Peter Sand - BIMCO Bulletin

Economy

ECONOMY December 2019 SHIPPING MARKET ANALYSIS Use tabs to navigate to pages Macroeconomics Tanker Container Dry bulk Macroeconomics World growth and trade volumes under pressure, but still positive A continued slowdown in global growth, as well as a lower trade multiplier will reduce overall demand for shipping for the rest of this year and through 2020. Glocal economics The World Trade Organization (WTO) has substantially lowered its forecast for trade volumes growth in 2019, putting numbers to the slowdown that is already being felt by the shipping industry. Global growth is now expected at just 1.2%, compared with the 2.6% that had been forecast in the April report. This would represent the lowest growth in trade volumes since 2009. Import growth in developed nations is expected to continue to slow into 2020, reaching only 1.2% Expectations for global trade growth have also been lowered for 2020; this is now forecast at 2.7%, down from 3%. The WTO cautions that risks to these forecasts are weighted to the downside, with these risks including a potential deepening of trade tensions, financial volatility and rising geopolitical tensions in many regions of the world. World goods trade grew by only 0.6% in the first half of 2019, with the WTO expecting a slight recovery in the second half of the year in order for volumes to reach the projected growth of 1.2%, which reflects normal seasonality from a shipping perspective. Peter Sand, Chief Shipping Analyst at BIMCO Europe 7% 7% 6% 6% 5% 5% 4% 4% 3% 3% 2% 2% 1% 1% Growth rate High growth in trade volumes in 2017 reflected strong growth in industrial production in developed countries. Over the past two years, however, industrial production has fallen consistently, with OECD countries reporting a year-on-year decline in industrial production for much of 2019, leading to lower trade volume growth. Growth rate Imports by developed countries are expected to grow by only 1.6% in 2019, down from 2.5% in 2018. Growth in imports by developing Emily Stausbll, Shipping Analyst at BIMCO nations is also expected to fall back, from 4.1% in 2018 to just 1.1% in 2019, which will be the first time since 2016 that growth in imports by developing nations is lower than those by developed nations. But while growth in imports by developing nations is expected to recover in 2020, to 4.3%, import growth in developed nations is Growth in trade volumes expected to continue to slow into 2020, reaching only 1.2%. Goods only, 2015-2020P 0% Germanys chambers of commerce (DIHK) have warned that Imports developed countries Imports developing countries exports may contract year-on-year in 2020 for the first time since Source: BIMCO, WTO Note: Growth rates for 2019 and 2020 are projections. the financial crisis. DIHK now predicts growth of just 0.3% in 2019 and a contraction of 0.5% in 2020, as global trade tensions hit the export-reliant economy. On the other hand, Frances economy which is more dependent on domestic demand than exports has proved more resilient, with growth of 1.2% expected for the full year (source: Insee). 2015 2016 2017 2018 In Italy, Europes fourth largest economy, growth targets have been cut by the new government, which has announced that it expects growth of only 0.1% this year. The government plans to introduce a range of stimulus measures to raise growth to a projected 0.6% in 2020. Without these policies, they expect growth of 0.4% in 2020. 2019P 2020P 0% Global growth is now forecast to slow to 3% in 2019 In the eurozone, slowing growth and fears of a looming recession have led to the European Central Bank (ECB) approving stimulus measures to encourage continued lending, even as growth drops below 1.5%. The International Monetary Fund (IMF) now predicts 1.2% growth in the eurozone in 2019, down from 1.9% in 2018. The European Union (EU) as a whole generally fares a little better, with growth expected at 1.5%. With yet another Brexit deadline behind us and the UK still in the EU, uncertainty continues to plague businesses, with a UK General Election taking place before the latest deadline: 31 January 2020. US The inventory/sales ratio in the US has fallen in recent months to 1.44, its lowest level since November 2018. Since November 2018, the implementation of tariffs on imports from China led to the ratio rising, as companies rushed to fill their inventories of containerized goods before prices rose. The ratio peaked at 1.49 in February 2019, which is the highest level in more than a year. Sep 2019 Mar 2019 Jan 2018 Jul 2019 1.38 May 2019 1.38 Jan 2019 1.40 Nov 2018 1.40 Sep 2018 1.42 Jul 2018 1.42 May 2018 1.44 Mar 2018 1.44 Nov 2017 1.46 Sep 2017 1.46 Jul 2017 1.48 May 2017 1.48 Mar 2017 1.50 Jan 2017 1.50 Ratio 2017-2019 Ratio A falling inventory/sales ratio indicates that inventories are being emptied faster than they are being filled, despite a delay in the implementation of tariffs on USD 160 billion of mostly containerized goods, which are currently set to be implemented on 15 December. With Thanksgiving already upon us and Christmas fast approaching, BIMCO does not expect another pre-tariff rush to materialise in late November or December 2019, with the ratio only rising to 1.45 in September. US retail inventory/sales ratio Source: BIMCO, US Census Bureau The fall comes despite retailers usually stocking up at this time of the year ahead of the