The South Korean shipbuilding industry is in shock after it has lost the world’s largest container ship deals to Chinese companies. It is a symbolic event that shows the two countries’ intense competition across all of industries, marking the 25th anniversary of their diplomatic relations.
According to shipbuilding industry sources on August 20, France’s CMA CGM recently signed a letter of intent (LOI) with two Chinese shipyards – Hudong-Zhonghua Shipyard and Shanghai Waigaoqiao Shipbuilding – to build nine 22,000 TEU container ships. South Korea’s big three shipbuilders – Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering – participated in the bid. Hyundai Heavy competed for the deal until the last minute but Chinese shipbuilders won the contract.
The deal for nine ships total US$1.44 billion (1.6 trillion won). An official from the shipbuilding industry said, “South Korean companies had swept large container ship deals in the global market but they now feel embarrassment that not only the market of low-end ships but also ultra large and high value added ships are being eaten into by China.”
The deal is to build nine ultra large container ships which have dual-fuel propulsion systems that can operate on either liquefied natural gas or fuel oil. With stricter international regulations on the emission from ships, including sulfur oxides, domestic shipbuilders expected to win new orders of ultra large and eco-friendly high value added ships. However, they unexpectedly lost to Chinese companies. The shipbuilding industry, which is already suffering from a lack of business, raises concerns that they can keep falling behind Chinese firms in the future. A LOI is a document outlining an agreement between two or more parties before the agreement is finalized. However, South Korean companies has a very small chance of winning a partial order out of the nine.
Domestic shipbuilders won the deal of 2.83 million CGT in the first half of this year but fell behind China with 133 ships or 2.9 million CGT. An official from the shipbuilding industry said, “In short, even foreign container shippers have admitted that Chinese shipyards’ technology and price competitiveness have caught up with Korea. South Korean shipbuilders used to rank first to seventh in the top 10 list. However, only big three made the top 10 list now with many Chinese and Japanese firms included.”
The Asia to Southern Africa market has witnessed a significant growth as spot rates reached their highest in seven years, according to shipping consultancy Drewry.
Instead of an earlier expected 13% decline in southbound volumes in the first quarter, Container Trade Statistics (CTS) is now reporting marginal growth of 0.4% for the same period, representing an additional 22,400 TEU on the original numbers.
Southbound shipments increased by 8% in the second quarter, representing the fastest rate since the second quarter of 2013.
After six months the headhaul southbound market was up by 4.3%, well on course to record the first significant annual gain since 2013.
Drewry said that freight rates are expected to continue their ascent in this growing trade over the coming months, while new capacity would be supported by greater volumes.
“Indicative of a strengthening market carriers are adding capacity to the southbound trade with effective southbound slots estimated to have been up by 15% year-on-year in July. Further additions that appear on schedules for August and September will raise that annual comparison yet again,” according to the shipping consultancy.
The strength of the recent demand recovery has contributed to a recovery in ship utilisation and freight rates. Southbound load factors were in the high-70s in May and June and “should go higher still in the traditionally stronger second half of the year, even with the extra capacity.”
China has risen as the world’s largest importer of crude oil, moving ahead of the United States, according to data provided by Gibson Shipbrokers.
Namely, China reached an average of 8.55 million b/d of crude oil imports in the first half of 2017 compared with 8.12 million b/d imported by the United States.
The ship broking company said that the country’s ever greater role in the global oil market, coupled with declining domestic production and refinery expansions, should prove positive to tanker demand in years to come.
Although this trend looks set to continue, “other factors play a role,” Gibson Shipbrokers said.
One of the biggest differences between China and the United States is domestic oil production. China’s domestic crude production has been in gradual decline. Gibson cited data by Reuters showing that domestic production fell by 5.1% in the first 6 months of 2017, averaging 3.89 million b/d. This is in contrast to growing US production as the shale industry has been revitalised in recent months and highlights a growing trend in China of increased crude imports to replace declining domestic production.
“Another factor driving imports has been the continuing effort to build strategic petroleum reserves (SPR). Finding accurate data on the levels of SPR build can be difficult. However, by adding crude imports to domestic production, minus refinery throughput an idea of surplus oil used to build SPR can be identified.”
Gibson informed that it is assumed that China will continue to build their SPR for years to come with the IEA highlighting 2020 as a tentative completion date, with 182 million barrels of storage space yet to be commissioned.
China plans to add 2.5 million b/d of refining capacity by 2020, supporting growth in Chinese oil imports into the future, a recent presentation from Sinopec shows.
