Norwegian dry bulk operator Western Bulk managed to shrink its net loss in the first half of the year to USD million from USD 10 million reported in the same period in 2016.
Western Bulk said that the net result also exhibited “a very positive development” during the first half of 2017, increasing from the first to the second quarter, yielding a positive net result for the second quarter of 2017.
Net time charter result improved from USD 1.3 million in the first six months of 2016 to USD 15.1 million seen in the first half of this year, aided by an improved dry bulk market, market volatility, improved customer relationships, better operational performance and an increased fleet.
The first half of 2017 saw the Baltic Supramax Index 58’(BSI) perform better than many expected, particularly in February and March after the end of the Chinese New Year, before falling back again during during May, Western Bulk informs.
As a whole, the first half of 2017 ended more or less where it started at USD 8,500/day, but with variations from the low level of 6,430/day on February 6 to the higher level of 10,090/day on April 20.
“Rates are still low in a historical perspective, but considerably higher than the previous 2 years in the same period,” the company said, adding that “volatility in rates also improved, particularly in Q1-17, as rates increased sharply before falling off in Q2-17.”
The strength of the BSI in the first half of the year and particularly the first quarter “was better than many expected, and goes some way to showing that the market is slowly recovering and gradually closing the oversupply gap.”
The order book for new tonnage is slowly decreasing. Provided demand increases in line with expected development in GDP and trade volumes, the market is expected to gradually improve, Western Bulk said.
With tonnage oversupply in the tanker market already on the cards, ship owners are increasing looking towards demand in order to find some silver linings. In its latest weekly report, shipbroker Charles R. Weber said that “key forecasting agencies, the US Department of Energy’s EIA and the Paris‐based IEA, are both forecasting a new milestone for crude oil demand during the latter half of 2018: demand exceeding 100 Mnb/d. Despite the milestone’s positive connotations, 2018’s projected global oil demand growth rate of 1.5%, as derived from the average of the two agencies’ projections, is hardly much cause for optimism among crude tanker owners. Indeed, it follows a moderately higher rate of growth presently projected for 2017 of 1.6% and comes against our projected crude tanker capacity growth rates of 6.8% and 3.8% during 2017 and 2018, respectively”.
According to CR Weber, “annual demand growth swung violently before and after the global financial crisis with high oil prices and the market crash causing demand destruction during 2008 and 2009 before the recovery and resurgent oil‐intensive development in emerging markets propelled 2010 to the highest demand growth rate of the decade so far. Since 2011, demand growth has oscillated between 0.8% (2011) and 2.1% (2015) with the average between 2011 and 2016 pegged at 1.5%”.
The shipbroker added that “these agencies have a bit of a history of revisions as the forecasted period draws nearer – and quite often well after the fact. This is due to the inherent limitations of forward forecasting – and a lack of transparency in historical trade and consumption data (particularly in outside of the OECD). We note that for the developed world, projections made at the end of 3Q16 underestimated the extent of demand growth during 2016 amid lower fuel costs, declining unemployment and rising consumer sentiment. Simultaneously, demand growth in the non‐OECD world was downwardly revised. Total world oil demand was upwardly revised by nearly 900,000 b/d. It would seem that the regular negative revisions of the years following the global financial crisis have given way to positive revisions. Tanker owners will certainly be hoping that the latter remains the norm”.
CR Weber added that “of course, trade patterns can skew the implications of demand growth for tanker fundamentals strongly. Despite 2016’s positive y/y growth, a migrating of crude trades towards shorter distances meant that VLCC ton‐miles declined by 4%, y/y. Applying adjustment factors to ton‐miles to account for diversification and efficiency of trades, demand contracted by 4%. Simultaneously, during 2015, when world oil demand grew by 2.1%, VLCC ton‐miles grew by a much larger 7% and adjusted demand grew by a massive 21%., the shipbroker concluded.