upcoming Christmas sales. Unsurprisingly, the National Retail Federaton (NRF) is, in fact, predicting strong sales in the holiday period, noting that consumer spending has remained strong. In normal times this leads to high volumes on the eastbound transpacific route, but the trade war means these are not normal times, and shipping has not received its usual pre-Christmas boost this year. The IMF has lowered its forecast for US GDP growth since July, and now expects growth of 2.4% in 2019 and 2.1% in 2020. The slowdown in the worlds largest economy comes as its manufacturing purchasing managers index (PMI) reveals that in the third quarter, US manufacturing had its worst quarter in more than a decade, with the average of the index over those three months lower than any other quarter since 2009. The PMI has since risen to 51.3 in October, after bottoming out at 50.3 in August. In contrast to other major economies and the global index, the US PMI has, despite slowing, not fallen to beneath 50, the threshold level, this year. Asia The IMF has also lowered its growth forecast for China in both 2019 and 2020, with the rates now projected at 6.1% and 5.8%, respectively. The slowing growth is primarily being driven by falling exports as a result of the US-China trade war, as well as softening domestic demand, and comes despite stimulus measures that have already been put into place. Furthermore, the government has doubled the amount of infrastructure projects that it has approved this year compared with 2018, in an attempt to boost growth through the variables that it can directly influence. Higher infrastructure spending will, to some extent, bring a boost to dry bulk shipping. Chinese industrial production Despite the stimulus measures, growth in industrial production in China fell to 4.4% in August its lowest level since 2002 and remained low, at 4.7% in October. It had rebounded in September, pushing up to 5.8%, with the rise attributable to higher domestic demand, although overall demand including that for exports remains historically low, which is reflected in the lower growth in October. In other Asian countries, growth is also slowing. The disruptions in China are spilling over, and the continued tensions between Japan and South Korea, as well as rising geopolitical risks, are all dampening growth. For example, the IMF now forecasts 2% growth in South Korea in 2019 and 0.9% in Japan. Outlook In addition to the WTOs trade growth downgrades, the IMF has revised its GDP growth projections down for 2019 and 2020, so that they are now in line with BIMCO expectations following the further escalation of the trade war. Global growth is now forecast to slow to 3% in 2019 (down 0.2 points from the IMFs July report) before rising to rise to 3.4% in 2020 still below 2018s 3.6%. 4.2% 4.2% 4.0% 4.0% 3.8% 3.8% 3.6% 3.6% 3.4% 3.4% 3.2% 3.2% 3.0% 3.0% 2.8% 2.8% 2.6% 2015 2016 2017 Actual growth WEO April 2018 2018 2019 2020 WEO October 2016 WEO April 2019 2021 2022 2023 2024 2.6% WEO October 2017 WEO October 2019 Source: BIMCO, IMF While the current IMF outlook sees growth improving in the next few years, up to 3.6% in 2024, expected growth for a given year tends to fall as it approaches. For this reason, BIMCO does not expect global growth to reach the levels currently forecast by the IMF, and warns against expecting global growth to boost shipping over the next few years. Lower global growth may be the new normal. The US and China are rumoured to be nearing an agreement on phase one of a deal whatever that means which, if signed, could ease tensions, reducing the risk of a further escalation of the trade war. We have, however, been in a similar situation several times before over the past year, and although the current tariff delays are good news for trade volumes, BIMCO remains concerned that this trade war may continue to drag on into 2020 and, potentially, beyond. Even if a phase one deal can be signed, the hardest parts of an agreement are yet to be worked on. Furthermore, after a WTO ruling on aid given to Airbus, the US has imposed higher tariffs on USD 7.5 billion worth of EU goods, further worsening global trading relationships. BIMCO reiterates that raising tariffs is bad not only for the economies directly involved, and shipping between them, but also for the global economy and trade as a whole. Photo (top): monsitj / iStock and Danny Cornelissen at www.portpictures.nl Growth rate 2015-2024P Growth rate The low GDP growth predictions from the IMF come despite governments around the world implementing stimulus measures. The IMF estimates that without these, global growth would be 0.5 points lower in both 2019 and 2020 (at 2.5% and 2.9%, respectively). The higher growth as a result of these packages is, of course, good news for the shipping industry, but also leaves the question of whether there is more that can be done to lift growth especially in advanced economies or if governments have simply run out of options for stimulating their economies? IMF real GDP growth projections Quick Facts Tanker shipping Sky-high freight rates have given way to a profitable winter market supported by the fast-approaching IMO 2020 Sulphur Cap BIMCO expects freight rates will once again come under pressure after the end of the high seasonal demand in Q4, as well as the boost from the sulphur cap. The fleet growth of 6.3% in the crude oil tanker market and the 