Peter Sand - BIMCO Bulletin


ECONOMY September 2020 SHIPPING MARKET ANALYSIS Use tabs to navigate to pages Macroeconomics Tanker Container Dry bulk Macroeconomics A slow and uneven recovery awaits After the sharp and sudden shock of the pandemic, the economic recovery has begun and it is clear that it will be drawn out and uneven, both geographically and by sector. Though China has returned to growth, most other countries are lagging behind. Huge stimulus packages have so far been enough to prop up some parts of the economy. However, these are not magic pills, and, with the virus still spreading, a global recovery is some way off. Overview Many nations across the world recorded their largest recorded drops in economic activity in the second quarter of the year. Many had doubledigit drops and some saw more than a fifth of their economy disappear. For many of these countries, the large Q2 gross domestic product (GDP) drops came after smaller contractions in Q1 which, combined, has left large parts of the world in a recession. Peter Sand, Chief Shipping Analyst at BIMCO The recovery will not be spectacular Even as the pandemic continues to spread at an elevated rate, and a trusted vaccine appears months if not years away, most governments have eased their containment measures and are using a more local approach to target flare-ups over the summer. Because of this, even if the outbreak continues to spread, Q2 is likely to have been the quarter in which economies were most affected by the pandemic, as many workers have since returned to factories and consumers to shops and restaurants. The recovery will not be spectacular, however, given the public health restrictions still in place, greater uncertainty and higher unemployment. Emily Stausbll, Shipping Analyst at BIMCO Europe EU-27 countries USA Overall, the EU economy fell by 14.1% in the second quarter of the year compared with the same quarter last year. Spain was the worst-affected European economy, with a 22.1% drop in GDP. France and Italy take the runners-up spots, with declines of 19% and 17.3%. These economies also experienced the worst outbreaks of coronavirus in the EU, as well as some of the strictest lockdowns. Japan 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% -14% -16% -18% -20% -22% -24% -26% -28% -30% Growth rate 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% -14% -16% -18% -20% -22% -24% -26% -28% -30% 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 Oct 2019 Nov 2019 Dec 2019 Jan 2020 Feb 2020 Mar 2020 Apr 2020 May 2020 Jun 2020 Jul 2020 A continued recovery in production and a return to the prepandemic trend is probably not on the cards until consumption returns to its previous levels, which is still a long way off given the higher uncertainty and many government support schemes for workers ending. In the US, the extra payments of USD 600 a week for the unemployed ended at the end of July and many European governments are easing their furlough schemes. Growth rate China bucks the global trend; having locked down earlier than other countries, it saw a faster return to growth. It is the only major economy seeing growth in its industrial production compared to last year. Others such as the EU, the Monthly industrial production US and Japan are, to July, still experiencing double-digit drops in Year-on-year, 2018-2020 10% industrial production compared to last year. 8% China Source: BIMCO, Eurostat, NBS China, METI, Federal Reserve System Across the EU, many industries that provide demand for shipping have been hard hit Across the EU, many industries that provide demand for shipping have been hard hit. One of the largest of these is the German car industry, which was brought to its knees in April, when only 11,287 cars were produced, a 97.2% drop from April 2019. The easing of restrictions since then has resulted in car production rising to 334,000 cars in July, though this still leaves accumulated production down by 35.8% in July (source: VDA). This comes after three consecutive years of declining car production in Germany because of new environmental regulations, a slowing economy, and the US-China trade war. In 2019, the lowest number of cars was produced since 1997. The German car industrys importance to EU manufacturing is illustrated by the European manufacturing PMI falling month on month since December 2017. 100 100 The worlds largest economy is also suffering the largest COVID-19 Export Production outbreak. Its GDP fell by 9.5% in the second quarter of the year Source: BIMCO, Verband der Automobilindustrie compared with last year. As in other countries, despite a 10.1% increase in personal income (driven upwards by an 80% rise in income payments by the government, in particular the Economic Impact Payment), personal consumption expenditure fell by 10.7%. Exports were down 23.7% from last year and imports fell by 22.1%. The latter development was especially felt by container lines transPacific, as well as trans-Atlantic. Jan 2020 Jan 2019 Jul 2018 0 Thousand cars 200 Jul 2020 200 Apr 2020 300 Oct 2019 300 Jul 2019 400 Apr 2019 400 Oct 2018 500 Apr 2018 500 Jan 2018 600 Oct 2017 600 Jul 2017 700 Apr 2017 US 700 Jan 2017 Better news for shipping could be found in July, when the eurozone manufacturing PMI posted its first reading above 50 (51.8) in a year and a half. Month on month growth was registered in output as well as new orders. However, employment continued its decline, with cost cutting still in focus as manufacturing remains stuck far below pre-pandemic levels, and the outlook is bleak. Thousand cars Now out of the EU, the UK experienced a 21.7% drop in its economy in Q2. Services fell by 21.2% from a year ago, but, more importantly for shipping, total production is down 18.8%, with manufacturing suffering a 22% drop. The construction sector has also been hard hit and is down 36.4% from Q2 2019. Though the data showed a slight recovery in June, as restrictions eased, the economic activity generated remained one-sixth smaller Passenger cars in Germany than it had been in February. 