Peter Sand - BIMCO Bulletin

Economy

ECONOMY June 2020 SHIPPING MARKET ANALYSIS Use tabs to navigate to pages Macroeconomics Tanker Container Dry bulk Macroeconomics Global trade to suffer massive losses from Covid-19-related shutdowns No V-shaped recovery in sight after the large-scale shutdown of economic activity and the virus posing a risk to globalisation. The global economy and world trade are being battered by the widespread and comprehensive measures to limit the spread of Covid-19. Even though some countries have started easing their lockdown measures such as in China there has been no swift uptick in economic activity, leaving no hope of a swift global economic recovery. The impact on shipping will be lower demand across all sectors On 8 April, the World Trade Organization set out two scenarios and both predict trade dropping in every region and across all sectors. In its most optimistic view, global trade will fall by 13% in 2020, whereas its pessimistic outlook sees trade falling by 32% from 2019 levels, with a recovery in 2021 that will not return volumes to pre-pandemic levels. BIMCO believes the actual drop will be somewhere between these two figures, depending on how long it takes for the pandemic to be brought under control, and how governments around the world are able to coordinate and implement effective stimulus measures to get their economies back up and running. Peter Sand, Chief Shipping Analyst at BIMCO The International Monetary Fund (IMF) has turned its 2020 growth forecast on its head, from + 3.3% growth before the outbreak, to a 3% contraction, although this prediction remains shrouded in uncertainty as the duration of the crisis and the speed at which nations can reverse lockdown measures remains unclear. This sudden and drastic contraction far exceeds that of the 2008 financial crisis; the Great Depression of the 1930s, unfortunately, looks like a closer comparison. The crisis, which took hold in Europe in March, has seen countries responding in different ways, although most have been on a scale ranging from a full lockdown and curfews to more restrained social distancing measures. Common to all countries, however, is that their economies have taken a massive hit. Index 100 = 2018, 2018-2021P 110 110 106 100 100 100 100 100 100 87 90 90 84 80 80 70 Index points Europe Volume of world merchandise trade Index points In its April World Economic Outlook, the IMF forecasts the economy will normalise in 2021 with growth of 5.8%, bringing the global economy to an index level of 102.6 from 2019 levels. This forecast assumes that most containment efforts will be removed over the course of the second half of 2020. Emily Stausbll, Shipping Analyst at BIMCO 70 68 60 2018A 2019A 2020P Pessimistic scenario 60 2021P Optimistic scenario Source: BIMCO, WTO The largest economies in Europe are among those worst affected. Germany, the UK, France and Italy have all posted negative Q1 GDP growth: -2.2%, -2.0%, -5.8% and -4.7%, respectively. The European Union as a whole saw its economy shrink by 3.5% in the first quarter of 2020 compared with Q4 2019, although when looking year-on-year, the economy was 0.2% larger than in Q1 2019. The impact on shipping will be lower demand across all sectors. Note: Figures for 2020 and 2021 are projections. These Q1 GDP contractions are merely a warning of the damage the virus is likely to cause in the second quarter of the year. Most countries only implemented containment measures in March, and the continued confinement in April as well as the slow and winding road out of the situation means the economic damage will be greater in the second quarter than in the first, inevitably leading to slower growth. The IMF forecasts a 7.5% contraction in the eurozones economy for the full year. Even with a return to growth in 2021 of 4.7%, would still leave the economy significantly smaller than in 2019. The service sector, which outperformed manufacturing last year, has been even harder hit by the global health crisis. The eurozones service Purchasing Managers Index (PMI) fell to its lowest reading on record in April at just 12 points (the threshold of 50 indicates no change from the previous month, with anything under 50 representing a contraction). The virus has devastated the economy in the United States, with the first estimate showing GDP shrinking by 4.8% in the first quarter (quarter on quarter). Personal consumption expenditure fell by 7.6%, exports are down by 8.7% and imports by 15.3% (Source: Bureau of Economic Analysis). The outlook for the second quarter looks even worse. -5 -5 -10 -10 -15 -15 -20 -20 -25 -25 Germany UK France Italy March Spain Points below threshold US Points below threshold Manufacturing on the continent has also been dealt a heavy blow, with countries lining up to post record low readings of their Source: Chappatte, NZZ am Sonntag www.chappatte.com manufacturing PMIs. The eurozone saw a massive contraction. Its index fell from 44.5 to 33.4 in March, as factories closed and demand plummeted, with the new export orders sub-index falling to record lows. In the five biggest nations in Europe, the indexes fell to between 30.8 and 34.5 points. Despite Manufacturing PMI government measures to avoid unemployment, manufacturers points below threshold of 50 0 0 reported cutting staffing levels at the fastest rate since April 2009. April Weekly unemployment rates sky-rocketed at the start of the Source: BIMCO, IHS Markit Note: the threshold level of 50 distinguishes between positive and negative growth. crisis and, although new filings appear to have peaked when they reached 6.9 million in the week ending 28 March, new claims are still coming in by the million every week. The total hit 38.6 million after the