4.8% growth in the oil product fleet will have its consequences on the supply and demand balance. Demand drivers and freight rates Reported very large crude carrier (VLCC) earnings reached USD 307,888 per day on 11 October, although the following week they fell as quickly as they had risen. After the drop, rates stood at USD 74,681 per day on 1 November which, aside from the recent peak, is the highest level since early 2016. So what drove up the rates in October? Geopolitics is the simple answer. The slightly more detailed response is that geopolitics and the refiners need for crude ahead of the 2020 sulphur cap on 1 January created a hefty demand cocktail. On a geopolitical level, tighter US sanctions on certain oil tankers and shipping companies as well as those limiting crude exports from Iran and Venezuela and tension in the Persian Gulf and Red Sea, all had a significant impact on the market. Peter Sand, Chief Shipping Analyst at BIMCO All contracts higher than USD 200,000 per day quickly fell through The geopolitics was combined with the seasonal boost that Q4 traditionally brings to the tanker market and mixed with refiners which were desperate to get crude oil to their facilities to ramp up production ahead of the new sulphur cap, which is likely to be highly lucractive. Despite these factors, the fundamentals of the market remain unchanged, so the peak freight rates were unsustainable. Emily Stausbll, Shipping Analyst at BIMCO Crude oil tanker earnings Jan 2016 Mar 2016 May 2016 Jul 2016 Sep 2016 Nov 2016 Jan 2017 Mar 2017 May 2017 Jul 2017 Sep 2017 Nov 2017 Jan 2018 Mar 2018 May 2018 Jul 2018 Sep 2018 Nov 2018 Jan 2019 Mar 2019 May 2019 Jul 2019 Sep 2019 Nov 2019 Smaller crude oil tankers experienced similar spikes in freight rates; Suezmax earnings reached USD 159,257 per day on 11 October, higher than the 2009 peak, and Aframax earnings hit a high of USD 60,181 per day a week later. VLCC Suezmax A spike in oil product tanker rates, lagged the peak in VLCC earnings by a week, but otherwise followed the same pattern: a sharp rise in mid-October, followed by falling rates. Here again, though, they remain above levels seen in recent years. Oil product tanker earnings Iranian crude oil exports have fallen substantially, although not quite to zero, since waivers on US sanctions granted to eight countries ran out. Chinese customs statistics show imports have continued, albeit at a much lower level than previously: in September, China reported imports of 0.5 million tonnes of Iranian crude oil, with exports down 45.8% in the first nine months of the year. On the other hand, the EU where Italy and Greece had previously been large buyers has apparently stopped all purchases of Iranian crude oil, with Eurostat not reporting any imports since December 2018. EU crude oil imports from Iran 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 Million tonnes 3.5 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 Apr 2019 May 2019 Jun 2019 Jul 2019 Aug 2019 Sep 2019 Million tonnes 2017-2019 Source: BIMCO, Eurostat US oil product exports 2017-2019 Million barrels Crude oil production by OPEC members has fallen in 2019, from 31.9m barrels per day (bpd) in 2018 to 29.4m bpd in Q3 2019. This is mostly down to the agreed supply cut, which has not been followed by all members,Iraq and Nigeria in particular.In addition, sanctions on Iran and Venezuela and the attack on a Saudia Arabian oil installation further lowered production. These changing patterns create longer distances between producers and the Asian markets, benefiting shipping. Aframax Source: BIMCO, Clarksons Daily Long Range 2 (LR2) earnings reached USD 79,523 on 18 October before sliding to USD 30,658 on 1 November. LR1 earnings went to USD 38,684 per day and now stand at USD 23,608. MR earnings reached USD 23,493 per day, and Handysize peaked at USD 18,612 per day. Some tankers left the scrubber fitting queue in China to take advantage of the strong market, but are expected to return to get a scrubber at a later stage. Clarksons estimates that 36% of VLCCs will be scrubber-fitted by the end of 2020. This will have an impact on freight rates and it is understood there is a premium for scrubberfitted ships, at least on time charters. However, once the majority of ships become scrubber- fitted, it will become a discount for ships without, rather than a premium for those with. 320,000 300,000 280,000 260,000 240,000 220,000 200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 USD per day 320,000 300,000 280,000 260,000 240,000 220,000 200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 160 8% 140 6% 120 4% 100 2% 80 0% 60 -2% 40 -4% 20 -6% 0 -8% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Growth rate While reported earnings were more than USD 300,000 per day, anecdotal evidence suggests that all contracts higher than USD 200,000 per day quickly fell through once it became obvious the spike was very temporary. USD per day 2016-2019 2018 2019 2017 Acc. y-o-y growth 2018 (RH-axis) Acc. y-o-y growth 2019 (RH-axis) Source: BIMCO, EIA Note: BIMCOs US oil product exports does not include LPG exports, which have been taken out of EIA data. After a longer than usual maintenance season in US refineries, which has led to lower US oil product exports in the first eight months of 2019 compared with 2018, August was the first month since February in which exports were higher on a