One year ago we reported that it looked like container shipping was “at last starting to build towards something more positive” and that “2016 may well be seen as the year in which the container shipping sector really started to tackle its problems head on.” One year later, it looks like 2017 lived up to at least some of the expectations, with improved market conditions clearly visible.
Promising Building Blocks
2016 had largely been another challenging year for the container shipping sector, but as we moved into 2017 it appeared that the freight market at least had bottomed out. Box freight rates in general continued their late 2016 improvements into early 2017 and, although there was still significant volatility and easing back on some trades later in the year (by end 2017 mainlane rates stood below end 2016 levels), the SCFI Composite Index averaged 27% higher in 2017 than in 2016. Against this backdrop, charter market vessel earnings started to improve, rising sharply at end Q1 2017. Liner company service plans and, crucially, improved fundamentals supported a gradual improvement in rate levels and gains were largely maintained or even furthered through the rest of the year. The one year rate for a 2,750 TEU ship averaged $8,800/day in 2017, up 47% on 2016.
Sector fundamentals certainly did appear positive last year. Demand conditions improved once again, with global volumes expanding by an estimated 5% in the full year to 191m TEU. The rate of expansion on intra-Asian trades accelerated further in 2017, growth on North-South trades bounced back more quickly than expected, and volumes on the key Transpacific and Far East-Europe trades also turned in a robust performance. Meanwhile, on the supply side, containership capacity growth remained relatively moderate in 2017, at 3.7% in the full year. Deliveries remained fairly steady at 1.1m TEU; demolition did fall from the all-time record total of 2016, but to a still elevated level of 0.4m TEU. Whilst some surplus remains in the sector, it appears to be much reduced, with 2% of the fleet standing idle at the end of 2017 compared to around 7% one year earlier.
Boxships For Sale
Although the autumn saw the first orders for ‘megaships’ for a couple of years, the total level of capacity ordered in the full year stood at 0.7m TEU, not too far above the restrained 0.3m TEU seen in 2016 and a far cry from the level of more than 2.3m TEU back in 2015. However, what was exceedingly notable in 2017 in the containership sector was the all-time record level of S&P activity. Over 1.1 million TEU of boxship capacity changed hands on the secondhand market, way ahead of the previous record level of 0.6 million TEU back in 2016, and equivalent to around 6% of start year fleet capacity.
So, the sector heads into 2018, looking for further gains, having come a long way since the collapse of Hanjin in the summer of 2016. With the orderbook down to 13% of the fleet and supply growth set to remain fairly moderate for the next few years, fundamentals look set to provide ongoing support if the demand side holds. Consolidation, which has underpinned a more restrained supply side approach, continues (when the currently ongoing merger and joint venture activity is completed, the top 10 lines will deploy well over 80% of all boxship capacity). Risks remain on the demand side, but in 2018 the containership sector will be looking to push on and build further on the progress made in 2017.
During the last year, the majority of shipping companies has been exposed to cyber attacks and has intensified the fight against cyber crime, according to a survey in Danish Shipping’s CEO Panel.
The survey shows that cyber crime has become more important on the shipping companies’ agenda. Out of the 26 senior executives who took part in the survey, 42 percent indicated that they are “very worried or extremely worried that their company will be attacked or that their data will be lost in the coming 12 months.”
Danish Shipping said that the concern is based on a concrete threat as around 69 percent of the companies have been subject to cyber crime over the last year, according to the responses to the panel.
“Cyber threats must certainly be taken very seriously,” Maria Skipper Schwenn, Executive Director in Danish Shipping, said, adding that it is positive that 69 percent of the companies have increased their IT security budgets the past year.
Skipper Schwenn informed that the cyber threat is not expected to diminish in future, adding that the attacks experienced by the shipping companies are attacks that any company is at risk of being exposed to.
“Therefore, it is not the ships and the safety of the crew that is of the greatest concern but attacks on land-based systems and the consequences of these,” Skipper Schwenn said.
“Consequently, we encourage all our members to take the threat seriously and we will work closely with the authorities to ensure that our members are better equipped to fight the threat. Therefore, it is also good to see that shipping companies prioritise larger budgets for IT security,” she concluded.