2017-2020 0 The worsening COVID-19 outbreak in the US has stalled the number of passengers flying, which had previously been increasing from its low point at the height of the crisis. Having bottomed out at just 87,534 passengers per day in mid-April, numbers have since stabilised at a higher level and stood at 721,060 on 27 August. This is still far below the 2.6 million passengers (-71.8%) on the equivalent day last year and, with the virus still spreading fast and travel restrictions in place between states, as well as internationally a further increase will have to wait until the coronavirus is under control. The collapse in flight passenger numbers shows the impact the crisis has had on the demand for jet fuel, an important commodity for the product tanker shipping industry. Daily US ight passengers As many economies faced record-breaking contractions in Q2, China which was affected by the pandemic much earlier than the rest of the world showed more positive signs. After a 6.8% drop in the first quarter compared with Q1 2019, the Chinese economy grew by 3.2% compared with Q2 2019, indicating a return to growth, though below the 6% China had been used to. Million passengers Asia 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 Mar 0.0 Apr Part of this growth is because of the broad range of stimulus measures that the Chinese government has launched with the aim of keeping the economy going and ensuring continued employment. These include an RMB 1tn rise in government spending and a RMB 2.6tn increase in bonds being issued to local governments. May Jun 2019 Jul Aug Million passengers 2019-2020 2020 Source: BIMCO, TSA The recovery has, however, been uneven, as infrastructure investments and industrial production have proven easier for the government to boost than consumer spending. Industrial production has been posting monthly increases since April, though growth in July of 4.8% was not quite enough to bring accumulated year on year growth rate into positive, it is still down by 0.4%. On the consumption side, though, total retail sales of consumer goods have fallen every month compared with last year, with July down 1.1% from July 2019 and accumulated sales down 9.9% in the first seven months of the year. All Asian export nations will see a double dip as lower export orders bring down their earlier recovery. The delay from the pandemic means that, while some of Asia is reopening, they are economically limping, as many of their trading partners are still in economic crisis. Japan, already in a recession before the pandemic really hit, has also seen its economy badly hurt, despite an effective response to the virus. Stimulus measures have been considerable and wideranging, and yet, even as the unemployment rate remained low through the crises (<3% in May) and workers disposable income rose (+13.4% from May 2019) both held up by government stimulus measures consumer spending fell. Consumers are well aware that the government transfers are temporary, so they were more likely to hold on to the extra money than go on a spending spree. Source: Chappatte, Le Temps, Switzerland As well as lower domestic spending, Japan is heavily dependent on foreign demand. A recovery in China boosts demand from Japans biggest export market, but a true pick-up can only occur once there is a sustained recovery in the US and other major consuming nations. The major trading hubs of Singapore and Hong Kong saw their economies shrink by 13.2% and 9% respectively in Q2. Both are heavily reliant on the global economy and trade performing strongly, which is not currently the case. India is facing a rapid increase in coronavirus cases and, with the severity of lockdown measures varying by state, a recovery in the whole economy still appears a way off. In June, the International Monetary Fund forecast a 4.5% fall in Indian GDP in 2020 though, with the pandemic still raging, this is now a best-case scenario. Outlook In many of the worlds major economies, spending power has remained stable or even increased over the course of the pandemic, primarily as a result of the massive stimulus measures put in place by many governments. This increase in spending power did not result in higher consumption, however, because of uncertainty and the fear of unemployment among consumers. Now, with lockdown measures eased and many countries reopening (locally, not internationally), governments are looking to end these very expensive measures, which means more people facing job losses and/or lower unemployment benefits. This is likely to lower consumption even further and cause more pain to a container industry already struggling with low volumes, though still making money. The World Trade Organization (WTO) estimates that world merchandise trade fell by 18.5% in the second quarter of the year and it expects a full-year drop of 13%, much less than the 32% drop under its original, pessimistic, scenario. Index 100 = 2018, 2020-2021P 110 100 105.6 100.0 100.0 100.0 110 100 100.0 90 87.1 80 81.5 91.4 85.6 84.4 70 90 Index points The pandemic has made many countries and governments look inwards, and turn their backs on their dependencies, both for imports of key goods and exports to support their own economies. China is a prime example of the latter. Here, while production is increasing as shown by the latest PMI readings all posting above the threshold of 50 (which signals a month-on-month expansion) its new export orders index continues to contract, holding back its recovery. Volume of world merchandise trade Index points For growth to return to its pre-pandemic level, however, growth of around 20% is needed in 2021. Continued and coordinated stimulus and trade policies would have to be put in place for this to happen, which is not currently the case. The slower recovery means the WTO forecasts trade growth as low as 5% in 2021, leaving 2021 GDP between 9% and 14% lower than in 2019. The World Trade Organization (WTO) estimates that world merchandise trade fell by 18.5% in the second quarter of the year and it expects a fullyear drop of 13% 80 70 68.1 60 2018A 2019A Optimistic scenario 2020P Pessimistic scenario 2021P 60 June 2020 scenario Source: BIMCO, WTO Note: Figures for 2020 and 2021 are projections. In recent years, China has already been