month-on-month basis. This brought year-on-year growth to -3.9%, rather than the -5.5% recorded in the first seven months of the year. The crude oil fleet is expected to see the highest growth of all of the main shipping fleets Traditionally, global refineries run maintenance in spring and winter but, this year, spring maintenance was prolonged to avoid long autumn shutdowns to allow refiners to focus on meeting increased demand ahead of the new IMO 2020 Sulphur Cap. BIMCO, therefore, expects crude oil throughput to continue growing during the last months of the year. Whether or not this will translate into higher oil product exports, and therefore boost the oil product tanker market, depends on whether or not buyers can be found. Production itself does not determine demand for oil product tankers. Ramped up crude oil throughput has so far had little effect on US exports, with figures between August and October averaging 5.1m bpd, only 30,000 bpd higher than the average for the first six months of the year. Fleet news In anticipation of a strong demand boost from the IMO 2020 Sulphur Cap, shipowners have pushed up fleet growth higher than needed, if judged by freight rate developments. The largest share of the additional capacity comes from deliveries of Medium Range (MR) tankers. These average 48,549 DWT in size, bringing an extra 4.1m DWT into the fleet in the form of 85 ships. The majority of the remaining delivered capacity comes from 24 new LR2 tankers, amounting to 2.6m DWT. 2015A-2021E 10% 8 8% 6 6% 4 4% 2 2% 0 0% -2 -2% -4 -4% 2015A 2016A 2017A 2018A To be delivered p.a. 2019F Demolition 2020E 2021E Growth rate p.a. 10 Million DWT The oil product tanker fleet has seen a sharp rise in deliveries from 2018 which, combined with lower demolition, means that BIMCO now expects fleet growth of 4.8% in 2019, compared with 1.8% in 2018. Deliveries so far this year (8m DWT) have already overtaken those for the whole of 2018 by 2.2 million dead weight tonnes (DWT). BIMCO expects a further 0.6m DWT to be delivered before the end of the year. Demolitions currently stand at only 0.8m DWT, which BIMCO expects will rise to 0.9m DWT in the full year. Oil product tanker eet growth Growth rate (RH-axis) Source: BIMCO estimates on Clarksons raw data A is actual. F is forecast. E is estimate which will change if new orders are placed. The supply growth for 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 fleet is expected to see the highest growth of all of the main shipping fleets with a growth of 6.3% in 2019. In total, 27.5 million DWT of crude oil tanker capacity has been added to the market since the start of 2019, a number which towers over the 3.1m DWT that has been demolished. BIMCO is currently forecasting that the crude oil tanker fleet will grow by around 1.5% in 2020, a marked slowdown from this year. Delivery of new tonnage is expected to be 50% lower in 2020 compared with 2019, with 15m DWT currently expected to arrive on the water; demolition activity is also set to rise. The joint effect will mean a slowing of fleet growth. Outlook The International Energy Agency (IEA) expects OPEC production to fall by 1mbp in 2020 to 29mbp. In its latest World Oil Outlook, OPEC forecasts that although its output will continue to fall through to 2024, worldwide oil supply is expected to rise. OPEC predicts 60% of global oil supply growth during this period will come from the US. 2018-2019 20 20 15 15 10 10 Exports Sep 2019 Aug 2019 Jul 2019 Jun 2019 May 2019 Jul 2018 Imports Apr 2019 Net imports Source: BIMCO, US Census Bureau For shipping, the increasing proportion of exports from the US brings a higher tonne per mile demand as the US boasts longer sailing distances to European and Asian importing countries than many OPEC nations. This is one of the reasons why sanctions on Iran may give a boost to the tanker shipping industry. Increased US exports, including those to Asia, come despite a sharp drop in exports to China in the second half of 2018 and 2019 as a result of the trade war. Anecdotal evidence suggests that a considerable number of VLCCs are being used as floating storage, especially in the Far East, ahead of the IMO 2020 sulphur cap added to which, ships are being taken out of the market for scrubber retrofits. Both of these developments have reduced the available capacity, supporting already high freight rates. This is however, a short term gain, as when these ships return to the market, the boost to freight rates will be gone. BIMCO still expects the IMO 2020 Sulphur Cap to bring a boost to oil product tankers and help keep rates profitable in Q4 2019 and the first few months of the new year. Although the tanker shipping industry is likely to be the only part of the sector to see increased demand from the stricter sulphur cap, it will also face the same additional costs associated with compliance as other shipping segments. 