD 75 billion worth of US imports. BIMCO therefore expects the IMF to lower growth projections in its next report. The new US tariffs will have a limited impact on shipping as these are mostly high value containerized goods, and although the Chinese will add tariffs on bulk goods such as crude oil, these bulk trades have already been severely disrupted, which the shipping industry has already adapted to. In particular, the continued slowdown in manufacturing is highlighted as a reason for slowing growth as well as low business spending and consumers shying away from buying capital goods. The WTO predicts that growth in the volume of world merchandise trade will slow to 2.6% in 2019, from 3% in 2018, a growth rate the WTO expects will return in 2020. Like the IMF, the WTO highlights the differences across nations, with growth in developing countries expected to outpace that in developed. Developing nations are expected to grow exports by 3.4% and imports by 3.6%, whereas developing nations are expected to see 2.1% growth in exports and 1.9% growth in imports. The WTO highlights that trade tensions would have to ease for these growth expectations to be increased. Europe Germany’s economy is the biggest cause for concern in Europe, where falling GDP in the second quarter has led to concerns of the country heading for a recession. Peter Sand, Chief Shipping Analyst at BIMCO Emily Stausbøll, Shipping Analyst at BIMCO Manufacturing PMI 2018 - August 2019 Source: BIMCO, IHS Markit, NBS China Germany’s economy is the biggest cause for concern in Europe Germany’s manufacturing PMI rose slightly to 43.5 in August, up from 43.2 in July, which was its steepest decline in seven years. Leading the decline in July was the largest fall in new export orders since 2009, as well as output falling at a faster pace. The German economy has been hit hard by weakening demand domestically as well as internationally, including the effects of US-inspired trade tensions, which Germany, and its export heavy economy has been hard hit by. Auto sales in particular have slowed, with figures from the German Association of the automotive industry (VDA) showing that production is down 12% in the first seven months of the year compared to the same period last year, and exports are down 14%, with a slowdown in auto sales in China in particular hurting German exports. Although the economic data points to a weakening economy, the Port of Hamburg has had a strong first half of the year, with total seaborne cargo handling up 4.1% compared to the first half of 2018. Imports of full containers has risen by 8%, meaning the port handled 4.1m TEU in the first six months of 2019. The IMF still expects the euro area as a whole to grow by 1.9% in 2019, and have raised their growth forecast by 0.1 to 1.6% in 2020 since April. At the time of writing, it is expected that the ECB on 12 September will announce a broad range of stimulus to combat this slowing growth, including potential interest rate cuts. Despite stockpiling ahead of the then Brexit deadline giving a boost to first quarter UK GDP, the IMF forecasts growth of just 1.3% in 2019. The UK’s Office for National Statistics highlights falling production and construction as the main factors pulling down growth. In Q2, the manufacturing sector experienced its fastest slowdown in a decade. Growth projections are based on the assumption that Brexit will take place in an orderly manner although, with the latest deadline only weeks away, this remains unclear. European short-sea shipping faces high uncertainty and potential disruption, but the impact of Brexit will have little effect on global shipping. US The IMF has revised its growth expectations for the US upwards by 0.3 to reach 2.6% in 2019, on the back of a strong first quarter, although it expects growth to slow in the remainder of the year. GDP growth was at 3.2% in the first quarter, yet fell to 2.1% in the second. Statistics from the Bureau of Economic Analysis (BEA) showed that lower inventory investments, exports and investment in capital goods slowed growth in the second quarter, despite increased spending by both the federal government as well as consumers. Growth is expected to slow in 2020 to 1.9%, with the effects of the stimuli, such as the tax cuts winding down. The US’ manufacturing PMI remains just above the threshold of 50, posting 50.3 in August. Although this figure still signals growth, it is the weakest expansion since September 2009, with June and July also posting disappointing results of 50.6 and 50.4 respectively. Financial markets are beginning to voice concerns over a potential recession which would bring the longest US expansion on record to an end. In July the US Federal Reserve cut interest rates for the first time in more than a decade, and is said to be considering furthur stimulus measures, with an announcement on policy due on 18 September. Asia Source: © Chappatte, Der Spiegel www.chappatte.com Financial markets are beginning to voice concerns over a