first nine weeks of the crisis, with the unemployment rate rising to 14.7% in April from 4.4% in March. Retail sales figures in March and April give a detailed indication of what the lockdown has meant for sales of consumer goods. Advance figures from the US Census Bureau show that sales in grocery stores rose 29.3% in March 2020 from March 2019, with April sales up 12% from the previous year. However, sales in other stores have plummeted: clothing sales were down 89.3% in April and sales in furniture and electronics stores were down by 66.5% and 64.8% respectively. These are important goods for the container shipping sector, and if they are not being bought in the US, they will not need transportation across the Pacific. The Chinese manufacturing PMI posted 50.1 in March, indicating only a tiny positive change from February and by no means a full recovery The outlook for sales picking up remains poor; lockdown measures continued into May and the increases in unemployment and the looming recession offer little hope that consumers will boost their spending once back at the shopping malls. Trade data for March shows that the US trade deficit widened to USD 44.4 billion, up 11.6% from February, with exports declining faster than imports (-9.6% and -6.2%, respectively). Declines were posted in services, with tourism in particular coming under strain, as well as in the trade of goods, as demand and supply chain disruptions made themselves felt. Asia In China, where the virus outbreak led to a much earlier shutdown than in the rest of the world, the easing of the measures has provided some insight into how the rest of the world could emerge from this crisis. Chinas economy shrank by 6.8% in the first quarter, with it being harder hit than other countries because the containment efforts started earlier. The outlook for a strong recovery remains muted, as the after- effects of the lockdown in China and lower demand from the rest of the world take hold. The Chinese manufacturing PMI posted 50.1 in March, indicating only a tiny positive change from February and by no means a full recovery. Given the 40.3 contraction in February, there is a long way to go before activity returns to pre-Covid-19 levels. Despite a general return to work in Chinese factories, manufacturing activity contracted in April, albeit slowly, with an index reading of 49.4. This contraction is a result of the lower demand within China and the rest of the world, where goods delayed by the shutdown in China are arriving at their destination to find no demand and an increasing lack of storage space. A testament to this is the new export orders index out of China that in April stood at only 33.5 points. This is above the 28.7 it posted in February, but with March also posting a reading below 50 (46.4), the absolute volumes of exports remain much lower than before the crisis, with no hope of a rapid V-shaped recovery. It will take many consecutive months of PMI readings above 50 for manufacturing activity to return to pre-Covid-19 levels. Even a country such as South Korea, which has for the most part avoided strict lockdowns and confinement, has seen its economy take a battering, shrinking 1.4% in the first quarter, with a drop in consumer demand and exports being the primary causes. Japan has also been hit by these two factors which, along with -3.4% growth in Q1, caused it to enter a technical recession, following a 1.8% quarter-on-quarter contraction in Q4 2019. 20% 20% 15% 15% 10% 10% 5% 5% 0% 0% -5% Growth rate 2010-2020 Growth rate Industrial production in China recovered in April, posting growth of 3.9% from April 2019. This marked the first month in which production (measured in value) was higher this year than in the corresponding month last year. Comparing the first four months of the year though, industrial production is down by 4.9% from last year. Chinese industrial production and GDP growth -5% -6.8% -10% -10% -15% -15% 2010 2011 2012 2013 2014 Quarterly GDP growth 2015 2016 2017 2018 2019 2020 Industrial production Source: BIMCO, National Bureau of Statistics China Note: Data for January and February is the average over the two months. Outlook BIMCO does not expect a V-shaped recovery of shipping demand and economic activity in general. Instead after an alarmingly steep drop the economy faces a long and uncertain climb back to growth. This is due to the following reasons: The speed and scale of the slowdown in economic activity in nations around the world are unprecedented, and, while the threat from the virus remains, the duration of this crisis and the speed at which the nations will emerge from the slowdown are highly uncertain. The massive stimulus packages materialising around the world including wage compensation for workers otherwise at risk of unemployment, cheques from the government and deferred tax payments all aim to ensure that as much of the economy as possible is still standing once the health crisis eases. Even so, an economic crisis will follow. The post-pandemic world will be faced with, among other things, lower consumer spending power, lower consumer confidence and lower overall demand, both domestically and internationally. As we have seen in China, a recovery in its domestic market is not enough to shore-up demand it also needs a strong global economy. The slow re-opening of economies around the world also increases the risk of a new wave of infections and a return to more stringent lockdown measures, all of which will weigh heavily on government, business and consumer decisions until the crisis has passed. Global oil demand is massively impacted and lower demand will be felt by shipping, despite a shortterm boost caused by the oil price war in April. A coordinated response