London-based Baltic Exchange has formed the Baltic LNG Panellists Group as it aims to develop a new Liquefied Natural Gas (LNG) Index comprising several routes for the evolving LNG shipping market.
The move was made following an approach by leading Baltic Exchange LNG shipbroking companies. LNG shipbroking companies Affinity, Braemar ACM, Clarksons and SSY are the LNG Panellists Group’s first members.
The Baltic LNG Panellists Group is currently evaluating various routes. Once finalised, their proposal will be presented to the Baltic Index Council for approval and trial phase.
“The growth in LNG transported by sea has led to the formation of a spot market. However, any spot market needs to be underpinned by standard contractual terms – as already happens in the tanker and dry bulk freight markets,” Mark Jackson, Baltic Exchange Chief Executive, said.
“The Baltic Exchange is looking to support the LNG freight market as it matures and we hope to deliver greater transparency through an index,” Jackson added.
In recent years the substantial global increase in natural gas production and rising imports by India, China, Pakistan and Egypt has led to a fundamental change in LNG shipping market dynamics. In addition, more contracts are being signed for shorter durations and smaller quantities, without fixed destinations.
Trade patterns have diversified as new import and export terminals have been built and the LNG fleet continues to expand. Until recently, the LNG shipping market was characterised by low levels of spot market activity, with the majority of business conducted on a long term contractual basis.
Hong Kong-listed Cosco Shipping Development is planning to establish a shipping fund with China Cinda Asset Management Co., Ltd.
The move is being pursued in line with the company’s investment in the financing sector of the shipping industry.
Initially, the fund will dispose of a total of USD 154 million and Cosco plans to take a 49.95 pct in the fund or an investment worth approximately USD 77 million (RMB 500 million).
As disclosed, the shipping fund will be used for financing of ship assets including non-performing assets and restructuring programs.
The shipping industry has been faced with restricted availability of financing opportunities over the recent period as banks started to curb their exposure to bad shipping loans amid industry downturn.
Containership newbuilding orders jumped by 139.5 percent reaching 671,641 TEU in 2017, compared to only 280,480 TEU ordered in 2016, after adjustments for order cancellations, Alphaliner revealed.
During the year a total of 109 units were ordered, up from 75 orders placed in 2016. However, the capacity total is still far away from the 2.2 million TEU contracted in 2015, when 248 new containerships were ordered.
At the time, many ship owners rushed to take advantage before the IMO NOx Tier III requirements, which make ships more expensive to build, came into effect for vessels with a keep-laying date after December 31, 2015.
Alphaliner informed that, despite the increase, last year’s order volume saw the orderbook-to-fleet ration fall from 15.7 percent at the end of 2016 to its current value of 12.6 percent.
At 1.19 million TEU and 160 units handed over for the full year, the total capacity of ships delivered during 2017 “clearly exceeded the aforementioned vessel ordering activity,” Alphaliner indicated.
The number represents a rise of 26.6 percent compared to a total of 944,485 TEU and 146 containerships delivered during 2016.
Appetite for more newbuildings seems to be quite big during the first days of 2018. Allied Shipbroking said in its latest weekly report that “despite having only just returned from the Christmas holiday period, activity in the newbuilding market seemed to be holding firm, with several deals seemingly signed during the festive retreats. The main sector driving activity of recent is still the dry bulk market, with increased earnings driving buying interest and pushing for further units being ordered. The main activity seems to still be focused on the larger Capesize and Panamax segments, a trend that we have been noting since the summer of 2017. In terms of the rest of the orders it seems to be more a case of mix and match, with most of the m being more specialized units likely being placed to fulfill some sort of trading requirements by the buyers’ that placed them respectively. Overall, expectation is for a much more heated market in terms of activity here, with the total volume expected to likely surpass anything we have seen during the past 2-3 years”.