potential recession which would bring the longest US expansion on record to an end Growth continues to slow in China although it remains very high; GDP growth was reported at 6.2% in Q2 2019, and 6.3% in the first half of the year, according to the National Bureau of Statistics China (NBS). The IMF forecasts that full year growth will be 6.2% in 2019 and 6% in 2020. Weakening exports from slowing global growth as well as trade tensions have hurt the economy, with manufacturing and infrastructure slowing. Although consumption remains on the right path, car sales have slowed 11.4% in the first seven months of the year according to the China Association of Automobile Manufacturers, with production down 13.5%. BIMCO has previously explained why it does not believe that Chinese GDP is a reliable indicator of the Chinese economy on its own and that it therefore pays to follow data on imports/exports as well industrial production. The Chinese government has launched several stimulus programmes over the past few months. Latest measures include reforms to interest rates aimed at lowering borrowing costs to boost spending. Industrial output was in particular concerning by Chinese standards in July when it grew by just 4.8%, which is the weakest it has been in China since February 2002, adding to the worry that the stimulus measures have so far done little to stop the long term trend, despite some short term good news at the start of the year. Chinese industrial production 2013-2019 Source: BIMCO, NBS China Elsewhere in Asia rising tensions between Japan and South Korea are being played out. Originally down to a dispute over compensation for wartime forced labour, the countries have each removed the other from their lists of preferred trading partners, causing delays to those trading, as well as placing trade restrictions, as Japan has done on three high tech materials that South Korea’s economy relies on. Industrial As with trade wars elsewhere, this will not only hurt the two countries’ economies, in a time when in particular South Korea’s is already struggling, but also others’. Although the volumes of impacted goods has so far remained very low, shipping is held hostage in the situation and should the conflict escalate further, shipping volumes between the two countries, as well as to the rest of the world, could be impacted. Outlook The latest IMF forecasts do not take into account the latest escalation of the trade war, in which the US President announced 10% tariffs on USD 300 billion worth of US imports from China, consisting mostly of consumer goods and China responded with 5 to 10% tariffs on USD 75 billion worth of Chinese imports from the US. A delay in the implementation of tariffs on the most sensitive goods, such as phones and laptops appears to be an admission by the US government that increasing tariffs hurt US consumers. The first half part of the tariffs will be implemented on 1 September, and the rest will follow on 15 December, with the Chinese retaliation following the same timeline. The July IMF update to its 2019 growth forecasts from April shows that advanced economies are performing somewhat better than expected while the opposite is the case for emerging economies, with growth revised upwards by 0.1 and downwards by 0.3 respectively. www.portpictures.nl output was in particular concerning by Chinese standards in July when it grew by just 4.8% Photo (top): monsitj / iStock and Danny Cornelissen Year-on-year growth rate Index level Year-on-year growth rate Index level Manufacturing PMI 2018 - August 2019 Source: BIMCO, IHS Markit, NBS China Chinese industrial production 2013-2019 Source: BIMCO, NBS China Year-on-year growth rate Tanker shipping A boost from the 2020 sulphur cap will not make up for a fast-growing fleet Demand drivers and freight rates Rising geo-political tensions have led to disruptions to the tanker shipping industry and all other ships trading in the Persian Gulf. Tensions have risen following the expiry of waivers to the US imposed Iran sanctions, as well as attacks and arrests of ships sailing through the Strait of Hormuz. Despite the ending of waivers which the US had hoped would lead to all countries stopping their imports of Iranian crude oil. This has not been the case with the Chinese in particular continuing; their crude oil imports from Iran totalled 11m tonnes in the first six months of the year. This is 30.1% lower than last year and imports have slowed throughout the year; averaging 2.3m tonnes in the first 4 months but subsequently slowing to 1.1m tonnes in May and 0.9m tonnes in June. Exact data for Iranian crude oil exports does not currently exist. Reuters has reported that a Trump administration official estimates that 50-70% of Iranian’s crude oil exports are for China and around 30% go to Syria. The now renamed Adrian Darya 1 (formerly Grace 1) was arrested while believed to be sailing with crude oil from Iran to Syria, in breach not only of US sanctions against Iran, but also EU sanctions