trying to rebalance its economy so that it can rely more on domestic demand. Between 2006 and 2019, the share of GDP attributable to imports and exports fell from 64% to 32%. This trend is likely to continue in the wake of the pandemic as the Chinese government focuses on getting its own economy growing strongly again, rather than having to wait for the rest of the world to catch up. Changing trade patterns as a result of increased awareness of the vulnerability of supply chains, as well as economiesinterdependence is something shipping will most probably have to adapt to in the coming years. The scale of this could be huge. The McKinsey Global Institute estimates that 16-26% of global trade could be relocated in the medium term. This would involve some combination of a return to domestic production, near-shoring and shifting to other offshore locations, with a new balance having to be found between just in time and just in case. Photo (top): monsitj / iStock and Danny Cornelissen at Tanker shipping Freight rates back at loss-making levels after 12 very profitable months 120,000 80,000 80,000 40,000 40,000 Time charter rates for tanker ships have also fallen. At the height of the oil price war, a one-year time charter for a VLCC would cost USD 80,000 per day; by 28 August, this had fallen to USD 36,000. A similar decline has occurred for LR2s, which, on 28 August, stood at USD 20,500 per day, down from USD 40,000 in late April. VLCC 0 Aug 2020 Feb 2020 Suezmax Aframax Source: BIMCO, Clarksons Oil product tanker earnings Despite lower oil demand because of the public health measures, many countries saw imports rising year on year in the second quarter, as they sought to cash in on the cheap oil. China recorded its highest crude oil imports in May (48.0m tonnes), only for that record to be broken again in June, when imports totalled 53.1m tonnes. In July, China again imported more than 50m tonnes of crude oil (51.3m tonnes). The problems surrounding crew changes have not yet caused major disruptions to trading, nor does BIMCO expect them to. However, as the situation is constantly evolving and hard to evaluate, they could prove to be a joker for the market in the coming months. Between April and July this year, Chinese crude oil imports grew by 17.2% on last year, necessitating an additional 94 VLCC loads (300,000 tonnes) compared with the same period the year before. Illustrating the falling price, despite the full-year 12.1% increase in volume terms, Chinese crude oil imports have dropped in value by 23.7%. The high crude oil imports into China have again caused delays at ports, driving up the inefficiency of the fleet and lowering the number of ships that would otherwise be available and, in that way, supporting freight rates. Chinese crude oil imports Imported volumes 0 Jul 2020 Apr 2020 Feb 2020 Jan 2020 Sep 2019 Jul 2019 Feb 2019 0 Jun 2020 100 May 2020 10 Mar 2020 200 Dec 2019 20 Nov 2019 300 Oct 2019 30 Aug 2019 400 Jun 2019 40 May 2019 500 Apr 2019 50 Mar 2019 600 Jan 2019 60 USD per tonne based on import data 2019-2020 Million tonnes Though Chinese demand for crude oil and oil products has risen from the low point in February, much of this extra crude oil is going straight into storage. This is either directly, as crude, or after having been processed. In fact, crude processing reached its highest ever level in China in July, at 59.6m tonnes, with accumulated year on year volumes up 2.3% in the first seven months of the year. Though internal demand has recovered in China, international demand has fallen, with exports down to 3.2m tonnes this July compared with 5.5m tonnes last year. Most of these exports went to short-haul destinations. Jan 2020 Dec 2019 0 Jul 2020 120,000 Jun 2020 160,000 May 2020 160,000 Apr 2020 200,000 Mar 2020 200,000 Nov 2019 240,000 Oct 2019 240,000 Sep 2019 280,000 Aug 2019 280,000 Jul 2019 320,000 Jun 2019 320,000 USD per day 2019-2020 May 2019 Oil product tanker earnings have fared less well, with the largest LR2 tankers earning USD 18,785 per day on 28 August. Handysize rates have recovered from their low of just USD 1,974 per day on 21 August, to stand at USD 5,601 a week later. Crude oil tanker earnings Apr 2019 Already, tanker freight rates have fallen from the highs they reached when the market peaked in April, with all crude oil tankers seeing earnings beneath their daily break-even levels. On 28 August, Very Large Crude Carrier (VLCC) earnings averaged USD 16,949 per day, indicating a loss of around USD 7,000 every day. At USD 11,949 per day, Suezmax earnings are also around USD 8,000 below breakeven, and Aframaxes can expect to lose USD 7,700 per day, with earnings averaging USD 9,322 per day. Peter Sand, Chief Shipping Analyst at BIMCO Emily Stausbll, Shipping Analyst at BIMCO Mar 2019 The tanker industry experienced a boost immediately after the start of the COVID-19 crisis, because of the lower oil price and higher exports from major producers. In the long run, however, the lower aviation and transport demand, and fundamentally lower oil consumption, will hurt the industry for at least 15 months. Feb 2019 Crude oil and oil products were among the commodities most affected, most quickly, by the lockdowns around the world. In its latest forecast, the US Energy Information Administration (EIA) estimates that global oil demand in 2020 will fall by 8.1 million barrels per day (bpd). Though revised slightly upwards from its May report, when it forecast a drop of 8.3m bpd, the downside risks weigh on the forecast as the coronavirus continues to spread. The drop wipes out six years of demand growth, with 2021 unlikely to see a return to 2019 levels. Jan 2019 Demand drivers and freight rates In the long run the lower aviation and transport demand, and fundamentally lower oil consumption, will hurt the industry for at least 15 months USD per day A stunningly strong 12 months for the tanker shipping industry is now being replaced by lower freight rates, as lower oil production and demand sets in across the globe. Only China bucks this trend with record-high crude oil imports, benefiting from the low oil price. Given the global recession and lower transport