In a separate weekly note, Clarkson Platou Hellas said that “the Dry market has seen one order this week, with Huangpu Wenchong reported to have signed a contract for two firm 82,000 DWT Kamsarmax Bulk Carriers with domestic owner Seacon Ships. These two units will be delivered within 2019 from China. In Gas, Clients of GasLog have announced an order for one 180,000 CBM LNG Carrier with Samsung Heavy Industries. This single vessel is slated for delivery in 2019 from Samsung’s Geoje facility. There are more LNG Carrier orders to report, with Hyundai Heavy Industries (HHI) receiving an order for one firm plus one optional 174,000 CBM LNG Carriers from Clients of Cardiff Marine for delivery in 2020. Sovcomflot have also signed a contract with HHI for one firm plus one optional 174,000 CBM LNG Carriers, also for delivery within 2020”.
Meanwhile, in the S&P market, Allied added that “on the dry bulk side, things were relatively slow, especially when compared to the average levels we noted during the past year. This is not necessarily indicative of the buying sentiment being noted, but rather that most seemed to have retreated taking any action during the final weeks of the year, likely choosing to wait and see how the New Year freight market will go. On the tanker side, activity continued to remain slow and pretty much inline with what we have been seen during the past 12 months. Given the poor earnings and the push back by most sellers, things have become a bit more tricky here and we may well be seeing a widening gap between buyers’ and sellers’ ideas, something that would surely hamper things further”.
Ships'valuations expert VesselsValue said that in the tanker market there was a slight softening in Afra and LR1 values following a drop in earnings since the beginning of January. In the dry bulk market, VV commented that there was “firming in older Panamax and Handy tonnage. Panamax Alpha Harmony (74,500 DWT, Jul 2001, Daewoo) sold for USD 9.0 mil, VV value USD 8.53 mil. Supramax Marine Stars (53,600 DWT, Mar 2006, Dayang Shipbuilding Co) sold for USD 8.2 mil, VV value USD 9.04 mil. Open hatch Handy Bulker Blue Ocean (31,700 DWT, May 2005, Saiki) sold for USD 9.0 mil, VV value USD 7.16 million”, it concluded.
Three second-hand vessel types are expected to see a considerable increase in value over the coming year, those being Handysize bulkers, LPG vessels and Long Range 1 (LR1) tankers.
Namely, the value of a 15-year old Handysize bulker is set to increase by 33 percent from USD 5.75 million in the first quarter of 2018 to a forecasted value of USD 7.63 million in the first quarter of 2019, according to VesselsValue.
Coming in second is 15-year-old LPG vessel sized 35,000 cbm. The value of LPG vessels is set to rise from USD 14.98 million in the first quarter of this year to USD 16.56 million in the corresponding quarter next year.
The third vessel type are the 15-year-old LR1 tankers, with a forecasted 9 percent increase over the next 12 months.
The recorded value of the LR1 tankers in the first quarter of 2018 is USD 8.92 million. The anticipated increase is set to reach USD 9.73 million, based on the forecast.
The value increase in both the second-hand and newbuilding sector is said to be driven by higher steel prices, in addition to the reported recovery in the dry-bulk sector.
The ongoing shortage of bulkers intended for scrapping resulting from the market recovery is expected to starve an overheated Pakistani market for tonnage, especially on the back of the country’s tanker ban still in place, according to GMS, one of the world’s largest buyers of ships for recycling.
The Gadani recyclers have missed out on the large LDT tanker and VLCC units sold over the recent past.
Hence, the year started with some risky tactics from speculative buyers aiming to drive pick up in rates with crazy fixtures.
“After a brief period of uncertainty and diminishing sales, an extraordinary and frankly unbelievable Capesize bulker fixture captured the attention of the industry this week and shifted the focus of industry players back on Pakistan once again,” GMS said.
As informed, one cash buyer paid uncharacteristically above the market about USD 45/LDT, with the expectation that closer to physical delivery, local prices may rise enough to make this a sensible deal.
However, GMS believes that this will result in a loss-making deal for the said cash buyer.
“This is undoubtedly an extremely risky tactic to employ as the fixing price is about USD 50/LDT away from where Gadani levels currently stand for dry units. When markets are positive, speculative offerings in excess of USD 10 – 20/LDT are commonplace. However, this price is definitely not reflective of current rates and could eventually come back to haunt the relevant shipowner/cash buyer,” GMS said.