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 Connect with BIMCO Facebook Twitter Photo (top): AvigatorPhotographer / iStock Linkedin YouTube Million tonnes -25 Mar 2019 -25 Feb 2019 -20 Jan 2019 -20 Dec 2018 -15 Nov 2018 -15 Oct 2018 -10 Sep 2018 -10 Aug 2018 -5 Jun 2018 -5 May 2018 0 Apr 2018 0 Mar 2018 0.04 5 Feb 2018 5 Jan 2018 Million tonnes The US is currently set to continue expanding its crude oil exports in 2019, as well as the number of destinations to which it exports. Exports have consistently risen in the past few years after the US Congress lifted a ban on crude oil exports in December 2015, and increased the usage of fracking to extract it. The US is expected to become a net exporter of crude oil from Q4 2019. September was the first month in which the seaborne imports of the US were less than a million tonnes higher than exports, with net imports of just 37,304 tonnes. Average net seaborne imports per month stood at 10.2 million tonnes in 2018. US seaborne crude oil trade balance Quick Facts Container shipping Pressure remains despite some of the trade war damage being offset by a reshuffling of manufacturing in Asia Container shipping has in the last few months felt the effects of the trade war digging in, as global container volumes continue to see very sluggish growth, now standing at 1% in the first nine months of the year. This brings the total volume of containers shipped this year to 126.3 million TEU, up just 1.3 million from the corresponding level in 2018. All this compares with the 3.8% growth at this time last year, or an additional 4.6 million TEUs. Frontloading at the end of last year, ahead of planned tariffs hikes on US imports from China, led to higher volumes as well as higher freight rates. Since February, volumes between the two countries have been consistently lower than last year. US containerised imports from China in tonnes are down 7.3% in the first nine months of the year. Despite the fall in volumes from China, total containerised imports out of Asia have grown so far this year, albeit only just. Volumes are up 1.1%, compared to full year growth of 6.5% in 2018. 2018 growth was pulled up at the end of the year due to the frontloading. Emily Stausbll, Shipping Analyst at BIMCO Global container shipping demand In particular, volumes to the US west coast (USWC) have suffered, where laden container imports are down 1.5% in the first nine months of the year, according to BIMCOs own data. Exports have also fallen by 4.2%. 2017-2019 Million TEU The continued, albeit modest, growth in US imports from the whole of Asia reflects a reshuffling of exporting nations that has occurred in the Far East. This has manifested itself in two ways: Peter Sand, Chief Shipping Analyst at BIMCO 16 12% 14 10% 12 8% 10 6% 8 4% 6 2% 4 0% 2 -2% 0 -4% First, the trade war and added tariffs on goods from China has speeded up the process which had already begun of some manufacturing moving away from China in favour of its neighbours with lower labour costs. Jan Feb Mar Apr May 2017 2018 2019 Jun Jul Aug Sep Oct Nov Dec Acc. y-o-y growth 2018 (RH-axis) Acc. y-o-y growth 2019 (RH-axis) Source: BIMCO, CTS Second, the trade war has led to products, still being produced in China, being transhipped through neighbouring countries to change their country of origin and thereby avoid additional tariffs when they arrive in the US. US containerised imports from Asia 2017-2019 12 30% 11 25% 10 Million tonnes 9 20% 8 15% 7 6 10% 5 5% 4 3 0% 2 -5% 1 - China Ju l2 01 Se 7 p2 01 No 7 v2 01 Ja 7 n2 01 8 M ar 20 M 18 ay 20 18 Ju l2 01 Se 8 p2 0 No 18 v2 01 Ja 8 n2 0 M 19 ar 20 M 19 ay 20 19 Ju l2 01 Se 9 p2 01 9 7 01 ay 2 M M ar 20 01 7 17 -10% n2 Ja Despite these developments, volumes on intra-Asian trades year are flat in the first nine months of 2019 compared to the same period in 2018 . The boost that could have been expected from shifting manufacturing and transhipment has not come to the shipping industry, which instead is feeling the pressure from slowing overall exports from the region. This may be because transhipped volumes are primarily being transported by land from China into neighbouring countries before being put on a ship. Growth rate Demand drivers and freight rates The continued, albeit modest, growth in US imports from the whole of Asia reflects a reshuffling of exporting nations that has occurred in the Far East Growth rate With fleet growth of 3.7%, compared to global container shipping demand growth of only 1%, even blanked sailings have been unable to lift freight rates. Rest of Asia Acc. y-o-y growth China (RH-axis) Acc. y-o-y growth Asia (RH-axis) Source: BIMCO, US Census Bureau 2018-2019 2,500 750 2,000 600 1,500 450 1,000 300 500 150 SCFI US West Coast CCFI US West Coast (RH-axis) At the end of 2018, BIMCO forecast 100,000 TEU would be demolished in 2019, although it said that figure could double if, as has been the case, slowing demand and low freight rates materialised. Demolitions this year currently stand at 163,219 TEU. Sep 2019 Jul 2019 Source: BIMCO, Shanghai Shipping Exchange Fleet news Note about SCFI: ... Container ship eet growth 2015A-2021E 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 To be delivered p.a. 2019F Demolition 2020E 2021E Growth rate p.a. 1,750 000 TEU Growth in the container shipping segment now stands at 3.6%, and BIMCO expects full-year growth of 3.7%. 