is needed to ensure as smooth a recovery of globalisation and the global economy as possible. Countries must avoid turning towards protectionism. On this front, worrying signs are emerging. In particular, the trade war between the US and China which had been experiencing a truce since the signing of the Phase One agreement in January risks flaring back up, as the US threatens more tariffs on imports from China in a response to its handling of the Covid-19 outbreak. It goes without saying, this will only hamper both economies recoveries, at a time when they both need plenty of help rather than further stifling. However, increased tariffs are not the only threat to global trade. The virus has opened many peoples eyes to the vulnerability of international supply chains and their reliance on manufacturing plants on the other side of the world. This is the case for governments many of which experienced shortages of critical equipment usually imported from abroad as well as businesses. The exposure of these vulnerabilities will no doubt lead to changes in supply chains, with some benefiting the shipping industry, while others will harm it. Connect with BIMCO Facebook Twitter Linkedin YouTube Photo (top): monsitj / iStock and Danny Cornelissen at www.portpictures.nl Quick Facts Tanker shipping Sky high freight rates replaced by reality of falling global oil demand Geopolitical tensions have now eased, leaving freight rates to feel the full effects of the weak underlying market and falling demand. Tanker shipping looks set to be under pressure for the rest of the year. Demand drivers and freight rates This drop in demand is illustrated by the collapse in oil products being supplied in the US: gasoline fell by 37.7% from 3 January to 3 April, a loss of 3.1 million barrels per day (bpd), but has since recovered some of that lost supply and, as of 15 May, stands at 6.8m bpd (down 16.5% from 3 January). The supply of jet fuel has fallen by 62.5% since the start of the year, standing at 0.6m bpd on 15 May (down from 1.6m bpd on 3 January). Increased production by Saudi Arabia is detrimental to US producers and is bad news for tanker shipping Peter Sand, Chief Shipping Analyst at BIMCO 10.0 9.5 9.0 6.0 6.0 5.5 5.5 5.0 5.0 Jan 2020 Oct 2019 Sep 2019 Apr 2019 Mar 2019 Feb 2019 US gasoline supplied May 2020 6.5 Apr 2020 6.5 Mar 2020 7.0 Feb 2020 7.0 Dec 2019 7.5 Nov 2019 7.5 Aug 2019 8.0 Jul 2019 8.0 Jun 2019 8.5 May 2019 8.5 Jan 2019 The chartering spree from Saudi Arabia, as it prepared to flood the market with its cheap oil in April, led average Very Large Crude Carrier (VLCC) earnings to soar to USD 279,259 per day on 13 March, with rates staying high until the end of April. However, since then, as oil production has been cut and the reality of an oversaturated market hit home, rates have dropped to USD 42,547 per day on 22 May. Rates will continue to fall, as the global economy is unable to provide the demand needed to keep them elevated. Million barrels per day April was certainly a month to remember, with the biggest oilEmily Stausbll, Shipping Analyst at BIMCO producing nations setting off a price war and flooding the market with millions of extra barrels each day at the same time as demand was collapsing. The OPEC+ (an expanded alliance of countries collaborating to control the world production of crude oil) production cut that was eventually agreed, and has now come US gasoline supplied into force is, however, still not enough to balance the oil market 2019-2020 10.0 after lockdown measures around the world cut demand for all oil 9.5 products. 9.0 Million barrels per day The tanker shipping industry was once again caught in a whirlwind, as freight rates skyrocketed with little regard to the poor market fundamentals before the latter once again caught up with rates. Geopolitics continues to dominate the headlines when it comes to the tanker market, and developments in the supply of oil overshadow the steep drop in demand caused by the Covid-19 crisis. Floating storage has also increased primarily due to the mismatch between oil production and oil demand, tightening tonnage availability in the market and further supporting freight rates. 5 year average Source: BIMCO, EIA As is often the case, rates for the smaller crude oil tankers followed the paths of the VLCCs with Suezmax earnings peaking at USD 120,870 per day before falling to USD 30,992 on 22 May. Aframax earnings peaked later, reaching USD 83,921 per day on 24 April before falling to USD 26,959 per day on 22 May. 320,000 320,000 280,000 280,000 240,000 240,000 200,000 200,000 160,000 160,000 120,000 120,000 80,000 80,000 40,000 May 2020 Mar 2020 Jan 2020 Nov 2019 Sep 2019 Jul 2019 May 2019 Mar 2019 Jan 2019 Nov 2018 Sep 2018 Jul 2018 May 2018 Jan 2018 Mar 2018 40,000 The dramatic increase in oil production in April, at the same time 0 as demand collapsed, caused the oil price to tumble. The price of West Texas Intermediate (WTI) crude oil for delivery in May fell briefly into negative territory in late April as concerns over storage VLCC Suezmax Aframax Source: BIMCO, Clarksons availability rattled the market an unprecedented event. Following a sharp increase in storage since the end of March, US crude oil Oil product stocks have risen to their highest level since April 2017 at 532.2 tanker earnings million barrels at the start of May. Stocks in Cushing, Oklahoma, peaked at 65.5 million barrels on 1 May around 86% of its working capacity and the highest level since May 2017. USD per day 2018-2020 USD per day Oil product tanker rates saw a more restrained rise in earnings in March and April compared with their crude oil counterparts. But the sudden and unsustainable demand for crude tankers eventually led to earnings