demand, however, the tanker industry is set for some challenging months. Value per tonne (RH-axis) Source: BIMCO, General Administration of Customs PR China Note: January and Febuary 2020 are average imports for the two months. The price per metric tonne is inferred from available data on General Administration of Customs PR China. The easing of lockdown measures has sounded the starting gun for demand recovering, but the EIA and others are still forecasting lower demand in 2021 than in 2019, so major oil producers are having to find a balance between increasing production and slowly increasing demand. The OPEC+ alliance, which includes the OPEC countries as well as ten other oil producing nations, the largest of which is Russia, has already begun reducing its production cuts, increasing its output by 2m bpd to 7.7m bpd, from 9.7m bpd immediately after the oil price war. Elsewhere in the world, however, the still-low oil price is hindering some production from being restored. In the US, weekly crude oil production is still reduced from its high point in March (13.1m bpd), standing at 10.7m bpd. US petroleum product supplied The US is set to consider tightening sanctions on Venezuela at the end of October. This would aim to put a stop to the limited activity that is still happening, primarily with European and Asian buyers. Tensions have also been on the rise in the Middle East Gulf after US seizures of Iranian oil that was headed to Venezuela which has also brought an increased focused on ships turning off their AIS locators when loading fuel in Iran, as well as ship-to-ship transfers. 22,500 22,500 21,500 21,500 20,500 20,500 19,500 19,500 18,500 18,500 17,500 17,500 16,500 16,500 15,500 15,500 14,500 14,500 13,500 Jan 13,500 Feb Mar Apr May Jun Jul 2015-2019 range Aug Sep 2019 Oct Nov Dec Thousand barrels per day Like crude oil production, product supplied in the US remains below last years level, though up from the lows reached at the height of the lockdowns. However, as evidenced by flight passenger numbers in the US still being down considerably, demand for oil products still has a way to go. By 7 August, the US was supplying 19.4m bpd of oil products, the highest level since 20 March, but still 2.7m bpd (-4.1%) less than in the corresponding week last year. Thousand barrels per day 2015-2020 2020 Source: BIMCO, EIA Fleet news BIMCO expects demolition activity to rise as freight rates and actual demand for tanker shipping falls In contrast to the other major shipping sectors, the crude oil tanker sector has seen very little demolition in the first six months of the year. In fact, only seven crude oil tankers were demolished in the first eight months of 2020, totalling 681,832 dead weight tonnes (DWT). Year to date, no VLCCs have been demolished, while 26 were delivered, resulting in the VLCC fleet growing by 7.9m DWT. This is on top of the 68 VLCCs delivered in 2019, which led to the VLCC fleet growing by 8.6%. The last VLCC to be demolished was in June 2019, with only four having been demolished since October 2018. BIMCO expects demolition activity to rise as freight rates and actual demand for tanker shipping falls, with total crude oil demolition coming to 7.5m DWT in the full year and 1m DWT of product tankers being demolished. So far this year, 547,334 DWT of oil-product tankers have been removed. Over the full year, BIMCO expects that the oil product tanker fleet will grow by 2.7% and the crude oil tanker fleet by 2.4%. This represents a marked slowdown from last year, when they grew by 4.6% and 6.2% respectively. Total tanker deliveries have totalled 16.2m DWT so far this year, a 43.9% drop from last year. The lower contracting activity fits with the poorer outlook, which is also reflected in the value of second-hand tankers. Prices for 10-year-old VLCCs and LR2s both fell by 19.2% and 18.4% respectively from the start of the year to late-August. A new VLCC is worth 7.5% less now than at the start of the year, and the value of an LR2 has fallen by 1.7% drops of USD 7.35m and USD 0.86m respectively. 2016A-2022E 10% 8 8% 6 6% 4 4% 2 2% 0 0% -2 -2% -4 -4% 2016A 2017A Delivered 2018A Demolition 2019A 2020F 2021E To be delivered p.a. 2022E Growth rate p.a. 10 Million DWT This slowdown in fleet growth will continue in the coming years, as the pandemic has lowered contracting activity. Contracting for crude oil tankers has fallen by 37.9% so far this year compared with last. At 4.1m DWT, product tankers is the only segment in which there have been more new orders in the first eight months of this year than the same period of last year (+31.9%). Ten of these orders are for a series of 50,000 MR tankers placed by Bahri. Oil product tanker eet growth Growth rate (RH-axis) Source: BIMCO, Clarksons 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 Outlook Despite tensions between the US and China ratcheting up in previous months, there was progress made on the Phase One trade agreement, with record-high US crude oil exports to China in May, when 5.1m tonnes was exported. China remained the largest destination for US seaborne crude oil exports in June, even as exports halved. Whether or not China continues to make these higher purchases of US crude oil remains to be seen, with any that are made providing a good boost to the crude oil tanker shipping market, given the long sailing distance between the loading and discharging ports. US crude oil exports 55% 45% 40% 35% 30% 25% 20% 15% 10% The loss of several years growth in global demand for oil and, therefore, for tanker shipping will lead to a worsening of the fundamental balance in the market. Though fleet growth will be lower, as a result of the drop in contracting during the pandemic and the poorer outlook in the coming years, the fleet will continue to grow year on year. Jul 2020 May 2020 Mar 2020 Jan 2020 Nov 2019 Sep 2019 Jul 2019 May 2019 Mar 2019 Jan 2019 Nov 2018 Sep 2018 World total The question of when demand will return to pre-pandemic levels remains clouded in uncertainty as the virus continues to spread. Travel restrictions remain complicated and demand for global travel is still abated. Land-based transportation has had