Meanwhile, in the VLCC market this week, CR Weber said that “rates in the VLCC market were softer this week on a pullback in demand in the Middle East market, sending average earnings to fresh multiple‐year lows. In the Middle East, there were 15 fresh fixtures reported, representing a 35% w/w decline. One‐third of this week’s regional fixture tally were concluded under COAs, making demand there seem lower than it was. In the West Africa market, there were nine fixture reported, representing a tripling of last week’s tally”.
The shipbroker added that “with 100 Middle East August cargoes covered thus far, there are an estimated 22 outstanding. Against this, there are 53 units available; once accounting for likely West Africa draws, the implied end‐August Middle East surplus stands at 24 units, or the highest surplus since the conclusion of the May program. A week ago, the surplus looked set to stand at 19, illustrating a fresh disjointing of supply/demand. As such, rates remain in negative territory and will struggle to find much positive impetus once participants progress into what is widely expected to be a busier September program. In isolation, rates in the Caribbean basin were stronger this week on declining in‐ bound USG tonnage, and a fresh round of activity following a prolonged lull”, the shipbroker concluded.
Given the weak freight rate outlook for LPG shipping over the next twelve months, there is more downside risk to the second-hand values of very large gas carriers (VLGCs), according to shipping consultancy Drewry.
Shipping analysts have been bearish on the VLGCs market since the beginning of the year and rates so far have been in line with expectations. Vessel earnings in the spot market are currently below operating cost.
Drewry said that it maintains a bearish outlook and believes that the next twelve months “will continue to be tough for VLGC owners due to strong fleet growth. The recovery phase will not start until the second half of 2018 as fleet growth slows as a consequence of weak ordering over the past 18 months.”
One anomaly in the current market is that second-hand VLGC values have not come down as sharply as the freight market and are trading at a high multiple to vessel earnings.
“Considering our weak freight outlook for the next twelve months, we expect there is more downside risk to second-hand values of VLGCs. Therefore, we expect second-hand prices of VLGCs to correct by another 5%-8% over the next one year,” Shresth Sharma, Drewry’ senior analyst for gas shipping, said.
Further consolidation in the container shipping market seems to be imminent and is likely to result in the survival of five or six top carriers, according to the Chief Executive Officer of AP Møller Mærsk A/S, Søren Skou.
In an interview with the Financial Times, Skou is cited as saying that “the consolidation trend in the past 24 months that has seen eight of the top 20 container shipping groups be acquired or go bankrupt would continue” in the upcoming ten years.
The market has already seen CSAV being acquired by Hapag-Lloyd, NOL/APL by CMA-CGM and the two major Chinese lines merging. This was followed by the financial collapse of Hanjin Shipping which marked the sector’s biggest casualty in 30 years.
Aside to the tonnage overcapacity in the sector that pushed down freight rates causing financial woes to many carriers, Skou said that the consolidation push has also been driven by “the withdrawal of many governments from the sector” such as in the Middle East, Singapore and South Korea.
Maersk’s container shipping arm, the world’s largest, Maersk Line is in the process of buying German rival Hamburg Süd, a part of the Oetker Group, for EUR 3.7 billion (USD 4 billion) on a cash and debt-free basis.
The bolstering of ranks among container carriers has been prompted by the need for further market equilibrium aimed at restoring sustainable financial recovery for carriers and bridging the gap between tonnage demand and supply.
Once the top-five container shipping companies complete consolidating their market position through mergers and acquisitions, their market share is likely to be around 57% in 2018, up from 45% in 2016, according to Fitch Ratings agency.
As stressed by Fitch earlier this year, merger and acquisition deals are the preferred option to alliances, as “they are the most likely route to restoring the supply-demand balance in container shipping.”
The latest push in this direction saw China’s COSCO Shipping Holdings made a bid to acquire all issued Orient Overseas International Lines (OOIL), the world’s seventh largest container shipping line, for a total of USD 6.3 billion.