also spiking in the clean market, with LR2 earnings reaching USD 167,158 per day on 1 May and LR1 earnings hitting USD 114,370 dollars per day. They have since fallen to respectively USD 32,999 and USD 28,293 per day (22 May). Crude oil tanker earnings 0 US crude oil stocks The sudden drop in the price of crude oil because of higher supply and lower demand, left countries facing different prospects. Because of its low cost of production per barrel, Saudi Arabia is able to keep producing oil at a profitable rate, while other major producers with higher costs find themselves losing money at the current oil price (in April, Brent crude averaged USD 26.6 per barrel). The US Energy Information Administration (EIA) forecasts that, given the lower price, crude oil production in the US will fall by 4.1% in 2020 (to 11.7m bpd) from 2019 levels and decline a further 6.8% in 2021 (to 10.9 m bpd) from 2020 figures. Increased production by Saudi Arabia is detrimental to US producers and is bad news for tanker shipping. Now the temporary jump in shipments out of Saudi Arabia has passed, demand for shipping will fall because of this trend, as the distance needed to be covered is much shorter. A trip to China from the Middle East is 5,800 nautical miles, whereas if the crude oil comes from the US Gulf, a ship must cover 15,000 nautical miles. Crude oil imports to China for example were up 1.7% in the first four months of the year. Even though, under the Phase One of the US-China trade agreement, China has committed to increase its purchases of crude oil from the US, the imports from the US totalled only 0.4 million tonnes in Q1 a 54% drop from Q1 2019. This means that, of the 39.2 million tonnes of crude the US exported in Q1 2020, only 1.1% has gone to China. Increased production by Saudi Arabia is detrimental to US producers and is bad news for tanker shipping The realisation of the commitments made under the Phase One agreement become even more unacheivable when you consider the recent drop in the oil price. The extra volumes agreed upon for this year (+244%) and the next were based on 2017 export values, when the oil price was considerably higher. To match 2017 values, let alone exceed them by several billion dollars, exports by volume would have to rise by significantly more than the 244% growth needed in value. After the first quarter, exports of energy goods are down by 94% from Q1 2017. Read more about the trade war here. Fleet news Unsurprisingly, given the developments in the market, no tankers were demolished in April, with reductions in the total tanker fleet so far this year coming to only 0.6m DWT, down 63% from the same period last year. Of total tanker demolitions, 0.4m DWT were product tankers and the remaining 0.2m DWT crude oil tankers. BIMCO expects the product tanker fleet to expand by 2.4% this year, with growth so far of 1.1%. The crude oil tanker fleet is expected to rise 2.1% this year. BIMCOs expectations for demolition levels in the two markets remain unchanged from the previous update at 1m DWT and 7.5m DWT, respectively. Oil product tanker eet growth 2016A-2022E The outlook for the tanker shipping market is highly dependent on how long lockdown measures and travel restrictions continue. However, even once restrictions are officially lifted, demand for transportation, which accounts for 55% of oil demand, will not rebound suddenly, as uncertainty will keep downward pressure on the market. Travel and air travel in particular will be slow to return. The direct impact of lower demand for transport will add to the decrease in demand for fuel caused by diminished economic activity. Similarly, the demand for plastics and petrochemicals (19% of oil demand) is heading for a slow recovery. 8 8% 6 6% 4 4% 2 2% 0 0% -2 -2% -4 -4% 2016A 2017A 2018A 2019A To be delivered p.a. 2020F Demolition 2021E 2022E Growth rate p.a. Outlook 10% Million DWT Product tankers were particularly popular among investors in April, with new orders for these totalling 1.8m DWT, including 12 for 120,000 DWT LR2s by Chinese leasing companies. 10 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 2020-2022 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 Tanker freight rates, once past the April spike, will fall to much lower levels and remain under pressure until global oil demand recovers. Given the economic outlook, this is likely to be a cumbersome and long-winded process. Annual change in world liquid fuels consumption 2018-2021F As a result of the dramatic drop in demand, refineries around the world have announced cuts to production in response to faltering demand. In the US, for example, refinery throughput has fallen by 24.5% since the start of the year, taking in 12.7m bpd of crude oil in the last week of April the lowest levels since 2008, and 4.1m bpd lower than the start of this year. 8 7.0 6 6 4 4 1.2 2 2 0.8 0 0 -2 -2 -4 -4 -6 -6 -8 -8 -8.1 -10 2018 2019 US Other OECD China India 2020F Middle East Other non-OECD -10 2021F world Source: BIMCO, EIA Short-Term Energy Outlook May 2020 Even while refineries across the globe are cutting production, some positive news can be found in China. After deep production cuts in February during its lockdown, Chinese refineries are now taking advantage of the low oil price and ramping up production; Bloomberg reports that the privately owned and independent teapot refineries have seen their crude throughput reach record high levels. However, the strength and duration of this recovery remains to be seen. Even though China is further ahead of the rest of the world as it exits its lockdown, fear of a second wave of infections and muted external demand dampens the outlook. Floating storage has been one of the hot topics in the tanker