0 SCFI US East Coast CCFI US East Coast (RH-axis) Despite slowing growth and lower freight rates, charter rates for container ships, especially the largest vessel sizes, remain elevated. This is partly due to these larger ships leaving the market for scrubber retrofits. Rates for an 8,500 TEU vessel have been standing at USD 30,000 per day for the past 11 weeks. This is a sign of weakness, as it indicates that demand has stalled; BIMCO expects to see lower charter rates in the coming months. Charter rates for a 6,500 TEU vessel, after five weeks at USD 26,000 per day, have already fallen slightly, standing at USD 25,000 per day on 8 November 2019. Charter rates for smaller vessel sizes remain more subdued. Fleet growth in container shipping has also slowed in recent years, although not as fast as the slowdown in global container shipping demand, meaning that the fundamental balance of the market has continued to worsen, to the detriment of freight rates and shipowners operating in this sector. Mar 2019 Jan 2019 Sep 2018 Mar 2018 0 Index level 900 Nov 2019 3,000 May 2019 1,050 Nov 2018 3,500 Jul 2018 1,200 May 2018 4,000 Jan 2018 On these routes, both the CCFI and SCFI are down from where they were at the same time last year, when they were buoyed by the frontloading ahead of the tariffs. As evidenced by the falling inventory/sales ratio in the US (see macroeconomics section), retailers there have not been stockpiling to the same extent as they usually do in the lead-up to the Christmas period, causing volumes and freight rates to disappoint. Container freight rates China to US USD per TEU Intra-Asian volumes provide an insight into how volumes out of Asia will develop, with lower volumes already putting pressure on freight rates on the major routes. The overall CCFI fell to its lowest level of the year with a reading of 776.9 on 18 October 2019, although by 8 November it had risen to 808.93.The subindexes covering Europe, as well as both the east and west US coasts, where the usual peak season has failed to materialise, have performed particulary poorly. Note: Frontloading was clearly visible in January. 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. Taking into account deliveries of 964,064 TEU, it brings the total containership fleet to 22.9 million TEU. Of the vessels delivered this year, 27 have a capacity above 14,500 TEU and, added together, these Ultra Large Container Ships (ULCSs) accounted for 544,202 TEU of the total delivered, or just over 56%. ULCSs currently make up 60% of the orderbook in volume terms, a figure which has grown over the past few years from 41.4% in January 2016, and one that is likely to continue to do so. In October, a total of 12 ships were ordered: 11 had a capacity of more than 23,500 TEU, and the twelfth a capacity of 1,096. These orders lift the total ULCSs ordered in 2019 to 26 (averaging 18,651 TEU), considerably lower than the 36 ordered in 2018, although there are still a few weeks left of 2019. There are only a few trades able to handle ULCSs and, as they arrive on the market, cascading will lead to large ships finding their way to many of the worlds other trades, the majority of which have no need for larger ships or extra capacity, putting further pressure on freight rates. Outlook Although volumes being shipped between the Far East and Europe have remained high up 4.6% from the same period of 2018 this has done little to lift freight rates. The CCFI index to Europe in October was 10.5% lower in 2019 than in 2018 and, over the same period, the SCFI was down 17.1%. The continued deployment of bigger ships, as well as the overall market conditions, mean that even high demand growth on a route cannot single-handedly lift rates on that route. While bunker adjustment factors (BAFs) have long been around, carriers have developed new formulae to calculate them, and their ability to pass on these extra costs will depend on the conditions of the market. Shippers want the lowest possible price and, as long as the market fundamentals are on their side, they will be unwilling to pay extra, even if these costs are disguised as BAFs. Around 50% of the ULCS fleet is now expected to have a scrubber installed by the end of 2020, up from 34% by the end of 2019 (source: Clarksons), with carriers preferring the upfront costs rather than prolonged higher costs of fuel. 2017-2019 1,800 1,700 1,600 1,500 1,400 1,300 1,200 1,100 1,000 900 800 700 600 500 400 300 200 100 0 1,200 1,175 1,150 1,125 1,100 1,075 1,050 1,025 Index level Thousand TEU Carriers have announced further blanking of sailings (pulling a ship out of rotation) in November which, along with ships heading to yards for scrubber retrofitting amongst other things, has pushed the idle fleet up in all ship sizes in recent weeks. However, despite the continued blanking of sailings, freight rates have not risen substantially as the fundamental balance has continued to deteriorate. This will only hurt carriers, especially as they face the final preparations before the implementation of the 2020 sulphur cap and the battle to pass on higher fuel costs to customers. Far East to Europe container shipping demand 1,000 975 950 925 Jan Feb Mar Apr May 2017 2018 2019 Jun Jul Aug Sep Oct Nov Dec 900 CCFI Europe 2017 (RH-axis) CCFI Europe 2018 (RH-axis) CCFI Europe 2019 (RH-axis) Source: BIMCO, CTS, Shanghai Shipping Exchange Carriers have announced further blanking of sailings in November which, along with ships heading to yards for scrubber retrofitting amongst other things, has pushed the idle fleet up in all ship sizes in recent weeks Carriers, competing in a commoditised market, will probably be willing to undercut each other if it means they can sail with more containers onboard. Because of this, cost-cutting will continue to be a focus as fuel costs rise. The slowdown in demand is showing no signs of easing, and should the latest round of tariffs be implemented on 15 December as planned, virtually