against Syria. Tensions remain high in the Persian Gulf, where a US-led mission to ensure the security of international ships when transiting the Strait of Hormuz has so far been joined by the UK, Australia and Bahrain. Iran’s President Rouhani has been quoted by Reuters as issuing a veiled threat that, should Iran’s crude oil exports be forced to zero, security in international waters could not be guaranteed. In reaction to the first attacks, on two tankers transiting the Strait of Hormuz in June, crude oil freight rates from the Persian Gulf to China doubled over the course of a few days, as BIMCO reported. They soon returned to previous levels as it became clear that despite the added risk, maritime operations would continue at close to normal levels and shipowners would have to absorb the higher insurance cost. There was a sudden jump in earnings for the largest crude oil tankers in August, with VLCC earnings reaching their highest point of the year at USD 37,239 per day on 16 August. Earnings for the smaller vessel sizes have remained much more stable, and after falling fast at the start of the year, Suezmax earnings have averaged USD 16,716 per day between June and August, while an Aframax tanker has in the same period earned an average of USD 12,215 per day. Oil product tanker earnings have been volatile over the summer, falling to below USD 10,000 per day for all vessel sizes in July, but have since risen again, with LR2 rates reaching USD 21,542 per day on 9 August, and at the end of August, remain above USD 19,000 per day. Quick Facts Peter Sand, Chief Shipping Analyst at BIMCO By the middle of August, the total tanker fleet has already grown by 4.3% Chinese crude oil imports from Iran 2018-2019 Source: BIMCO, GACC Oil product tanker earnings 2015 - August 2019 Source: BIMCO, Clarksons Crude oil tanker fleet growth Source: BIMCO estimates on Clarkson’s 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. Growth rate (RH-axis) US exports of finished petroleum products were down 4.5% in the first five months of the year. A longer than usual refinery maintenance season which was brought about to allow refineries to produce the low sulphur fuel oil needed by the maritime industry come 2020 by avoiding further maintenance shutdowns which are traditionally performed in the last few months of the year. Exports of finished petroleum products have so far this year averaged 3.3m bpd. Fleet news By the middle of August, the total tanker fleet has already grown by 4.3%. Growth in the crude oil tanker fleet is particularly high with BIMCO expecting full year growth of 5.3%. The higher fleet growth comes not only from increased deliveries, but also from slower than expected demolitions. Only 2.1m DWT of crude oil tankers has been demolished so far this year, in response BIMCO has lowered its expectations for crude oil tanker demolitions in 2019 from 9m to 4m DWT. In contrast to the disappointing demolitions, ordering has picked up. New orders for the total tanker fleet have increased to 13.1m DWT. Since May 6 VLCCs of 300,000 DWT or more have been ordered as well as 30 Aframaxes. As BIMCO expects the total tanker fleet will grow by 5% this year, the already over supplied market has no need for extra ships, and further ordering will only worsen future market conditions. Demolitions of product tankers have also slowed down through the year, with owners preferring to keep their tonnage active in the hope of benefitting from additional demand for oil product tankers as we approach IMO 2020, and new low sulphur fuel types are made available around the globe. BIMCO expects this will provide a much-needed boost to demand for tanker shipping. With only 0.6m DWT having left the oil product fleet, deliveries of 6.4m DWT has meant fleet growth of 3.5% this year, with BIMCO expecting full year fleet growth of 4.4%. Even with a demand boost to the oil product tanker shipping sector expected to come, this high fleet growth will put pressure on earnings. Recently contracting activity has slowed down in the oil product tanker market, with only nine MRs being ordered in June and July. The orderbook for oil product tankers now stands at 11.9m DWT, which is 15.9% lower than in August 2018, as more has been delivered than ordered in the past twelve months, a positive trend to be continued to enable a return to a more balanced market. Outlook In July OPEC+ ministers announced that they would maintain their current output restrictions, of 1.2m barrels per day (bpd), aiming at reducing high stocks in an oversupplied market. The US has continued to increase its crude oil production and exports, with seaborne exports reaching a new record high of 11.9m tonnes in June. South Korea became the largest importer of US seaborne crude oil exports, after China all but disappeared from the market as its relationship with the US soured. Emily Stausbøll, Shipping Analyst at BIMCO This high fleet growth will put pressure on earnings Crude oil tanker earnings Oil product