“In recent years the expansion of China’s refining capacity has pressured regional refining margins, as China’s refined product exports rise. Politics may impact this in the future, but expanding capacity does look set to place China in a more dominant position within the refined products market.”
Cargo availability is on the rise in the Middle East VLCC market, but rates don’t seem to be able to pick up considerably. In its latest weekly report, shipbroker Charles R. Weber said that “VLCC rates in the Middle East market posted a minor improvement this week, in‐line with a stronger pace of demand and recent demand strength in the West Africa market. A total of 23 fixtures were reported in the Middle East market, representing a 28% w/w gain. The West Africa market saw six reported fixtures, off by three w/w (though the four‐week moving average has risen to a one‐month high)”.
Accordin to CR Weber, “the immediate fundamentals facing the market remain poor: in the Middle East market, there are 31 units available to cover 3 remaining regional cargoes and four West Africa cargoes. The implied surplus of 24 units remains level with the view a week ago at a three‐month high; the surplus is twice the 12‐month average. As participants move into a September program, demand is expected to be busier on both seasonality (with a reduction of crude supply from Middle East producers to meet domestic summer demand surges subsiding) and geopolitical factors (as resolve by OPEC members to adhere to quotes appears to be waning as the strategy has failed to yield desired results). Any improvement in the demand profile however, will likely have little impact on rates, at very least while participants work early September cargoes, given the extent of surplus tonnage carrying over from August to September. Thereafter, the extent of early September demand and draws from the West Africa market will have a large baring on rate developments thereafter, as both of these can change the supply/demand positioning considerably”.
According to the shipbroker in the Middle East, “AG‐FEAST rates pared last week’s losses, adding one point to conclude ws41. Corresponding TCEs rose by 18% to conclude at ~$12,088/day. Rates on the AG‐USG route via the Cape were unchanged at ws23. Triangulated Westbound trade earnings were off by 2% to ~$19,780/day”. In the Atlantic Basin, CR Weber said that “rates in the West Africa market lagged those in the Middle East with the WAFR‐ FEAST route shedding 2 points to conclude at ws48. Corresponding TCEs were off by 4% to ~$16,792/day. After last week’s gains in the Caribbean market, muted demand and further testing showed a slightly more ample supply fundamental, which lead to a paring of regional rates. The CBS‐SPORE route eased by $150k to conclude at $3.10m lump sum”.
In the Suezmax market, “demand in the West Africa Suezmax market was muted this week with just five fixtures reporting, representing a five‐month low. Despite this, rates received a modest boost following stronger than anticipated demand for coverage of August’s final decade, which left the position list slightly less overpopulated than previously expected. The WAFR‐UKC route added 2.5 points to conclude at ws67.5, accordingly. A moderating of VLCC coverage past August’s final decade shows greater demand prospects for Suezmaxes, which could help to keep rates stable, or possibly offer a small measure of fresh gains”, CR Weber said.
In the Aframax market, the shipbroker said that “a revised tally of last week’s Caribbean Aframax fixture activity pushed the four‐ week moving average to a four‐month high, enabling modest rate gains this week as demand levels remained relatively elevated. The CBS‐USG route added five points to conclude at ws90. Little substantial change is likely during the upcoming week”.
Meanwhile, in the product tanker market, the shipbroker said that “the USG MR market observed a surge in rates this week after a fresh geographic diversification of trades in the Atlantic basin in recent weeks reduced available supply and demand increased this week. The weekly tally of regional fixtures jumped to an eight‐week high of 39, representing a w/w gain of 25%. Of this week’s tally, voyages to Europe accounted for just four (‐5, w/w) as traders scaled back interest in this direction following six consecutive weeks of above‐average demand; 22 fixtures were bound for points in Latin America and the Caribbean (+3, w/w) and the remainder are for alternative destinations or have yet to be determined. Rates on the USG‐UKC route surged 60 points to conclude at ws140 – the highest since late June. The USG‐CBS route added $275k to conclude at $625k lump sum (a four‐month high) and the USG‐CHILE route added $275k to conclude at $1.325m lump sum (a two‐month high)”.