The rebound of the dry bulk market could be in sight, despite looming signs that its momentum is about to slow down moving on to the final weeks of the third quarter and onto the fourth quarter of the year. In its latest weekly report, shipbroker Allied Shipbroking noted that “the bullish ride continues on for the iron ore market, with most in the market now eyeing the possibility for further gains to be had as Chinese steel prices continue to surge once more. It seems as though the iron ore market has now hit what many claim to be a “sweet spot” in terms of prices, with the US$ 60-70 range considered to be good enough to provide the market with enough support for miners to be seeing their profitability ratings go up, but not so high to be pushing back in idle capacity and allowing for a renewed interest in new mining projects to take off.
According to Mr. George Lazaridis, Head of Market Research & Asset Valuations with Allied Shipbroking, “at the same time steel producers have been seeing their inventory levels being driven to low levels, encouraging most firms to raise their output levels and in turn bolster iron ore demand. The problem with this however, is that in part this has been explained by the anticipation held that a curb on Chinese steel production in the winter months could lead to supply shortages, as such driving many consumers to increase their inventories so as to avoid any supply chain disruptions. This curb in production is part of the Chinese governments call on steel producers to halve output in four northern provinces (Hebei, Shangxi, Shandong, Henan) as well as Beijing and Tianjin during the peak heating months (around late November to late February), in order to reduce emissions in each of these respective regions. This in turn leaves the question as to how demand will trend during the winter months, with an increase in stockpiles likely to push for softer demand levels in the final quarter of the year”, he noted.
Allied’s analyst went on to say that “for the moment, it seems as though the recent rally has started to level off, with the freight market already showing more moderate day-to-day increases compared to what we were seeing in the first half of last week. With August typically a slower month in terms of freight performance, we could well see things start to slow down once again and stay that way up until the first weeks of September”.
Lazaridis added that “for now, the upward momentum for Capes and Panamaxes continues to endure, though in the case of both it has slowed down considerably now. We have however surpassed the psychological barrier of 1,000 points on the Baltic Dry Index, something that will surely play its role in feeding another round of optimism amongst owners and even possibly drive renewed interest in the secondhand market as owners look to bolster their position while prices still hold at relatively low levels”.
“We have already started to see hints of such a development, with activity in the secondhand market already pointing to a slight improvement in asset prices. The almost four months high reached on Friday evening for iron ore prices has been a significant step and with the dry bulk fleet having seen its growth rate slow down considerably compared to what we were seeing in the first quarter of the year, we may well find some improved support in the freight market during the final months of the year. Earnings overall have seen a considerable improvement during the first half of the year and this may well have led most to hold high expectations for the final quarter. However, given recent developments, even if the final quarter ends up disappointing compared to what most in the market were hoping to see, it seems as though the improvement in the market is still insight and on track. Given that we have one of the smallest orderbook to fleet ratios that we have seen in modern times and based on the fact that we have already started to reach some moderate supply/demand balance, there is plenty of reasoning for further such market rallies to take place”, Lazaridis concluded.
The ocean freight forwarding industry should embrace technology, according to online freight forwarding company iContainers.
“As shippers press on with their demand for speed, transparency, and efficiency, the freight forwarding strives hard to find a quick enough and appropriate response. The solution to this equation lies before our eyes: Technology,” Klaus Lysdal, Vice President of Sales and Operations of iContainers, said.
“In order for freight forwarders to fully take advantage of all that technology can offer, we should begin by looking for opportunities to utilize it and this should begin as soon as possible,” Lysdal pointed out.
Over the past decade, there has been an increasing number of freight forwarders adopting technology. But for the most part, the industry has employed it to improve its internal processes, for the sake of the freight forwarding company itself. In comparison, shipping lines have utilized it to enhance their services. Most carriers have been able to save time and money by making their customers submit documents online.
“Carriers have the advantage because they operate in a market with very little competition. Freight forwarders on the other hand, face the challenge of having to do things that help the clients rather than adopting a technology that could ease their workflow,” Lysdal added.
As explained, the reason behind the apparent reluctance to adopt technology is due to a cost versus gain issue. Certain freight forwarders find it too costly to develop online tools for their clients taking into consideration the relatively low return in potential increased business. Some have also argued that the freight forwarder business remains very much so a ‘people business’.