shipping market recently, but remains clouded in uncertainty, particularly in respect of how much tanker capacity is currently being used for storage. What is clear however, is that floating storage has reached its peak and will start to wind down. As it does so, tonnage currently tied up in storage will re-enter the market and put further downward pressure on freight rates. The main talking point going into the year the IMO 2020 sulphur cap has also been affected by the Covid-19 pandemic and subsequent drop in oil prices. On 1 January, a metric tonne of high-sulphur fuel oil (HSFO) in Singapore cost USD 360 and a tonne of very low-sulphur fuel (VLSFO) USD 710, giving a spread of USD 350 per tonne, and offering a large advantage to scrubber-fitted ships. Since then, fuel prices have fallen, lowering costs for all, but also significantly increasing the payback period for a scrubber investment, as the HSFO-VLSFO spread has fallen to just USD 73 per tonne on 19 May. Tanker freight rates, once past the April spike, will fall to much lower levels and remain under pressure until global oil demand recovers Photo (top): AvigatorPhotographer / iStock 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 Million barrels per day Million barrels per day In its May Oil Market Report, the EIA estimates that global oil demand will fall by 8.1 million bpd in 2020 from 2019 levels, with demand in the second quarter of this year expected to be 18.8m bpd lower than Q2 2019. The 7.0 million bpd increase currently expected in 2021 is not enough to return demand to 2019 levels. Because of the lockdown measures, as well as the poorer health of the economy and consumer spending ability, even the low fuel price is unlikely to lead to higher demand. 8 Quick Facts Container shipping Massive blanking of sailings has supported freight rates as demand collapses The Covid-19 crisis has and will continue to hit the container shipping market hard, and the current economic situation provides no hope for a short-term recovery. Demand drivers and freight rates The Covid-19 pandemic looks set to continue to hammer container shipping demand. While the lower demand that came when China shut down much of its manufacturing in February has passed, it was been replaced by a demand shock, as almost every other country entered their own forms of lockdown. Laden container imports into the US West Coast already show the effects of the disruptions in China, with imports in February and March considerably down. On the other hand, the poor April results mostly reflect the lower demand from the US as it went into lockdown. In the first four months of the year imports are down by 12.5% and at their lowest level since 2014. The current economic situation provides no hope for a short-term recovery Peter Sand, Chief Shipping Analyst at BIMCO March retail sales figures show the extent to which demand has fallen and with a host of blanked sailings already announced through to July, imports into these ports will not recover in the short term. A recovery in domestic consumption in the US is needed and, with businesses closing and millions losing their jobs, a full recovery to pre-Covid-19 levels will take a long time. Emily Stausbll, Shipping Analyst at BIMCO 10% 5% 800 0% 600 -5% 400 -10% 200 -15% 0 -20% Jan Feb Mar Apr May 2018 2019 2020 Jun Jul Aug Sep Oct Nov Dec Growth rate The drop in demand for container shipping has not been fully registered by freight rates, because steep and fast-paced capacity adjustments have supported rates while hiding the real demand picture. The global Xeneta shipping index (XSI), an indication of the long-term rates for containers on major trades, continued its upwards trend in April, currently 2.9% higher than it was at the start of the year and 11% higher than it was in April 2019. Thousand TEU Global container shipping volumes fell by 5.1% in the first quarter of the year compared with last year, with volumes down by 2.1m TEU at 38.2m TEU. The intra-Asian trade, a precursor for what will be exported from the region in USWC inbound loaded containers coming months, was down by 13.1%, with lost volumes higher in 2018-2020 1,200 March than February, despite Chinas return to work. On the major lanes out of the Far East, exports to Europe were down 12.0% and 1,000 exports to North America down by 9.4% in Q1. Acc. y-o-y growth 2019 (RH-axis) Acc. y-o-y growth 2020 (RH-axis) Source: BIMCO, PoLB, Port of Los Angeles, NWSA, Port of Vancouver, Port of Oakland Change in container freight rates from the Far East 1 January 2020 - 18 May 2020 15% 15% 9.6% 10% 5% 5% 0% 0% -1.1% -5% -0.8% -1.4% -5.4% -10% -10% -15% -15% -20% -20% -25% -25% -30% -30% -29.9% -35% USWC USEC -35% Europe Spot Contract Source: BIMCO, Xeneta Container ship charter rates 6-12 months It is, particularly, the larger vessel sizes that have experienced steep drops in charter rates, as the main long-haul routes have had the most blanking of sailings. Unlike the falling demand for larger ship sizes, demand for smaller ships has remained more resilient, as carriers have looked to short-term contracts on these smaller vessel sizes to ease regional disruptions. Here, rates have only fallen by 4.1% and 6.7% for 700 TEU and 1,100 TEU ships respectively since the start of the year. 35,000 35,000 30,000 30,000 25,000 25,000 20,000 20,000 15,000 15,000 10,000 10,000 5,000 5,000 - Jan Feb Mar Apr May Jun Aug Jul Sep Oct Nov Dec Jan Feb Mar Apr 2019 2019 2019 2019 2019 2019 2019 2019 2019 2019 2019 2019 2020 2020 2020 2020 TEU 700 TEU 1,100 TEU 6,500 USD per day 2019-2020 USD per day In these times, charter rates for container ships are a better gauge for the container shipping market than freight rates. The collapse in container shipping demand