CR Weber concluded that “this week’s gains were aided by a limiting of inbound tonnage to the USG earlier as ballast directions of units freeing at various parts of the western Atlantic basin were more diverse. However, with the USG market now offering a strong premium to all viable alternatives, we expect that a fresh buildup of positions will ensue during the upcoming week as the ballast orientation is now concertedly to the USG. Presently, the two‐week forward view of available tonnage shows 33 available units (11% fewer than a week ago). Charterers resistance is increasingly apparent at the close of the week and with more units expected to progressively appear during the upcoming week, we expect that modest downside at the start of the upcoming week will lead to a stronger correction by mid‐week, failing a strong extending of demand growth”.
Newbuild contracting fell to a 30 year low in 2016, but when looking at it in estimated investment value terms, the fall was slightly less sharp. This trend has continued, with contracting in 2017 so far up by significantly more in investment value terms than in numerical terms. This month’s Shipbuilding Focus investigates which sectors are attracting investment and which yards are benefitting from it.
Though still depressed in historical terms, the value of newbuild contracting investment, which declined by 59% in 2016, stands at $33.8bn in the year to date, up 58% year-on-year on an annualised basis. This has been driven by investment in high value vessel types such as cruise ships, which experienced record ordering levels last year and accounted for 43% of total investment. Firm cruise ship ordering has continued in 2017 so far, and the 20 cruise ships contracted have an estimated newbuild value of $12.6bn, up 36% year-on-year on an annualised basis and accounting for 37% of year to date investment. Similarly to in 2016, US owners account for the largest share of year to date cruise investment (82%).
Signs Of A Comeback
Most sectors suffered from a depressed contracting environment in 2016, but in 2017 so far some have shown early signs of improvement and estimated investment in tanker and gas carrier units is up by an annualised 133% and 176% respectively year-on-year. Tankers and gas carriers account for 23% and 10% of year to date investment respectively, and the increase in investment has been driven by firmer ordering of larger units such as VLCCs and large LNG carriers. Norwegian owners account for 49% of year to date gas carrier investment, while Greek owners account for 22% of year to date investment in the tanker sector.
Still Seeming Sluggish
Containership contracting has remained muted, with only 20 units of an estimated $0.5bn ordered in 2017 so far, an annualised year-on-year investment decrease of 71%. In contrast, boxships accounted for 22% of 2015 investment, compared to 1% in 2017 so far. Estimated bulkcarrier investment in the year to date is up 15% year-on-year on an annualised basis, but bulkers only account for 7% of estimated 2017 investment compared to 42% in 2010, even if with an improved freight rate environment, ordering could pick up.
Which Builders Benefit?
The benefits of higher investment levels have not necessarily reached all yards. While cruise ordering is booming, this is only benefitting a small number of yards, with European yards accounting for 96% of year to date cruise orders in investment terms. Similarly, in the VLCC sector, only eight yards have won orders in 2017 so far, mostly in China and Korea.
So, investment is up this year, with high value orders even more prominent than in 2016. The cruise sector has continued to boom and in the tanker and gas carrier sectors contracting is improving, but other sectors are still struggling. However, while ordering of high value units can have an impact, a recovery is needed across more of the major sectors for investment to return to healthier levels.
The emergence of China as a leading global force in trade has seen shipping among the leading beneficiary industries. So far, this effect was more pronounced in the dry bulk trades, but lately, it’s tanker owners who could also join the foray. In its latest weekly report, shipbroker Gibson said that “early this month, figures confirmed the rise of China as the world’s largest importer of crude oil ahead of the Unites States. Data shows that for the first time China averaged 8.55 million b/d of crude oil imports in the first half of 2017 compared with 8.12 million b/d imported by the United States. This trend looks set to continue as China develop its refining industry and builds strategic petroleum reserves. However, other factors play a role”.
Firstly, one of the biggest differences between China and the United States is domestic oil production. China’s domestic crude production has been in gradual decline. According to data provided by Reuters, domestic production fell by 5.1% in the first 6 months of 2017, averaging 3.89 million b/d. This is in contrast to growing US production as the shale industry has been revitalised in recent months and highlights a growing trend in China of increased crude imports to replace declining domestic production.
Gibson added that “perhaps more significantly, another factor driving imports has been the continuing effort to build strategic petroleum reserves (SPR). Finding accurate data on the levels of SPR build can be difficult. However, by adding crude imports to domestic production, minus refinery throughput an idea of surplus oil used to build SPR can be identified. According to data from Reuters, when comparing the first half of 2016 to 2017 the increase between available crude and refinery throughput was 510,000 b/d. Not all of this would necessarily go into filling the SPR, however, it is interesting to note that a large percentage of overall crude import growth can potentially be attributed to the SPR build. Data released for July, shows refinery throughput was the lowest it has been since September 2016. This slowdown in refinery throughput coupled with rising oil demand further highlights the role of SPR builds in crude demand and invariably raises the question of how long can this continue? It is assumed that China will continue to build their SPR for years to come with the IEA highlighting 2020 as a tentative completion date, with 182 million barrels of storage space yet to be commissioned (according to latest reports). However, unless further investment is made into building new storage facilities it is possible to assume that this artificial source of import demand will gradually decline”.