tanker fleet growth Photo (top): AvigatorPhotographer / iStock Chinese crude oil imports from the US fell by 76.2% in the first six months of the year. Over the same period, total Chinese crude oil imports are up 8.8% reaching 244.6m tonnes. Saudi Arabia has overtaken Russia as the largest supplier of crude oil to China, the two nations sent 37.8m and 37.7m tonnes respectively in the first half of the year. The increase in volumes from Saudi Arabia of 10.5m tonnes is good news for the shipping industry, as most Russian crude oil exports to China are through pipelines, and therefore have no effect on the crude oil tanker market. Although Chinese imports from Saudi Arabia boost the shipping industry more than those from Russia, a resolving of trade tensions and a return of Chinese buyers to the US crude oil market would provide an even larger boost for crude oil shipping, as it would increase tonne mile demand. Another boost to the industry comes from the ramping up of refined oil product exports around the world as the traditional Autumn maintenance season will be shorter, and volumes won’t fall as much as usual. As refineries start producing and selling low sulphur fuel, oil product tankers will be employed to transport the product to where it is needed.Any further escalation of the situation in the Persian Gulf, as Iran has hinted could come should their exports be forced to zero, would have a severe impact on the tanker shipping industry as around half of all seaborne crude oil is transported through the Strait of Hormuz. Should it be further threatened, or outright closed, the tanker market would face severe consequences. Crude Oil Tankers Source: BIMCO, GACC Oil product tanker earnings Source: BIMCO, Clarksons Oil product tanker earnings 2015 - August 2019 Source: BIMCO, Clarksons Crude oil tanker fleet growth Source: BIMCO estimates on Clarkson’s 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. Million DWT Growth rate p.a. Oil product tanker fleet growth Source: BIMCO estimates on Clarkson’s 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. Million DWT Growth rate p.a. Container shipping Ship sizes keep increasing despite stagnant volume growth Demand drivers and freight rates Global growth in container volumes has picked up slightly in the second quarter of the year, with growth in the first seven months reaching 1.2%, compared to the just 0.8% in the first quarter. Despite this rise, the growth figure remains substantially below what the industry has been used to, with growth in the first seven months of 2018 equal to 4.4%. This low growth figure masks large differences in developments on trades around the world. In particular a 5% rise in exports from the Far East into Europe singles itself out. That high growth should come on this trade is good news for the shipping industry as the large distances lead to a more than proportional increase in tonne-mile demand. Despite this growth, spot freight rates on the trade between the Far East and Europe have continued to fall. On 30 August spot rates are down 24% from the start of the year and 18.8% from the same week in 2018. The broader China Containerized Freight Index (CCFI), which covers ten ports in China and combines both spot freight rates and long-term rates has a less marked decrease of 7% since August 2018. Falling rates come despite carriers blanking sailings on the route in an attempt to lift freight rates. Figures from Alphaliner show that 42 sailings were, or will be blanked in the first three quarters of 2019, compared to 16 in the same period of 2018. Also experiencing high volume growth is the US East Coast (USEC) which year after year continues posting high volume growth. According to BIMCO’s own data, growth in the first half of the year stands at 7.2%, compared with the 7.4% and 10.6% in the first six months of 2018 and 2017 respectively. Despite this, spot rates continue to fall and are down 22.7% year-on-year, so that it costs USD 2,691 per FEU on 30 August to ship a container from Shanghai to the USEC. Taking into account more ports and other contract types, the CCFI ha fallen less dramatically, down 4.8% from the same time last August. High growth rates on both the Far East to Europe, as well as imports into the USEC raises the question whether containers are being sent from the Far East to the USEC through Europe. In contrast, other major container trades have experienced more sluggish growth. The trade war is certainly making itself felt on the Far East to North America route, where volumes have fallen by 0.4% in the first seven months of the year (Source: CTS). Even worse, compared to last year, laden container imports into the US West Coast (USWC) in the first seven months of 2019 are down 1.5%, according to BIMCO’s own data. Focusing on Far East container exports, rather than only China gives a better idea of the reshuffling of supply chains that has occurred in response to the trade war, in which China’s neighbours have benefitted from some of its lost