a stronger recovery than air transport, but it remains lower than this time last year. The EIA doesnt expect global oil demand to return to prepandemic levels in 2021; instead, it sees demand rising to 100.17m bpd in 2021 (in 2019 it was 101.25m bpd). As it looks now, 2022 seems to be the year in which volumes will have recovered. Jul 2018 May 2018 5% China World total (excluding China) Chinas share of total exports (RH-axis) Source: BIMCO, US Census Bureau For the remainder of this year, the tanker shipping industry will find itself paying for the highs it reached in the second quarter For the remainder of this year, the tanker shipping industry will find itself paying for the highs it reached in the second quarter. The higher demand for shipping at the time was not because of higher immediate consumption, but because of future demand being brought forward as importing refiners sought to benefit from the lower price. Photo (top): AvigatorPhotographer / iStock Crude Oil Tankers DWT Product Tankers DWT Aframax Suezmax VLCC 80,000-119,999 120,000-199,999 200,000+ 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 0% Twitter Linkedin YouTube Chinas share of total exports 50% Mar 2018 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 Jan 2018 Despite the strong purchases in May and June, however, China remains far behind on its commitments under the Phase One agreement. Because the agreement is made in value rather than volume, the recent drop in oil price has made it even harder to achieve than previously, although it would provide an even bigger increase in demand for shipping were China to meet its commitments. A six-month review of the deal, originally scheduled for mid-August, has been postponed, with no new date set, highlighting the tensions between the two countries. Million tonnes 2018-2020 Container shipping Capacity management key to carriers profitability as volumes falter Despite lower demand because of the pandemic, carriers have achieved high freight rates and profitability in the first half of the year through large-scale capacity reductions and low bunker prices. Tonnage providers have suffered the most so far, as they were left with many of the idle ships. Demand is showing signs of improvement, though, during a recession, it will be a long and drawn-out recovery. Demand drivers and freight rates Volumes are down on all the major trade lanes Peter Sand, Chief Shipping Analyst at BIMCO The container shipping industry is particularly vulnerable to changes in consumer spending, which has been severely impacted by lockdowns across the world. April and May have so far proven to be the worst months for container shipping volumes, in line with when the strictest lockdowns were in place. Volumes have recovered in June and July, but they remain considerably below last years level. Compared with last year, the volumes for April and May were down 1.9m TEU (-13.6%) and 1.7m TEU (-11.0%) respectively. The lost volumes in June were less than half this, down 0.7m TEU (-5.1%). Comparing the first half of this year with last, accumulated volumes are down by 6.8%, to 78m TEU, a loss of 5.8m TEU. Volumes are down on all the major trade lanes: intra-Asia down 4.2%, Far East to Europe down 12.3% (-1m TEU), and Far East to North America down 9.0% (-0.8m TEU). All these trade lanes follow the global pattern in which volumes have recovered slightly in June, with intra-Asian volumes up compared with June last year, while the east-west trades remain below last years level. Secondary trades have also had falling volumes, with intra-Europe down 2.6% and Europe to North America falling 7.0%. North America to Far East is down 3.9%. Change in container volumes from 2019 250 0% 0 -1% -250 -2% -500 -3% -750 -4% -1,000 -5% -1,250 -6% -1,500 -7% -1,750 -8% -2,000 Jan 2020 Feb 2020 ROW Mar 2020 Intra-Asian Apr 2020 May 2020 Far East to Europe Acc. growth rate (RH-axis) Despite capacity now being close to, or above, last years levels and although demand remains low container freight rates have shown remarkable resilience. As per usual, the long-term contract rates, on which most containers are shipped, have remained far more stable than their counterparts on the spot market, though they have still seen an increase. Growth rate on main trade lanes and the rest of the world Thousand TEU The uptick in container volumes being shipped has led to a morethan-proportional increase in container freight rates. Originally, the collapse in volumes led to carriers blanking a large part of scheduled sailings, sending the idle container shipping fleet to record highs (2.72m TEU on 25 May), but also elevating freight rates. The recovery in volumes has resulted in most sailings being reinstated. Between mid-August and late-October, only 3% of capacity on east-west trades had been blanked (source: SeaIntelligence, as of late August). Emily Stausbll, Shipping Analyst at BIMCO -9% Jun 2020 Far East to North America Source: BIMCO, CTS The problems surrounding crew changes have not yet caused major disruptions to trading, nor does BIMCO expect them to. However, as the situation is constantly evolving and hard to evaluate, they could prove to be a joker for the market in the coming months. The China Containerised Freight Index (CCFI), covering both long- and short-term contracts, rose to 905.23 on 28 August its highest since late February. The Shanghai Container Freight Index (SCFI), which only takes spot rates into account, has shown a much more spectacular increase, rising to 1,263.26 on 28 August, its highest level since September 2012. Container freight rate indices 1,300 1,300 1,200 1,200 1,100 1,100 1,000 1,000 900 Index value 2019-2020 Index value In particular, there have been strong increases in spot rates from the Far East into the US. Compared with this time last year, rates into the US West Coast (USWC) have risen 117.7% and rates into the US East Coast are up 47.9%. On 31 August, shipping a 40ft container into the USWC cost USD 2,880 and into the US East Coast USD 3,652. Contract rates are just over USD 1,370 per FEU lower into the USWC and USD 1,190 lower into the USEC (source: Xeneta). 