However, “according to a recent presentation from Sinopec, China plans to add 2.5 million b/d of refining capacity by 2020, supporting growth in Chinese oil imports into the future. In recent years the expansion of China’s refining capacity has pressured regional refining margins, as China’s refined product exports rise. Politics may impact this in the future, but expanding capacity does look set to place China in a more dominant position within the refined products market. Evidently, China will continue to have an ever greater role in the global oil market and continue to cement its position as the world’s largest crude importer. Due to declining domestic production and refinery expansions this should prove positive to tanker demand in years to come” Gibson concluded.
Meanwhile, in the crude tanker market this week, the shipbroker said that “we could easily have cut and pasted last week’s VLCC commentary with nobody realising…yet another bleak week for Owners as supply continued to swamp demand and Charterers took an easy attitude to working the new September programme. Rates remain anchored to as low as ws 37.5 to the East and low ws 20’s West for the near term, at least. Suezmaxes also showed no sign of revival and merely tracked sideways through a slack week. Rates operate at down to ws 65 to the East and to ws 27 West with some Owners deciding to ballast away. Aframaxes have tightened somewhat, but remain pegged at 80,000mt by ws 85 to Singapore though should improve a little if only moderate activity develops next week”, Gibson concluded.
There is no incentive to order new ultra large containerships from a cost perspective right now, despite extremely low prices of newbuilding tonnage, according to Søren Skou, Chief Executive Officer of A.P. Møller – Mærsk A/S.
The comment was made in an earnings call anent the CMA CGM 22,000-TEU megaship order rumors and its potential impact on capacity discipline among container carrier players.
As highlighted by Skou, five years ago large ships were ordered due to fuel economy, however, this advantage has been minimized, if not disappeared entirely, given the current oil price levels.
Furthermore, given the fact that charter markets remain in the doldrums, it is a better option to hire ships on the open charter market that opt for buying new ones.
“Additions to the order book will be driven mainly by the need to grow capacity in order to meet the market demand, and nothing else,” Skou said.
“We have no ambitions or plans about ordering new large ships this or next year,” he added.
The containership order book stands at 13% of the fleet size. Should the owners abstain from ordering, the order book would stand at 7 percent by the end of next year and 1 % in two years, laying grounds for a positive market outlook.
There have been no mega ship orders since the third quarter of 2015.
In April this year, Maersk Line took delivery of its 20,568 TEU Madrid Maersk.
The ULCV belongs to the 2nd generation of the company’s Triple-E class of vessels and is the first of 11 ships ordered from Daewoo Shipbuilding and Marine Engineering (DSME) back in 2015.
Danish container shipping major returned to profit in the second quarter of 2017, with revenue growing by USD 1bn year-on-year.
The company reported a profit of USD 339 million for the second quarter of 2017, against a loss of USD 151 million in the second quarter of 2016.
The underlying result was a profit of USD 327 million, also a major return from a loss of USD 139 million booked in the corresponding period a year ago.
As concluded by Skou, Maersk Line plans to focus on profitability rather than volume growth for the remainder of the year. He added that the company used “the price war” over the recent period to gain a good market share, and now that the company is profitable again, efforts would be directed toward meeting the profit guidance.
Nasdaq-listed dry bulk shipping company Golden Ocean Group Limited managed to cut its net loss for the second quarter of 2017 as dry bulk shipping rates continued to improve in the beginning of the period.
The company reported a net loss of USD 12 million for the second quarter of 2017, compared with a net loss of USD 39.2 million seen in the same period a year earlier. Operating revenues amounted to USD 99.7 million in the three months, up from USD 54.5 million reported in the second quarter of 2016.
After the Capesize rates increased to USD 11,170 per day in the first quarter of 2017, they continued rising to USD 12,043 per day in the second quarter of the year. Panamax rates were up at USD 8,800 per day in the quarter, while Supramax rates increased to USD 8,602 per day.