trade. Whether containers are exported from China or other Far Eastern countries makes little difference to the container shipping industry, so long as the volumes are still there. The trade war is certainly making itself felt on the Far East to North America route Container imports to the USWC have given a good oversight of the effects of frontloading, with full year growth in 2018 at 4.6% during which imports rose towards the end of the year to avoid higher tariffs. The lower growth in 2019 reflects that the inventory to sales ratio remains high, the implementation of tariffs and uncertainty over the future of the trade war remains significant. The slowdown in 2019 is an inevitable result of the tariffs and stocking up that boosted volumes into the USWC in the second half of 2018. Another round of frontloading imports has been made possible by US President Trump announcing that around half of the new tariffs on USD 300 billion will have their implementation date delayed from September until December. The delay may be an attempt to limit the impact on consumers over the Christmas period, with the 2020 elections looming. The goods that have been given some extra time are consumer goods of which the majority of US imports come from China. Retailers are therefore likely to stockpile these goods before additional tariffs are implemented, to delay the passing on of additional costs to US consumers. The impact on shipping may be more limited in this latest round given that the goods are mostly high value and low volume goods and therefore have less of an impact on container shipping volumes. The fall in volumes so far this year to the USWC, has also resulted in falling spot freight rates which are now down 28.9% year-on-year. With rates falling from USD 2,074 per FEU this time last year to USD 1,474 per FEU in August 2019. As on the USEC, CCFI shows a less drastic reduction than the Shanghai Containerized Freight Index (SCFI), with the index down 1% from August 2018. Six to twelve month charter rates for the larger container ships have risen quickly with rates for 6,500 TEU ships being 151% higher (USD 24,500 per day) on 30 August than they were at the start of the year. Charter rates for 8,500 TEU ships are up 88% (USD 30,000 per day). Charter rates for smaller vessel sizes have been very stable over the course of the year, rates for a 700 TEU ship have risen by USD 100 since the start of the year to reach USD 5,000 per day. Fleet newsSince the start of the year the container fleet has grown by 2.6% so far this year, a number which BIMCO forecasts will grow to 3.5% by the end of the year. Deliveries include four ships larger than the previous record holding vessel, the first with a capacity of 22,000 TEU which was soon followed by the delivery of two 23,756 TEU vessels and one 23,656 TEU ship. The size of the ultra large container ship (ULCS) fleet (14,500+ TEU) will only go one way in coming years, as these vessels are piling up in the orderbook with the already active vessels so young that demolition is still a long way off. Of the 165 ULCSs in the active fleet (currently at 22.6 million TEU), only 8 are over 10 years old, whereas 78 have been sailing for two years or less. These vessels are here to stay for the next two decades, and will soon be joined by many more. There are currently 71 ULCSs on order, amounting to additional capacity of 1.3m TEU with all but four contracted to be delivered between now and the end of 2021. The remaining four are set for 2022. A furthur eleven have recently been ordered by Evergreen, all of which have a capacity of 23,000 TEU. These ULCSs will be deployed on the Asia-Europe route at a time when freight rates indicate that there is no need for additional capacity, and existing sailings are being blanked despite the 5.2% volume growth rate, indicating that there is no urgent need for these extra ULCSs. As these newer ships are introduced, cascading of smaller, yet still significant ships will lead to added capacity on smaller routes. As larger ships have arrived on the Far East to Europe routes, Neo-Panamax ships (10,000-14,499 TEU) have found themselves being deployed elsewhere, a trend which will continue with larger and larger ships entering smaller trades. Cascading clogs up the balance of these trades where there is currently little demand growth. Far East to Europe 2017-2019 Source: BIMCO, CTS US West Coast, inbound loaded containers 2017-2019 Source: BIMCO, PoLB, Port of Los Angeles, NWSA, Port of Vancouver, Port of Oakland Container charter rates 6-12 months 2016 - August 2019 Source: BIMCO, Harper Petersen & Co. Source: BIMCO estimates on Clarkson’s 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. Growth rate (RH-axis) On the demolition side, the largest container ship to have left the fleet so far in 2019 had a capacity of only 5,364 TEU. The average size of container vessels sent to a scrapyard this year has been 2,142 TEU. Containership demolition activity picked up in August and is on