“There’s a reluctance to replace a personal touch that’s crucial for shippers. For many of them, the personal service is important. It’s vital for them to know that there’s a human presence around they can trust and rely on to take care of their shipment and to ensure things move as smoothly as possible,” Lysdal further said.
“Hopefully over time, the barrier between technology and freight forwarding will dissipate and a safe and beneficial fusion can emerge,” Lysdal concluded.
The shipping fleet trading in chemical and vegoil markets is set to accelerate at a much faster pace than demand, weakening earning prospects, shipping consultancy Drewry said.
Tonne-mile demand is expected to grow at 2.9% in 2017, and the fleet trading in chemicals/vegoils will expand by 9.5% by the end of this year, representing the highest fleet growth observed in recent years.
The chemical shipping market is facing severe oversupply because of new deliveries and swing tankers returning to the chemical/vegoils trade and seeking employment in this market.
The orderbook still contains 9% of the existing capacity to be delivered by 2021 and the deliveries of MR tankers will also contribute to rapid growth. Even though the Ballast Water Convention will take effect in 2019, any expected surge in demolitions by that time will not be enough to pull the market out of its current gloomy state, according to Drewry.
Combined with a bearish outlook for the CPP market, the shipping consultancy expects the oversupply situation to continue for the next two years which will squeeze freight rates on major routes.
Tonne-mile demand is expected to edge down from 2018. Organic tonne-mile demand growth is expected to decline from 6% in 2016 to 3.7% in 2017, while inorganic demand is likely to follow the same trend – a fall from 7.3% in 2016 to 1.2% in 2017. As a result, long-haul routes might face challenges in the next few years.
“Although vegoil volume will support the market, weak demand for chemical products during the summer lull and the bearish CPP market continue to encourage swing players to return to the chemicals/vegoils market, reducing freight rates and pushing up lot sizes. The effect of the latter will reduce not only the number of vessels needed, but also the opportunity to find cargoes in the spot market,” Hu Qing, Drewry’s lead analyst for chemical shipping, said.
“This quarter freight rates on major routes are facing challenges as there are few drivers to prevent the continuing trend of declining freight rates,” Qing added.
The growth of liquefied natural gas (LNG) carriers over the past decade has been synonymous with the growth in global LNG import and export capacity. However, in recent years the increase in LNG cargoes hitting the market has led to an oversupply problem, causing a significant decline in LNG spot prices, according to Westwood Global Energy Group.
This oversupply has heavily impacted the LNG carrier market resulting in appetite for newbuild carriers to dwindle. In 2016, orders for newbuild LNG carriers amounted to only 6 units, excluding two optional orders, which represents a 92% decline compared to the number of LNG carriers ordered in 2014.
The recent focus on the LNG market oversupply and the continuous growth in LNG export capacity is, however, masking the continuous increase in LNG demand. Whilst increasing demand has been driven by traditional demand hubs, such as China and India, several new LNG importers including Poland, Jordan, Malta, and Pakistan have also emerged in the last two years.
Westwood expects this trend to continue, as 16 additional countries, including Bangladesh, India, Russia, and Sri Lanka, commission their first floating import units (FSRUs) over the 2017-2021 period.
Over the forecast period, much of the LNG that will drive supply increase, will come from mega projects like Chevron’s Wheatstone in Australia, as well as North American projects such as Next Decade’s Rio Grande and Cheniere’s Corpus Christi. The increase in demand will be driven by small and medium sized projects dotted across the world.
“As a result, LNG carriers will have to travel longer distances from supply bases such as the US to Asia/Europe or East Africa to Asia and this could potentially lead to an increase in carrier demand.”
This latter situation provides a silver lining to a recent gloomy market, as over 219 newbuild LNG carriers are expected to be delivered over the 2017-2021 period, including 17 new units that have been ordered in 2017. The expected deliveries also include 92 newbuild LNG carriers, which are yet to be ordered. Over 80% of LNG carriers ordered in recent years have trended towards the large conventional carriers of 150,000-179,999 m3.