“Our second quarter results were positively impacted by the improved freight rate environment going into the quarter and by a small increase in our fleet operating days,” Birgitte Ringstad Vartdal, Chief Executive Officer of Golden Ocean Management AS, said.
For the first six months of 2016, the company’s net loss stood at USD 29.8 million, against a net loss of USD 107.4 million recorded in the first half of 2016, while operating revenues for the period stood at USD 181.6 million, up from USD 100.2 million seen a year earlier.
Compared to the first half of 2016, rates more than doubled for most vessel types in the first half of 2017. Capesize rates were at USD 11,596 per day in the first half of 2017, up from USD 4,717 per day reported a year earlier. Panamax rates increased to USD 8,536 from USD 3,991, while Supramax rates stood at USD 8,381, compared to USD 4,806 per day earned in the first half of 2016.
In the first quarter the company entered into agreements to acquire 16 modern dry bulk vessels from Quintana and from Hemen, the company’s largest shareholder. All of the vessels have been delivered and “we view the acquisition as timely based on the developments both in freight rates and asset values.”
“Our large fleet of young, modern vessels with the majority trading in the spot market gives us strong leverage to further improvements in the dry bulk market and positions the company to create significant value for our shareholders,” Vartdal added.
South Korean container shipping company Hyundai Merchant Marine (HMM) is reviewing Arctic shipping opportunities as it eyes cost savings resulting from the shorter trip duration between Asia and Europe via the route.
According to the Pulsenews, a trial operation is being planned for 2020 with the deployment of 2,5000 to 3,500 TEU ships.
A HMM Spokesperson confirmed to World Maritime News that the Arctic voyage is being considered as a new idea.
However, the specific dates and reported vessel specifications could not be confirmed, as the company “has nothing definite yet”.
Should the plans move forward, HMM would become the first South Korean container carrier to transit the route.
The Arctic vessel traffic more than doubled as sea ice retreated over the past 40 years, with expectations that the traffic volume might triple by 2020.
Nevertheless, shipping in the region poses a number of risks such as lack of hydrographic study of specific areas of the Arctic Ocean, a year-round ice factor and the need for qualified personnel.
Danish shipping company Dampskibsselskabet Norden A/S has trimmed down its expectations for the adjusted results for the year to USD -20 to 20 million.
Specifically, the company said it anticipates its dry cargo business results to post a loss ranging between USD 5-25 million and its tanker segment performance to range between USD -15 million to USD 15 million.
The expectations were narrowed from USD -20 to +40 million in the first quarter as the company relied on the recovery of dry cargo market.
Nevertheless, the combination of high coverage and a strong spot market has resulted in a weak start to the year in the dry cargo market, making it unlikely that the higher part of the expectations range can be achieved, Norden said.
For the tanker market, the outlook remains unchanged, as challenging market fundamentals prevail amid low demand for tankers and continuing pressure from strong deliveries over the past year.
“Norden still expects a gradual recovery into 2018 for product tankers as supply growth continues to decrease and inventories of refined products are normalized. Strong fleet growth for crude tankers could have a negative impact on rates for product tankers, but the effect is not expected to prevent rates from improving compared to the rate levels in 2017,” the company added.
However, for the rest of the year, the company said rates are expected to further weaken.
“The inventories of refined products are adjusting fairly slowly, and while the delivery pace of product tankers is slowing, supply growth from the last 2 years still has to be absorbed.”
In the second quarter, Norden booked a loss of USD 3 million, a somewhat smaller loss when compared to corresponding period of 2016 when the loss was USD 4 million.
During the period, Norden’s tanker business stayed in the black, posting an adjusted result of USD 3 million, compared to USD 7 million in the second quarter of 2016.
The generated TCE earnings for MR and Handysize stood at USD 14,871 per day and 12,800 per day, respectively.
The company’s dry cargo activities generated an adjusted loss USD 7 million, also trimmed down from USD 11 million loss from Q2, 2016.
During the quarter, Norden entered into 3-5 year charter agreements which include 2 MR tanker newbuildings and 3 Handysize tankers on long-term charter agreements. The 2 MR tankers are scheduled to be delivered in mid-2019 and early 2020, while the 3 Handysize tankers were delivered in July 2017. Additionally, the company took advantage of the market to acquire 2 secondhand MR tankers with delivery in the second half of 2017.
At the end of the second quarter of 2017, Norden had 2 dry cargo newbuildings held for sale scheduled to be delivered in the second half of 2017 once completed at the yard.