target to meet BIMCO’s expectation of 200,000 TEU leaving the fleet this year. In comparison, BIMCO expects total deliveries in 2019 of 967,000 TEU. Outlook Growth rates on intra-Asian container trades are viewed as an indicator of what is to come on long-haul routes, as volumes here indicate the health of supply chains in the region and therefore what finished goods are likely to be exported from Asia in the near future. With a volume growth rate of 0.8% in the first seven months of 2019, low growth levels can be expected in global demand for container shipping for the remainder of the year. The continued slowdown in global manufacturing and the broader global economy will impact container shipping. BIMCO expects the GDP multiplier to stay around one for the foreseeable future. The slowing demand growth means that despite the comparatively low fleet growth expectations which BIMCO has of 3.5%, the fundamental balance of the container shipping market will worsen this year. Furthermore, with the fleet currently projected to grow by 3.2% in 2020 this is unlikely to change much next year, with the industry heading deeper into a hole. Cutting costs will remain in focus to be able to weather the storm. Adding to the worsening of the fundamental balance, the added fuel costs due to the 2020 sulphur cap, paints a disturbing picture for the rest of the 2019 and 2020 for container shipping. As we have also noted in the dry bulk analysis, the oversupply of capacity is likely to make it difficult for shipowners to recover the additional fuel costs. expects the BIMCO GDP multiplier to stay around one for the foreseeable future Photo (top): jimmux / Shutterstock Growth rate US West Coast, inbound loaded containers 2017-2019 Source: BIMCO, PoLB, Port of Los Angeles, NWSA, Port of Vancouver, Port of Oakland Container charter rates 6-12 months Source: BIMCO, Harper Petersen & Co. Container ship fleet growth Source: BIMCO estimates on Clarkson’s 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. Growth rate p.a. Year-on-year Capesize fleet growth has been below 3% since February 2019 indicating that, for the moment at least, the supply side is under control. Solid scrapping has led to 22 Capesize vessels with a cargo carrying capacity of 4.2m tonnes, leaving the fleet since the start of the year. This has only partly countered the 43 Capesizes that have been delivered, including 8 Valemax (380,000 – 400,000 DWT) and 24 VLOCs (200,000 – 350,000 DWT). Dry bulk shipping Rates may have climbed out of the abyss, but challenges remain in place for the autumn Demand drivers and freight rates Earnings for Capesize vessels have continued their rollercoaster ride, reaching their highest level since the end of 2013, at USD 36,101 per day on 2 September 2019. Between 2 April, the low point of the year so far, and 2 September rates have risen 943%, into solid profit-making territory. Earnings for the smaller dry bulk ship sizes have also risen since the start of the year. Panamax earnings reached their highest level in almost nine years, USD 18,116 per day on 2 September 2019. The last time Panamax earnings were above USD 17,000 per day was in December 2010. Panamax earnings have increased as these ships have entered trading on traditionally Capesize trades. The strong increase in Capesize and Panamax earnings reflects a change in the market dynamics since the beginning of the year. Following major disruption at the start of the year, Brazilian iron ore exports have increased, although monthly exports since March remain lower than what they had been in the corresponding months last year. Iron ore exports bottomed out in April at 18.9 million tonnes and have since risen to 34.3 million tonnes in July. This sharp increase in volumes has resulted in more iron ore spot cargoes out of Brazil, which had been at zero for several weeks in April. The number of available spot cargoes increased through May and June reaching a high in July, during which 30 cargoes were made available over four weeks. Volumes have since fallen in August with between 2 and 5 cargoes being made available weekly in the first half of the month. Major Chinese dry bulk imports paint a conflicting picture for the Capesize market, with iron ore imports down 4.9%, whereas coal imports are up 6.9%. BIMCO has previously reported on the changing nature of Chinese iron ore demand, driven primarily by a switch to using scrap steel in steel production rather than imported iron ore, a change pushed for by the Chinese government. Chinese steel production is up 9% this year, the growing volumes being produced mainly for domestic consumption, as exports have not increased. The main Brazilian soya bean exporting season which due to seasonality occurs between March and July, disappointed. Despite a strong start to the year in January and February, exports in the first seven months of this year are down 5.9%. Although Brazil has had a record-breaking harvest this season, low stocks at the start of the season as well