Whilst Westwood still expects oversupply to persist beyond the forecast period, continuous pro-gas energy policies in Asia in combination with expanding LNG trade routes are expected to support the demand for newbuild LNG carriers.
US seaborne coal exports have turned years of negative growth around and seem to be climbing for a third quarter in a row, according to BIMCO.
The increase is driven by a growing demand from European importers. East Asian buyers have also ramped up their import of US coal, which is beneficial for the dry bulk shipping industry as it generates a substantial amount of tonne-miles, relative to other destinations.
After reaching the lowest levels for exported coal in the third quarter of 2016 since the start of 2007 in terms of total volumes, US coal exports now look to return to recognisable heights and become a dominant player in global seaborne coal transport once again.
“A rising US coal trade has a multiplying effect on the dry bulk shipping industry, as it provides some of the longest sailing distances,” Peter Sand, BIMCO’s Chief Shipping Analyst, said.
US coal exports are up 54% in total volume and 60% in terms of tonne-miles for the first five months of 2017 compared to the same period last year.
The main importers of US coal for the period are the Netherlands, India and Japan, importing 34% of all coal exiting the US via the sea. The most influential importers for the dry bulk shipping industry are India, Japan and South Korea, generating 46% of total tonne-miles.
Europe continues to be the largest importer of US coal and has for the first five months of 2017 imported 44% of all US seaborne coal exports. US coal exports to Europe occupies both the panamax and capesize segment.
East Asian importers are the main reason why tonne-miles are growing more than total volume, despite only 19% of total US seaborne coal exports destined for East Asia in 2017. The East Asian imports of US coal surged 113% in the first five months of 2017 compared to 2016, amounting to an increase of 3.1 million tonnes.
The Americas imported an additional 21% of US seaborne coal during the first five months of 2017 compared to the same period in 2016. This surge in total volume generated an additional 24% tonne-miles.
“BIMCO expects Q2 2017 to go beyond the levels seen in Q1 2017 in terms of tonne-miles and deliver the highest second quarter demand in four years. If US coal exports remain high throughout 2017 it will have a solid effect on the global seaborne coal trade and support the overall improvement in the dry bulk shipping industry,” Sand added.
Hong Kong’s carrier Orient Overseas Container Line (OOCL) managed to return to profit in the first half of 2017 posting USD 53.6 million, compared to a loss of USD 56.7 million seen a year earlier.
The company’s gross revenue reached USD 2.89 billion for the six-month period ended June 30, 2017, up from USD 2.56 billion reported in the same period in 2016, while the group’s operating profit stood at USD 110 million, compared to an operating loss of USD 18.6 million seen in the previous year.
Compared to the first half of 2016, OOCL liner liftings increased by 7% and load factor by 1%. Revenue levels per TEU increased by 8%.
“In the first half of 2017, we have begun to see a slow and steady recovery from the tough market conditions that characterised 2016,” C C Tung, Chairman of OOIL, said, adding that “it seems that healthier demand growth has reappeared, at least to some extent.”
In tandem with this gradual improvement in demand, the supply side growth has witnessed a slowdown. Scrapping occurred at a record rate in 2016, continuing at approximately the same pace in 2017 year to date, while newbuilding orders have been “notably absent” so far this year.
“This steady improvement in the supply demand balance is not a sign of a booming market – we are far from that. However, it does mean that for the first time since the onset of the Global Financial Crisis, the supply demand balance is not worsening year on year. This is a significant shift, and if it holds, then the industry will at least have the chance to start to absorb some of the excess capacity that exists,” Tung informed.
Driven in part by the unsustainable markets of last year, but also being the continuation of a relentless trend towards scale and consolidation, the shape of the container shipping industry has changed dramatically. Following a wave of M&A, corporate reorganisations, a corporate collapse, and the change in alliance groupings implemented in April 2017, the industry continues to evolve, according to Tung.
“Over time, this may help to provide a more stable context for the industry, which is ultimately to the benefit of liner companies as well as of their customers,” Tung said.