all US imports from China will be subject to tariffs, all of which will only cause further harm to the shipping industry at the same time as costs are increasing due to the IMO 2020 sulphur cap. A continued reshuffling in manufacturing in Asia may offer some upside, once processes are up and running. But, as BIMCO has previously said, there are no winners in a trade war, and this is already being felt across the board by shipping in 2019. The new year will bring not only the sulphur cap, but also skewed exports caused by the Chinese New Year. Pushing out goods ahead of widespread factory closures may bring a boost in January before a slow, and possibly painful, February awaits carriers. Photo (top): jimmux / Shutterstock Container TEU Feeder Panamax Post Panamax Neo Panamax Ultra large container ship (ULCS) 100-2,999 3,000-4,999 5,000-9,999 10,000-14,499 14,500+ Quick Facts Dry bulk shipping Freight rates down from multi-year highs as the market fundamentals make themselves felt The fundamental balance in the market has worsened in 2019 with supply growth outstripping demand, and BIMCO expects that this will continue into 2020. Demand drivers and freight rates After peaking in September, the fundamentals of the market have begun to drag on freight rates although the rates remain above the average experienced so far this year, buoyed by a handful of positive developments during Q3. After peaking in September, the fundamentals of the market have begun to drag on freight rates Capesize ships are the only dry bulk ships to have seen average freight rates in the first 10 months of this year higher than those in the corresponding period of 2018 with average rates up USD 624 per day, pulled up by the peaks in earnings experienced towards the end of Q3. On the other hand, average earnings are down for all the smaller vessel sizes: -3.2% for Panamax, -12.7% for Supramax and -17.1% for Handysize. Although Brazilian iron ore exports have suffered after the Vale tailings dam collapse in January, firmer exports in Q3 helped push Capesize rates to six-year highs, despite total Brazilian exports still being 12.3% lower in the first 10 months of 2019 compared with the same period of 2018. Peter Sand, Chief Shipping Analyst at BIMCO For only the third time this year, monthly exports exceeded 30m tonnes, with 31.2m tonnes exported Emily Stausbll, Shipping Analyst at BIMCO in October. In 2018, this export level was reached in nine of the 12 months. Indications from Vale suggest that exports may face renewed pressure through to the end of the year, Although after falling to zero at the start of November, the number of spot cargoes being reported has increased. Dry bulk earnings Nov. 2019 Sep. 2019 Jul. 2019 USD per day Supramax May 2019 Mar. 2019 Jan. 2019 Nov. 2018 Sep. 2018 Jul. 2018 May 2018 Mar. 2018 Jan. 2018 Nov. 2017 Sep. 2017 Jul. 2017 May 2017 Mar. 2017 Jan. 2017 Nov. 2016 Panamax Handysize Chinese iron ore imports 2017-2019 14% 110 12% 100 10% 90 8% 80 6% 70 4% 60 2% 50 0% 40 -2% 30 -4% 20 -6% 10 -8% 0 Jan Feb Mar Apr May 2017 2018 2019 Jun Jul Aug Sep Oct Nov Dec Growth rate 120 -10% Acc. y-o-y growth 2017 (RH-axis) Acc. y-o-y growth 2018 (RH-axis) Acc. y-o-y growth 2019 (RH-axis) Source: BIMCO, General Administration of Customs PR China US soya bean exports 3.5 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 Sep 0.0 Oct Nov Dec Jan 2016/17 Feb Mar Apr 2017/18 May Jun 2018/19 Jul Aug Million tonnes Million tonnes 2016-2019 2019/20 Source: BIMCO, USDA Note: The six weeks between 1 Jan 2019 and 14 Feb 2019 are average weekly exports based on a combined report for the six week period includes both seaborne and non seaborne exports. US soya bean marketing year runs from September to August. Despite rumoured breakthroughs in trade talks, BIMCO expects that exports in the main US soya bean season will continue to be lower than those in previous seasons unaffected by the trade war. This is not only because of these tensions, but also due to the massive culling of pigs in China in response to the African swine flu. This has led to 41% fewer pigs in China than at the same time last year, dramatically cutting the countrys demand for soya beans. Furthermore, Chinese buyers have continued purchasing Brazilian soya beans, which is unusual, at a time when they would usually be importing from the US. 2018 was the first year in which Chinese iron ore imports fell, and BIMCO expects this trend to continue This development has come about because US soya beans are now more expensive than their Brazilian counterparts, even before taking additional tariffs into account, thanks to rumours that large purchases from China were just around the corner. The changing seasonal export patterns have caused problems for ships that were in place and ready for the US season, only to find that Brazil was the place to be. Fleet news Dry bulk fleet growth in 2019 is already higher than it has been in any year since 2014. It is currently standing at 3.5%, and BIMCO expects it to rise to 4.1% by the end of the year. This is based on the expectation that a further6m deadweight tonnage (DWT) will be delivered betweenmid-November and the end of the year, adding to the 36m DWT already delivered, and 0.9m will be demolished. This would bump the total demolition up to 7 million DWT. Ordering activity has been subdued this year, amounting to 19.9m DWT by mid-November. This is 