900 Aug 2020 Jul 2020 Jun 2020 May 2020 800 Apr 2020 Mar 2020 Feb 2020 Jan 2020 Dec 2019 Nov 2019 Oct 2019 Sep 2019 Aug 2019 Jul 2019 Jun 2019 May 2019 Apr 2019 Mar 2019 Feb 2019 Jan 2019 As carriers have stopped blanking sailings and reinstated capacity, 800 the idle container shipping fleet has fallen and the activity in the 700 charter sector has picked up and, with the number of available ships falling, charter rates have risen. The daily hire for an 8,500 TEU ship has risen to USD 25,500 per day, having bottomed SCFI CCFI Source: BIMCO, Shanghai Shipping Exchange out at USD 12,000 per day at the height of the crisis. Before the pandemic, the rate was stable at USD 30,000 per day. The midsized ships (2,500-4,250 TEU) are the only ones experiencing higher freight rates now than at the start of the year. In particular 3,500 TEU ships have performed well recently. Charter rates for these stand at USD 12,250 per day, their highest level since July 2018. 700 Though volumes have started to recover, actual demand for goods is still considerably down Fleet news The container shipping fleet has grown by 1.6% since the start of the year, reaching a total capacity of 23.2m TEU. BIMCO expects that, over the whole year, the fleet will expand by 2.1%, which will mark a four-year low. BIMCO expects a total of 300,000 TEU to be demolished this year, so far this year 169,647 TEU have been demolished. The reopening of demolition yards on the Indian subcontinent, and the poor conditions in the container shipping charter market, saw owners pushed to getting rid of some of their older and substandard ships between June and August. The youngest container ship to have been demolished this year was 15 years old. These newly demolished ships include some of the largest container ships ever to be demolished. At 9,600 TEU, the Sine Maersk (built 1998) is the largest container ship ever to be demolished. Though these used to be among the largest container ships sailing, they are now far outclassed by the latest deliveries, and given the cascading that has resulted in ever larger ships on smaller trades, it has proven unattractive to keep these ships trading, even on the smaller trades. So far this year, four ships above 6,000 TEU have been demolished. Container ship eet growth 2016A-2022E The share of the orderbook made up by Ultra Large Container Ships (ULCS 15,000+ TEU) has fallen below 50% (at 47.4%), as five new ULCS (all 23,000 TEU) have been ordered, while 13 have been delivered totalling 301,724 TEU. There is 927,296 TEU of ULCS on order as per early September. 1,250 5% 1,000 4% 750 3% 500 2% 250 1% 0 0% -250 -1% -500 -2% -750 -3% 2016A 2017A Delivered 2018A 2019A Demolition 2020F 2021E To be delivered p.a. 2022E Growth rate p.a. 6% Thousand TEU The pandemic has also greatly dampened the appetite for new ships; in the first eight months of this year, contracting activity has been 33.5% lower than last year, as only 162,834 TEU has been ordered. This, combined with a normal pace of deliveries, has sent the container shipping orderbook to its lowest level since September 2003. 1,500 Growth rate (RH-axis) Source: BIMCO, Clarksons 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. Outlook Though volumes have started to recover, actual demand for goods is still considerably down. The high rates are testament to shippers again frontloading their goods, this time ahead of a potential second wave of coronavirus around the world and resulting lockdowns. In late 2018, frontloading occurred ahead of an increase in tariffs because of the trade war. Total retail sales in the US, excluding food and beverages, are down 1.3% in the first six months of the year. Higher unemployment and lower consumer income are looming, as governments start easing back on their stimulus measures. Even the higher state support was unable to stop consumer spending falling in the major consuming nations of the world, and, as this comes to an end, spending is likely to suffer even more, lowering demand for container shipping. The effects of this lower actual demand on container shipping will be more painful given the frontloading that we are currently seeing, which will depress volumes and freight rates in the future. In July, housing starts (private houses on which construction has begun) in the US saw a recovery from the previous months but, at 1.406 million units, remain 4.5% below levels in February, before the pandemic. BIMCO has previously estimated that there is a 22-month time lag between housing starts and container imports in the US. June was the first month this year in which volumes shipped on intra-Asian trades were higher than the corresponding month in 2019, up by 35,000 TEU. This by no means makes up for the lost volumes earlier in the year and, compared with the first half of 2019, volumes are still down by 890,900 TEU. Furthermore, with the new export orders index for manufacturers still contracting month on month in China in August (49.1), exports out of the region will remain muted. The resilience in intra-Asian volumes highlights the fact that the region is becoming less dependent on exports The resilience in intra-Asian volumes highlights the fact that the region is becoming less dependent on exports. Exports on to the main trade lanes are experiencing double-digit declines, compared to a less than 5% drop in accumulated volumes on the intra-Asian trade in the first half of 2020. This is the result of many years with high economic activity in the region increasing the size of the middle class and, therefore, the populations wealth and spending. 4,500 12% 4,000 9% 3,500 6% 3,000 3% 2,500 0% 2,000 -3% 1,500 -6% 1,000 -9% Growth rate Capacity management has been the key for success. As capacity is reinstated without a permanent recovery in demand, however, carriers find themselves balancing on a thin tightrope between maintaining market share and freight rates. This while the fundamental balance in the market deteriorates as the fleet grows by 2% and demand falls. BIMCO expects freight rates to fall in the near future unless capacity adjustments are constantly made to rebalance the market. Thousand TEU Across the board, major carriers have announced strong results for the first half of the year, despite volumes falling. This has so far been achieved by the stable freight rates and the cost savings from cheaper bunkers, blanking sailings, Intra-Asian container volumes and returning ships to tonnage providers. 