as lower Chinese demand due to the African swine flu, has meant that the record harvest has not driven record exports. Read more about BIMCO’s expectations for the new US soya bean marketing year as well as a roundup of the 2018/2019 marketing year here. Fleet news Deliveries of 25.6m DWT compared to demolitions of only 5.5m DWT has resulted in a net fleet growth of 2.4% so far this year, with the fleet currently standing at 865.3m DWT. BIMCO expects that the dry bulk fleet will grow by 3.7% in 2019. Quick Facts The strong increase in Capesize and Panamax earnings reflects a change in the market dynamics since the beginning of the year The main Brazilian soya bean exporting season disappointed Dry bulk earnings Source: BIMCO, Clarksons Brazilian iron ore exports 2017-2019 Source: BIMCO, ComexStat Dry bulk ship fleet growth Source: BIMCO estimates on Clarkson’s 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. Chinese soya bean imports 2017-2019 Source: BIMCO, GACC Chinese coal imports Source: BIMCO, GACC BIMCO expects that the dry bulk fleet will grow by 3.7% in 2019 BIMCO expects that the solid scrapping activity will slow down in the second half of the year. BIMCO expects that transported volumes will grow along usual seasonal patterns in Q3 and Q4, with Capesize earnings remaining profitable for the rest of the year. This does however depend on iron ore exports from Brazil and Australia remaining stable, and Chinese demand for iron ore not falling due to the increased use of scrap steel in steel production. Chinese coal imports must also maintain what has so far this year been a supportive role, and which could deliver volatility to an otherwise steady outlook. Contracting activity has been slow over the summer months with 18 dry bulk vessels being ordered between June and August, consisting of 5 VLOCs, two standard Capesizes and 11 Handymax, of between 42,000 and 49,500 TEU. The total order book as of the start of September stood at 93.3m DWT. Outlook The African swine flu outbreak has had a severe impact on the Chinese pig herd, with official statistics showing that 32% of China’s pig herd has been culled in the past 12 months, dramatically reducing demand for soya beans, in a trade that has already faced much disruption since the start of the trade war. The massive culling makes it even more unlikely that the trade will return to volumes previously seen any time soon, with Chinese soya bean imports in the first seven months of the year down by 11.3%. With the main Brazilian exporting season having drawn to a close, focus will turn to the US and what is expected to be another disappointing export season as China has announced that it will stop all purchases of US agricultural goods as well as adding a further 5% tariff to soya beans as part of the latest escalation of the trade war. Chinese coal imports, which so far this year are up 6.5%, are facing increasing domestic political influence. Reports of shipments of coal from some of the traditional coal exporters to China facing increased delays with customs clearance as well as some local customs areas limiting coal imports in 2019 to the same level as 2018, mean that this trade is an important swing factor in the rest of the year. BIMCO expects the fundamental market balanceto deteriorate in 2019 Photo (top): Lukasz Z / Shutterstock In December 2018, Chinese coal imports were dramatically reduced when some customs areas stopped clearing coal to limit total imports. Should 2019 follow the same pattern as 2018, coal imports will gradually decrease on a monthly basis through to the end of the year, with several factors pointing to this possibility. The political importance which the Chinese government has placed on keeping the growth of coal imports low comes from their hopes of becoming self-sufficient. The Chinese state has made several large investments in domestic coal production, leading to a recording breaking 333.4 million tonnes of coal being produced in June 2019, as supply grew to meet high energy demands over the summer. But as Chinese coal remains more expensive than imported coal, sudden changes in customs’ policy mean that this trade can quickly go from high growth rates to volumes plummeting. BIMCO expects the fundamental market balance to deteriorate in 2019 which will do nothing to improve freight rates as the 2020 sulphur cap (and its extra costs) nears. Shipowners’ ability to pass these extra costs on to shippers will depend largely on the market conditions, and for as long as supply is larger than demand, passing on extra costs will be difficult. Connect with BIMCO Dry Bulk Dry bulk earnings 2015 - August 2019 Source: BIMCO, Clarksons Brazilian iron ore exports 2017-2019 Source: BIMCO, Dry bulk ship fleet growth Source: BIMCO estimates on Clarkson’s 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. Chinese soya bean imports 2017-2019 Source: BIMCO, GACC Chinese coal imports 2017-2019 Source: BIMCO, GACC Connect with BIMCO Facebook Twitter Linkedin YouTube