caused a jump in the number of ships available for charter, which sent charter rates especially for the large vessel sizes down. The daily hire for an 8,500 TEU vessel has fallen by 38% from the start of the year, from USD 30,000 per day to USD 18,500 on 15 May 2020, with rates likely to continue falling until higher cargo volumes return. Rates for a 6,500 TEU ship have fallen the most: down 42% since the start of the year, to USD 14,500 per day on 15 May. -5% % change 10% % change Maintaining some stability in freight rates has only been achieved by large capacity withdrawals from the market, with blanked sailings sending the idle container shipping fleet to record highs of 11.3%. Even when excluding ships that are having a scrubber retrofit, the idle fleet is record high. Despite this, not all rates have been able to remain elevated. While spot and contract rates from the Far East to the US have remained close to, or above, levels at the start of the year, those to Europe have fallen. Spot rates to Europe have dropped by 29.9% since the start of the year and contract rates by 5.4%. In fact, the fall in spot rates and underlying volumes was so steep that in April the average freight rate for sending a container from Europe to the Far East was higher than sending one from the Far East to Europe, a reversal of the usual fronthaul/backhaul trades on this route. - TEU 8,500 Source: BIMCO, Harper Petersen & Co Fleet news 2016A-2022E 6% 1,250 5% 1,000 4% 750 3% 500 2% 250 1% 0 0% -250 -1% -500 -2% -750 -3% 2016A 2017A 2018A 2019A To be delivered p.a. Demolition 2022E Growth rate (RH-axis) A is actual. F is forecast. E is estimate which will change if new orders are placed. The supply growth for 2020-2022 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. In these times, charter rates for container ships are a better gauge for the container shipping market than freight rates So far this year, the containership fleet has grown by 0.6% and, as of 19 May, stands at 23.1m TEU. BIMCO expects the fleet to expand to 23.4m DWT by the end of the year, an annual growth of 2%, half of the growth rate in 2019. This comes after adjustments to the slippage rate for deliveries from 20% to 25%, and BIMCOs demolition estimate rising from -199,000 TEU to -299,000 TEU. There were no new orders for container ships in April and the first half of May, with owners more likely to want to delay ships that are scheduled for delivery in the coming months than to add to their future fleet. In the year to date, new orders for container ships have fallen by 36.8%, to 153,422 TEU compared to last year. Outlook The idle container ship fleet reached a record in May, at 2.65m TEU, because of blanked sailings as a result of the shutdown of manufacturing in China in February. With demand now being severely affected, BIMCO expects the idle fleet to remain at around 10% for the rest of the year. The large idle fleet has, so far, been enough to support freight rates, temporarily hiding the losses for carriers. While savings are made by not sailing with voyage costs and some operating costs avoided the empty ships are still generating a loss on a daily basis, with some of the operating costs still present and financing costs unchanged, while not providing any income. The recession and drop in consumer spending that this crisis has provoked will hit the container shipping industry hard, with no sudden bounce back in demand expected. Even under the WTOs optimistic scenario, container shipping demand will fall by 10% in 2020. Container shipping demand will not rebound in the short term. Sales of containerised consumer goods have been some of the hardest hit by lockdown measures, and lower consumer spending power because of this crisis is likely to persist for a prolonged period. 2021E Source: BIMCO estimates on Clarksons raw data Demolitions have also faced severe disruptions from the Covid-19 crisis. The now-extended lockdown on the Indian subcontinent means ships scheduled for demolition are not being accepted at the facilities. Only two ships totalling 6,534 TEU was demolished in April. Idle container shipping eet 11 May 2020 Idle TEU millions The extent to which carriers will continue to blank sailings at the levels they have done up until now will be tested in the coming months. Each will seek to balance, on one side, keeping freight rates high and, on the other, increasing the use of their ships. 2020F Growth rate p.a. 1,500 0.9 180 0.8 160 0.7 140 0.6 120 0.5 100 0.4 80 0.3 60 0.2 40 0.1 20 0 500999 1,0001,999 2,0002,999 TEU 3,0005,099 5,1007,499 7,50012,499 12,500 & over Number of idle ships Including these two new ultra-large container ships, 62,922 TEUs of new capacity entered the market in April, with the rest of the volumes made up of much smaller feeder ships. Year-to-date deliveries were down 57.6%, to 175,920 TEU, by 19 May compared with the same period last year. Container ship eet growth Thousand TEU In what can only be defined as terrible timing, the record for the worlds largest container ship was broken in April, when a 23,964 TEU ship set sail for its first voyage. At 400m long and 24 rows across, the HMM Algeciras breaks the previous record of 23,756 TEU. It was the first in a series of 12 ships all with a capacity of either 23,000 or 23,964 TEU due to be delivered this year, adding 282,746 TEU to the market. The second ship, the 23,000 TEU HMM Oslo, was delivered in May. 0 Number (RH-axis) Source: BIMCO, Alphaliner BIMCO expects that, much like on the Far East to Europe route, spot rates and contract rates will fall in the coming months, with average earnings for the year at loss-making levels. In particular, the ultra-large container ships delivered in recent years face a big challenge. Their