Despite the fact that the majority of LDT tankers are being taken by Bangladeshi yards, the country’s scrapyards have lost a few VLCCs to a rampant India and Chittagong.
As highlighted by the cash buyer, buyers really need to step up their game if they are to secure more of their favored vessels in the coming weeks, since there seems to be little to no chance of securing dry tonnage and Capes/Panamax containers, seeing how Pakistan remains in exceptional form.
“As such, it was unsurprising to see a blank sales board for another week. Luckily for local recyclers, there are a number of vessels from previous sales from the months gone by that are still taking up space on local yards as cutting has been comparatively slower this year,” GMS added.
The shipping industry would see optimism outweigh pessimism during the next twelve months, according to shipping adviser Moore Stephens.
“According to a recent study, pessimists live longer than optimists, and shipping is short of neither. But the industry has always valued longevity as well as new blood, and it certainly ended 2017 in more optimistic mood than it closed the previous year,” Richard Greiner, Moore Stephens Partner, Shipping & Transport, said.
Overall industry confidence hit a three-year high in 2017. Oil prices reached a three-year peak, while there was a 50% rise in the Baltic Dry Index over a six-month period in the second half of 2017.
Finance was available from within and outside the industry, Greiner said, adding that some sanity returned to the newbuilding orderbooks, and charterers in particular displayed an appetite for new investment.
“In 2018, freight rates will harden if there is a further reduction in tonnage overcapacity and an acceleration in ship demolition,” Greiner added.
Smart technology will assume increasing importance, adding value and improving safety but putting pressure on R&D budgets. Doubts are expected to persist about the sufficiency of low-sulphur fuel, and gas will become an increasingly attractive option for powering new and converted tonnage as the price of oil recovers.
“Shipping remains a vital global industry, carrying the vast majority of world trade while emitting a lower per-unit level of harmful emissions than any other comparable form of transport. In 2018, optimism can be expected to outweigh pessimism in the shipping industry,” Greiner concluded.
The shipping industry went through a number of changes in 2017, much for the better, but a cautious approach is still needed for 2018 to maintain the progress already achieved, BIMCO said.
Economic growth has accelerated in Europe, Asia and the Americas since mid-2016, and the global GDP growth rate is now set to raise slightly in 2018 to reach 3.7%, up from 3.6% in 2017.
In 2018, the dry bulk sector is likely to improve the fundamental market balance further, if operational speeds do not increase.
For the container shipping sector, the improvement in 2017 will carry on into 2018, where fleet growth rate seems to match demand growth, and as a result no big freight rate changes are expected to lift earnings.
For oil tankers, there is a potential upside in low fleet growth for both crude oil and oil product tankers. The growth in demand, coming from increased oil consumption and a return of more price arbitrage-driven trading activity, depends on a better-balanced oil market.
Increasing slightly on gains made in 2017 – global GDP growth rates are forecast to stay around
2018 levels, all the way into 2022, BIMCO said citing data from IMF.
Nevertheless, the world trade volume growth rate is expected to drop from 4.2% in 2017 to 4.0% in 2018.
“The shipping industry has adapted quite well to a lower level of demand growth over the past couple of years. The next challenge is to understand that this is as good as it gets, and to avoid wishful thinking that demand levels will increase significantly – as that will not happen, BIMCO informed.
In its “Road to Recovery” market analysis, BIMCO highlighted that 2018 could become the first year since 2011, with the industry returning a profit, “but we shouldn’t be too hasty.”
For 2018, the challenge is for dry bulk owners and operators to maintain slow steaming. BIMCO expects the supply-side to grow by around 1% in 2018, against 3.2% in 2017.
The crude oil tanker market is set to see a net fleet growth of around 2% in 2018, down from 5.1% in 2017, while the supply side growth rate of the oil product tanker fleet is expected to be at around 1.8%, compared to 4.2% in 2017.
The previous year saw some signs of imprevement in the container shipping market as freight rates went up and their volatility reduced. The segment is to see a net fleet growth of around 4.1% in 2018, up from 3.3% in 2017.