2018-2020 500 -12% 0 -15% Jan Feb Mar Apr May 2018 2019 2020 Jun Jul Aug Sep Oct Nov Dec Acc. y-o-y growth 2019 (RH-axis) Acc. y-o-y growth 2020 (RH-axis) Carriers have been, and continue to be, in a better place to face Source: BIMCO, CTS this crisis than tonnage providers, as carriers could blank sailings and, in many cases, get unwanted tonnage off their hands. Tonnage providers, on the other hand, were left with these unwanted ships, having to cover their cost and, at the height of the crisis, unable to charter them out, even at low rates. Carriers also achieved large cost savings through the lower bunker price, which has resulted in their voyage costs falling. The price of both high-sulphur fuel oil and low-sulphur fuel oil has fallen, though as the latter has fallen more than the former the price spread between the two fuel types has also narrowed. This decrease in the spread has increased the payback time for a scrubber, which just less than a quarter of container ship capacity has installed. Despite the increased payback time, they still make economic sense. 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 10,000-14,999 15,000+ Dry bulk shipping Chinas demand keeping the dry bulk market going An impressive recovery in Chinese dry bulk imports has protected the industry from the effects of falling demand in the rest of the world. High deliveries and low contracting have left the orderbook at multiyear lows, but with the poor outlook the current influx of new dry bulk ships orders is not what is needed. Demand drivers and freight rates The dry bulk fleet has seen both deliveries and demolitions rise over the course of the pandemic, while contracting has fallen steeply The biggest story in the dry bulk industry in recent months has been the strength of the recovery in major Chinese imports. These are up across the board, breaking previous records, not just for monthly imports, but also accumulated over the first seven months of the year. The Chinese recovery has been strong enough to make up for lower activity in the rest of the world, with all ship sizes above their break-even levels. Capesize earnings rose quickly in late June, to reach USD 33,760 per day on 7 July. The high Chinese imports led to congestion at many of its ports, temporarily lowering the number of available ships. Since then, rates have fallen to a more sustainable level, averaging around USD 19,400 per day in August. In particular, Chinese iron ore imports have been strong and are up 11.8% in the first seven months of this year compared with last an additional 348 Capesize loads (200,000 tonnes). At 112.6m tonnes, imports in July were at a record high, bringing total imports in the first seven months of the year to 659.6m tonnes. Peter Sand, Chief Shipping Analyst at BIMCO Emily Stausbll, Shipping Analyst at BIMCO Higher steel production levels are, in part, behind the higher iron ore imports. Stimulus measures from the Chinese government are prompting local governments to invest in infrastructure projects, encouraging steel production. After monthly declines in March and April, Chinese crude steel production has recovered and, after seven months, is up by 2.8%. Dry bulk earnings 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 Capesize Panamax Supramax 0 Jul 2020 May 2020 Mar 2020 Jan 2020 Nov 2019 Sep 2019 Jul 2019 May 2019 Mar 2019 Jan 2019 Nov 2018 Sep 2018 Jan 2018 0 Jul 2018 USD per day 40,000 May 2018 The rise in steel production in China comes at the same time as production is falling in the rest of the world (-16.5% year-on-year), as the recovery elsewhere lags behind. This development means that, in Q2, China accounted for a record high 62% of global steel output, up from 54% in 2019. EU steel production was down 24.4% in July from last year, drops largely driven by the collapse of many manufacturing sectors, in particular Germanys car production. 40,000 Mar 2018 USD per day 2018-2020 Handysize Source: BIMCO, Clarksons The high iron ore imports come after a few years in which Chinese steel production (+8.3% in 2019 and +6.6% in 2018) has grown faster than its iron ore imports, as it has moved towards using more electric arc furnaces and scrap steel, rather than blast furnaces. Looking at the whole picture, the higher steel production and infrastructure investment cannot fully explain the rise in iron ore imports and much of it will make its way into stockpiles. The problems surrounding crew changes have not yet caused major disruptions to trading, nor does BIMCO expect them to. However, as the situation is constantly evolving and hard to evaluate, they could prove to be a joker for the market in the coming months. In contrast to Chinese iron ore imports, which have grown throughout the year, coal imports did not grow in Q2. Since April, monthly coal imports have been below the corresponding month in 2019. In July, imports were 6.8m tonnes lower this year than last. The strong start to the year boosted by cargoes arriving at the end of 2019 but only clearing customs in January and February because of local restrictions means that, Major Chinese import growth rates despite the fall in Q2, accumulated year-on-year growth is still up Accumulated year-on-year, 2018-2020 30% by 6.8% in the first seven months of the year. 30% Lower electricity demand as a result of the pandemic has caused US coal production to fall. In the week of 29 August, US coal production stood at 11.1m metric tons, 26.7% lower than the same week last year. Year to date, US coal production is down 26.9% from last year. The Energy Information Administration (EIA) expects that, over the full year, US exports of metallurgical coal will fall by 32.3%, to 37.3m tonnes, and thermal coal exports will drop by 30.2%, to 26.3m tonnes. In total, the drop in US coal exports would mean a loss of 319 Capesize loads (200,000 tonnes). 