size means many of them can only be deployed on the Far East to Europe route, and with demand here falling, the ships will have nowhere to go. The jump in idle fleet also shows that cascading to other routes in present market conditions is not an option, as demand has evaporated across the board. In the charter market, the biggest losers in the short term are those who charter their ships on short-term contracts. One positive factor that carriers can lean on in these otherwise dark times is the lower bunker price resulting from the collapse in oil prices reducing voyage costs. In some cases, the combination of lower shipping demand and bunker fuel prices has led carriers to sail around the Cape of Good Hope, avoiding the cost of transiting the Suez Canal (which can be upwards of USD 600,000 for a one way trip for a ULCS) and soaking up some more capacity by extending sailing times. On record, 20 ships have done that trip in the year to date. 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 No quick recovery for the dry bulk market as Covid-19 digs deeper The outlook is poor for dry bulk, as the negative demand shock and overcapacity come together to send rates to multi-year lows, even a return to work in China is not enough to support the market. Demand drivers and freight rates The importance of China to the dry bulk market was clearly reflected when it went into lockdown, as the rates went downwards and, since its reopening, it has provided some upwards support to volumes, but the low rates remain. Volumes of Chinas major dry bulk imports have posted year-on-year growth throughout the crisis. Iron-ore imports are up 5.3% and coal up an impressive 27.8% in the first four months. Of particular importance to the Capesize market are iron ore exports out of Brazil and, here, the reason for the low freight rates becomes clearer. Iron-ore exports are down 8.7% in the first four months of the year, a loss of 9m tonnes, or 45 Capesize loads (200,000 tonnes). Dry bulk earnings and break-even levels 40,000 40,000 35,000 35,000 30,000 30,000 25,000 25,000 20,000 20,000 15,000 15,000 10,000 10,000 5,000 5,000 0 Capesize Capesize B/E Panamax Panamax B/E Supramax Supramax B/E May 2020 Mar 2020 Jan 2020 May 2019 Mar 2019 Jan 2019 Nov 2018 Sep 2018 Jul 2018 May 2018 Mar 2018 Jan 2018 0 Handysize Handysize B/E Source: BIMCO, Clarksons The poor US exports spoil the picture of strong grain exports from the Americas Two-thirds of Brazilian exports in the first four months of the year went to China (+10.5% or 5.8m tonnes from 4M 2019). The lost volumes to the rest of the world come primarily from lower exports to Asia, excluding China, (-5.2m tonnes) and Europe (-4.5m tonnes). Even though they have remained consistently below break-even levels, rates for the smaller vessel sizes have avoided the trough that the Capesize market was in, as volumes on their main trades have remained stronger. In more normal times, in fact, developments on these trades would probably have pushed freight rates much higher, but, given the conditions in the market, positive demand developments have only just been enough to sustain freight rates. Argentinian grain exports have been strong, growing 18.7% from Q1 2019 to Q1 2020, with strong wheat and coarse-grains exports, in particular, providing much-needed demand for Panamax and Supramax ships but still not enough to bring freight rates up to profitable levels. 80% 70% 15.0 60% 13.5 50% 12.0 40% 10.5 30% 9.0 20% 7.5 10% 6.0 0% 4.5 -10% 3.0 -20% 1.5 -30% 0.0 -40% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Growth rate Million tonnes Brazilian soya bean exports were particularly impressive in April. After their highest ever Q1 exports of 17.4m tonnes, 16.3m tonnes were exported in April alone, bringing year-on-year growth to 33.8%. Comparing April 2020 with April 2019, an extra 92 Panamax loads (75,000 tonnes) were exported, with 113 extra loads needed in the Brazilian soya bean exports first four months of this year compared to last. Three-quarters of 2018-2020 18.0 total exports went to China. 16.5 On the other hand, the drop in US soya-bean exports to China has been particularly marked, down 41.7% from the first quarter of last year. Compared with 2017, before the trade war started, soya bean exports are down 65.6%, a loss of 5.4 million tonnes, or 72 Panamax loads (75,000 tonnes). USD per day 2018-2020 USD per day The exports of 24m tonnes in April curtailed the losses of the first quarter, when volumes were down 17.2% from Q1 2019. This was largely because of the low April exports in 2019. The 24m tonnes was much higher than the 18.7m tonnes last year, when the tailings dam collapse and poor weather conditions disrupted exports. The strong April exports this year did little to lift spot freight rates though, with the majority of the volume going on the ships that are on long-term charters and which have been waiting in line for cargoes after slow exports in the first quarter of the year. Spot rates for iron ore from Brazil to China have fallen to just USD 7 per tonne, down from USD 18.8 at the start of the year. Emily Stausbll, Shipping Analyst at BIMCO Nov 2019 Capesize earnings have been well below the average USD 15,300 per day needed to break even, falling to just USD 1,992 per day, its lowest level since March 2016. While the smaller vessel sizes did not reach such a low point, earnings only reached break-even levels for a brief period, with most of the year at loss making levels. Peter Sand, Chief Shipping Analyst at BIMCO Sep 2019 The first quarter of the year proved a mixed bag for the dry bulk shipping industry, with freight rates for the smaller dry bulk segments faring better than those in the Capesize market. April has