47% lower than the 37.7m DWT ordered in the first 11 months of 2018, which saw orders for a total of 40.1m DWT. It is a very positive development, sowing the seeds for a better market balance. Dry bulk ship eet growth 2015A-2021E 5% 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 Demolition 2020E 2021E Growth rate p.a. 50 Million DWT There is a noticeable absence of orders for standard Capesizes this year, with only two ships both 180,000 DWT ordered. This is down from the 43 such ships ordered in 2018. For the second year in a row, no Valemax orders have been placed yet. But 38 VLOCs (200,000-350,000 DWT) with a total capacity of 8.9m DWT, have been ordered. Also popular are Panamax ships (65,000-99,999 DWT), for which there are 65 new orders to date this year totalling 5.3 million DWT. 40,000 37,500 35,000 32,500 30,000 27,500 25,000 22,500 20,000 17,500 15,000 12,500 10,000 7,500 5,000 2,500 0 Source: BIMCO, Clarksons Brazilian corn exports are up 123.8% in the first 10 months of the year, with volumes from Argentina up 48.7%. This brings total exports from the two countries to 60 million tonnes, or an additional 317 Panamax loads, compared with exports from the two countries in the same period of 2018. On the other hand, the US has seen falling corn exports, down 44.3% in the first nine months of the year. In volume terms, this means a loss of 234 Panamax loads not enough to derail the positive effects of higher exports from Brazil and Argentina. These strong corn exports helped to boost Panamax and Supramax freight rates at a time when they were already being pulled up by the strong Capesize market. Rates for these vessel sizes have since fallen, as US soya bean exports, usually strong in the last four months of the year have, like last year, disappointed in September and October. The US soya bean marketing year runs from September to August, and in the first nine weeks exports are down 3.8 million tonnes from the same period in the 2017/2018 marketing year-the last one unaffected by the trade war. Exports are however 1.2 million tonnes higher than they were in the 2018/2019 marketing year, but this is testament to very low exports in 2018/2019, rather than a good start to the current marketing year. Sep. 2016 Capesize Million tonnes Agricultural exports have been a mixed bag so far in 2019. While overall soya bean exports from Brazil and the US are down 6.8% in the first nine months of the year a loss of 90 Panamax loads (75,000 tonnes) corn exports from Brazil and Argentina have been a positive development. Jul. 2016 Despite all earnings coming down since their peak in September, they remain much higher than during the first half of the year when rates tumbled. On 1 November, Capesize earnings stood at USD 24,637 per day, Panamax at USD 12,142 per day, Supramax at USD 11,590 per day and Handysizes earning on average USD 8,398 per day. At these levels, all rates are above the average break-even costs, covering not only operating, but also financing costs. May 2016 Jan. 2016 2018 was the first year in which Chinese iron ore imports fell, and BIMCO expects this trend to continue as China moves towards using scrap steel, rather than imported iron ore in steel production. 40,000 37,500 35,000 32,500 30,000 27,500 25,000 22,500 20,000 17,500 15,000 12,500 10,000 7,500 5,000 2,500 0 Mar. 2016 USD per day Imports of iron ore to China have also fallen, down 1.6% in the first 10 months of the year. Nevertheless, imports in September were the third-highest ever, pulling year-on-year accumulated growth rates up from the -5% they had been hovering around throughout the year. 2016-2019 Growth rate (RH-axis) Source: BIMCO estimates on Clarksons raw data Outlook 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. While earnings have remained at healthy levels moving into Q4, this has little to do with the market fundamentals. Instead, it is a continuation from the high freight rates seen in Q3, where a positive demand shock saved them from the doldrums they had experienced in the first half of the year. The swing factor remains Chinese coal imports, which have grown by 9.6% in the first 10 months of the year. While this growth is expected to continue into the last two months of the year, policy decisions in China could have a large impact. Imports were curbed at the end of last year, as a result of domestic policies aimed at reducing emissions. This meant Chinese coal imports fell from June through to December, with imports in December 2018 dropping to less than half of those in the same month in 2017. The fundamental balance in the market has worsened in 2019 with supply growth outpacing that of demand. BIMCO expects that this will continue into 2020 and the fleet to grow by around 3%. This will do nothing to help shipowners pass on the additional costs of the looming IMO 2020 sulphur cap, which is set to add even more pressure to already struggling bottom lines. It remains unclear whether the high freight rates in Q3 were due to delayed cargoes from Q1 appearing on the market, or the pushing forward of Q4 cargoes. BIMCO expects the former, but fears that if the latter is to blame, then freight rates will continue to fall in the last few months of 2019. Twitter 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 Connect with BIMCO Facebook The swing factor remains Chinese coal imports Connect with BIMCO Facebook Twitter Linkedin YouTube