25% Growth rate 20% 17.7% 15% 15% 11.8% 10% 10% 6.3% 6.8% 5% 5% 3.7% 0.5% 0.5% 0% 20% Growth rate 25% 0% -1.0% -5% -5% -10% Iron Ore -7.9% Soya beans Coal 2018 2019 -10% 7M 2020 Source: BIMCO, General Administration of Customs PR China Iron ore and coal trades provide demand mainly for Capesize ships, while the smaller ships in particular, Panamaxes and Supramaxes have experienced higher demand because of strong agricultural exports. Brazilian soya bean exports have been at a record high this year. So far, they are up 36.3%, at 69.8m tonnes. Compared with last year, this is an increase of 248 Panamax loads (75,000 tonnes), three-quarters of which sailed across the world to China. BIMCO does not expect strong US soya bean exports this season These strong agricultural exports have helped drive Panamax earnings up to USD 15,815 per day on 19 August, and Supramax earnings to USD 10,494 per day. Fleet news The dry bulk fleet has seen both deliveries and demolitions rise over the course of the pandemic, while contracting has fallen steeply. So far this year, the dry bulk fleet has grown by 2.8% and breached 900m dead weight tonnes (DWT) for the first time. Currently at 903.3m DWT, BIMCO expects full-year growth to reach 3.5%. On the other hand, the orderbook has fallen to 63.4m DWT, its lowest level since April 2004. Deliveries have risen by 7.8m DWT from this time last year, with 33.9m DWT of new capacity arriving on the sea in the year to date. Of this, just less than half of the tonnage comes from the 70 new Capesize ships that have been delivered (15.5m DWT). Given that an average Capesize ship carries six loads a year, these new ships can carry 495 loads (200,000 tonnes) a year. The 111 new Panamax ships will be able to carry an additional 893 loads (75,000 tonnes), as these average seven loads a year. A sharp increase in fleet growth, as a result of these deliveries, has been somewhat offset by an increase in demolitions, but the fleet continues its growth, because even an 69.4% increase in demolitions, compared with last year, only amounts to 8.7m DWT being demolished. The pandemic and the poorer outlook have caused a 59.1% fall in contracting activity, as owners have not wanted to invest during a recession plagued by uncertainty. Only 108 new dry bulk ships have been ordered in 2020, totalling 7.5m DWT. Of these, 10 are Capesize ships (210,000 DWT) all of which have been ordered by Chinese leasing interests. The most popular ship size has proven to be Handymaxes, of which 62 have been ordered, totalling 3.5m DWT, the majority of which have a capacity of between 60,000 and 65,000 DWT. Dry bulk ship eet growth 5% 40 4% 30 3% 20 2% 10 1% 0 0% -10 -1% -20 -2% -30 -3% Million DWT 50 Outlook With the start of September comes the start of the US soya bean export season, when the US replaces Brazil as the main exporter for the rest of the year. Outstanding sales of US soya beans for this marketing year representing what has been ordered, but not yet shipped total 24.2m tonnes, significantly up from the start of last season (9m tonnes). China accounts for 56% of total outstanding sales for this season. 2016A 2017A Delivered 2018A Demolition 2019A 2020F 2021E To be delivered p.a. 2022E Growth rate p.a. 2016A-2022E Growth rate (RH-axis) Source: BIMCO, Clarksons 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. While it is yet to be seen whether these soya beans will actually reach Chinese shores, even these higher sales are far below what is needed under the Phase One agreement between the two countries. China, however, has already stockpiled plenty of soya beans after record-high imports from Brazil, with total imports up 17.7% from last year (55.1m tonnes). The continued impact of African swine fever has also reduced Chinese demand. As such, BIMCO does not expect strong US soya bean exports this season, but would be pleasantly surprised should they come about as goodwill purchases ahead of, or immediately after, the November election in the US. Chinese soya bean imports 2018-2020 11 30% 10 25% 9 20% 8 15% 7 10% 6 5% 5 0% 4 -5% 3 -10% 2 -15% 1 -20% 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Tensions have also been rising between China and other countries, 2018 Acc. y-o-y growth 2018 (RH-axis) Acc. y-o-y growth 2019 (RH-axis) 2019 including Australia, Chinas largest supplier of iron ore and other 2020 Acc. y-o-y growth 2020 (RH-axis) Source: BIMCO, General Administration of Customs PR China dry bulk imports. The tensions, ostensibly over the handling of the virus, run deeper, with Australia ready to step up to the giant, despite its dependency. So far, Chinese coal imports from Australia have seen delays, though iron ore has been untouched. In fact, iron ore exports to China have been very strong: Port Hedland exported a record 46.2m tonnes of iron ore to China in June. However, the stockpiling in China may suggest it is preparing for a further escalation of tensions. Nov Dec Growth rate 35% Million tonnes 12 -25% Whatever happens between Australia and China, higher stockpiles in China of iron ore and soya beans lower the prospects for the dry bulk industry. At some point, freight rates will feel the pain of the demand that has been brought forward. Given the importance of China to the dry bulk market, the recovery in industrial production and massive imports there have, so far, been enough to support the market. However, the rest of the world needs to join the recovery wave if this is to be sustained, to stimulate demand in other areas of the world, as well as to ensure that Chinas recovery doesnt falter because of the lower international activity. With COVID-19 cases still rising, a global recovery seems some way off. Even with higher demolitions, the fleet will grow by 3.5% this year while, on the other side, demand falls, and faces a slow return to pre-pandemic levels. The dry bulk market already struggling before the pandemic is now looking ahead to even more challenging times, and the industry most certainly does not need to see the currently low orderbook grow. Tensions have also been rising between China and other countries, including Australia 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 Twitter Linkedin YouTube