provided some relief for the struggling Capesize markets, although rates for all ship types remain below break-even levels. The importance of China to the dry bulk market was clearly reflected when it went into lockdown Jul 2019 The dry bulk shipping market has had an appalling start to the year, with all sectors at loss-making levels. Even as China returns to work, the Capesize market, which had found some relief in April, is again experiencing rock-bottom freight rates. Acc. y-o-y growth 2018 (RH-axis) Acc. y-o-y growth 2019 (RH-axis) Acc. y-o-y growth 2020 (RH-axis) 2018 2019 2020 Source: BIMCO, Comex Stat The poor US exports spoil the picture of strong grain exports from the Americas. As data is released for each new month, the failure of the Phase One trade agreement between the US and China becomes more and more obvious. Even before the Covid-19 outbreak, January exports saw no boost, and this has only worsened since then. In the first quarter of the year, only 3.1 million tonnes of agricultural goods have been exported from the US to China less than 10% of the 33.4 million tonnes that China committed to buying at the start of the year. Fleet news 2016A-2022E 50 5% 40 4% 30 3% 20 2% 10 1% 0 0% -10 -1% -20 -2% -30 -3% 2016A 2017A 2018A 2019A To be delivered p.a. 2020F Demolition 2021E 2022E Growth rate p.a. Demolitions have also been disrupted by the pandemic, with the major shipbreaking nations having closed their beaches to ships because of their lockdown measures. This resulted in only one dry bulk ship being demolished in April, a 28-year-old ore carrier with a capacity of 268,132 DWT. The easing of some of the measures allowed 3 ships to be demolished in May, bringing total dry bulk demolition so far this year to 5.4 million DWT. Dry bulk ship eet growth Million DWT Since the start of the year, the dry bulk shipping fleet has grown by 1.6% to reach 891.5m DWT on 19 May. BIMCO expects the fleet to grow by 3% in 2020, and we expect a further 39.3 million DWT to be delivered to the market through the rest of the year. This reflects a higher slippage rate for planned deliveries because of the Covid-19 disruptions, which has risen to 35% from 25% before the crisis. 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 2020-2022 contains existing orders only and is estimated under the assumptions that the scheduled deliveries fall short by 10% due to various reasons and 35% of the remaining vessels on order are delayed/postponed. As a result of the poorer outlook for the dry bulk market this year, BIMCO has revised upwards its demolition expectations for the dry bulk market to 14m DWT, from 12m. After reduced contracting activity in March, there was a slew of orders from Chinese interests in April, including eight, 210,000 DWT Capesizes. New orders in April totalled 2.7m DWT, bringing total ordering this year to 4.8m DWT, down 56% from the 11m DWT ordered in the same period of 2019. Vales announcement that it will stop using converted very large ore carriers (VLOCs) spells the end of this ship type, as most are well past average demolition ages for the sector and, in the current market conditions, have no prospect for future gainful employment beyond their expiring contracts. Already, 60% of these converted VLOCs are out of operation, and BIMCO expects them to be demolished over the next few years as their charters expire. BIMCO expects trading in all commodities to fall, including the grains trade Outlook Even as China, the biggest driver for the dry bulk industry recovers, the full scale of the demand shock for the dry bulk industry remains to be seen. Some of the stimulus measures that have been, or are expected to be, announced concentrate on infrastructure and housing investment, which will boost demand for raw materials. But other industries that provide demand for dry bulk such as steel and aluminium for the automotive industry have all but collapsed. The automotive industry has taken a significant hit. Chinese car sales fell 41% in the first quarter of the year and sales in the UK fell by 97% in April, to their lowest level since 1946. While some of the sales will recover when the shops re-open, the poorer financial situation in which many consumers are finding themselves, and a reluctance to invest in durable goods, will limit this recovery and, therefore, the demand for steel and, so, the demand for iron ore. 1971-2020 400 400 200 200 0 Q1 0 -200 -200 Full year -400 -400 -600 -600 1971 1980 1990 2020 Source: BIMCO, IEA 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 Twitter 2010 Power The outlook may yet deteriorate further if lockdown measures last longer than expected, or have to be reinstated to avoid a new wave of infections, but there is little prospect of an improvement. Even with large government investments in infrastructure, the global recession will doubtless lead to lower demand and low freight rates. Facebook 2000 Metric tons of carbon equivalent Given the overcapacity which was already plaguing the market after years of supply growth outstripping demand BIMCO already expected average freight rates to be in loss-making territory in 2020. This will only be exacerbated by the negative demand shock from Covid-19. Annual change in coal demand Metric tons of carbon equivalent BIMCO expects trading in all commodities to fall, including the grains trade, although this could yet turn out to be the joker for the year. Lower commodity demand comes as a direct result of the lockdowns, as well as from the ensuing economic slowdown. The International Energy Agency (IEA) expects demand for coal will fall by 8% in 2020, with lower demand coming from lower electricity consumption because of lockdowns and reduced manufacturing activity. Linkedin YouTube