Owners of Suezmax tankers are worse off than their counterparts with focus on other ship classes, said shipbroker Charles R. Weber in its latest weekly report. The shipbroker said that the Suezmax market will face a prolonged course towards recovery, as a result of a lack of enough phase-outs, compared to other tanker classes. According to the report, “a broad decline in Suezmax rates since the start of the year has seen average pushed earnings to sustained lows with average returns hovering under $3,000 /day throughout this past week. Representing merely third of average daily OPEX, average earnings stand 35% below the low observed during 2017 – at a time when the market is still at seasonal strength”.
CR Weber said that “while hosts of factors have influenced trade dynamics to the detriment of demand distributed to the Suezmax class, the drivers of the extreme scope of the earnings downturn are far from complex: global fleet supply has expanded by 17% since 2015 while demand has decline by 8%. Indeed, in order to achieve earnings equivalent to the ~$42,280/day observed during 2015, we estimate that the fleet would need shed 111 units. Instead, we project that the 2018 orderbook will produce 33 deliveries by the close of the year. Net of a projected 21 phase‐outs, the fleet is likely to expand by 2.4%. During 2019, a further 24 newbuilding deliveries and 15 phase‐outs are projected, for a net growth of a further 1.7%”.
The shipbroker added that “Suezmax demand is not isolated and the class’ ability to compete in VLCC and Aframax markets implies that any advance improvements elsewhere in the crude tanker market will be supportive, to varying degrees, of Suezmaxes. Inversely, challenges in those markets have applied strong negative pressure on Suezmaxes in recent quarters – something evidenced by the fact that Suezmaxes presently earn considerably less than Aframaxes on a TCE basis but are more expensive for charterers on a $/mt basis for comparable voyages. At the time of the last downturn, at their lowest Suezmax earnings were earning 56% of Aframaxes were – and indeed today, the larger class is earnings 59% of the smaller. Typically, Suezmaxes out earn Aframaxes by 132%”.
Accordin to CR Weber, “encouragingly, the pace of demolition sales in the crude tanker market surged during 2017 amid 38% rise in $/ldt values. Twelve Suezmaxes were ultimately retired through such sales, partly offsetting the 51 newbuilding units delivered; between 2014 and 2016, just 10 units were retired. Expanding the pace during 2018 could help to lift the floor during the ongoing trough market. It would be unreasonable to expect 111 units to be quickly phased‐out in the coming months – indeed, achieving that number would require nearly every unit under 16 years of age to be demolished, something unlikely given recent major maintenance undertaken on a large portion thereof. Simultaneously, it would not be unreasonable to expect at least some pickup. Our base‐case phase‐out assumption, which is based on a granular analysis of the likely phase‐out time for each consistent of the fleet given a range on information pertaining to attributes like ownership, construction and deployment, is for 22 phase outs during 2018”.
“In a high scrapping scenario, we would assume that the commercial disadvantages of older tonnage and the prolonged earnings lull would change the mentality of owners around scrapping sufficiently that most units under 18 years of age would be phased‐out in during the year, totaling 38 units. Assuming that similar scrapping acceleration is observed throughout the crude tanker space, the impact would certainly be meaningful: we estimate that the difference between 22 and 38 phase‐outs during 2018 for earnings could be as much as $13,000/day”, CR Weber concluded.
Global schedule reliability deteriorated to 74.5% in 2017, dropping by 8.4 points from 82.9% in 2016, SeaIntel Maritime Analysis said.
Taiwanese container carrier Wan Hai was the most reliable carrier in 2017, with schedule reliability of 81.0%. Hamburg Süd and Evergreen followed close behind with on-time performance of 79.7% and 79.1%, respectively.
SeaIntel said that none of the top 18 carriers improved on their 2016 schedule reliability scores.
Evergreen and HMM recorded the lowest decreases of 4.7 and 5.0 percentage points. On the other hand, MOL, PIL, and Yang Ming recorded the largest year-on-year declines at 12.7, 11.2, and 10.2 percentage points, respectively.
Looking at the major East/West trade lanes, Asia to North America West Coast saw a 9.3 percentage point drop in schedule reliability to 72.1% in 2017. Matson was the most reliable carrier on this trade lane with on-time performance of 93.3%, followed by Evergreen with 81.0%.
Asia to North America East Coast saw a significant drop in on-time performance, from 80.4% in 2016 to 66.3% in 2017. Evergreen was the most reliable carrier here in 2017, with schedule reliability of 72.3%, followed by Maersk Line and MSC with 70.5%.
Schedule reliability on Asia to North Europe and Asia to Mediterranean dropped by 3.0 and 9.3 percentage points, reaching 76.4% and 74.6%, respectively. Evergren was the most reliable carrier on Asia to North Europe with on-time performance of 82.6%, followed by COSCO with 82.5%.
On Asia to Mediterranean, Safmarine was the most reliable carrier with on-time performance of 95.5%, followed by Evergreen with 79.8%.
Both the Translatlantic trades saw drops in on-time performance of larger than 10.0 percentage points, with Transatlantic Westbound declining by 10.5 percentage points to 67.4%, and Transatlantic Eastbound decreasing by 10.6 percentage points to 70.2% in 2017.
Niche carriers ICL and Marfret had the highest schedule reliability on the Transatlantic Westbound and Eastbound trade lanes, recording on-time scores of 97.5% and 98.7%, according to SeaIntel.
Rates for LNG tankers picked up considerably during the final part of 2017. In the LNG shipping spot market, TFDE headline rates, as reported by Clarksons, rose through the end of the fourth quarter, reaching a peak of $82,000 per day in late December, an increase of 82% from the same time in 2016. According to a market outlook by shipowner GasLog LNG Partners this week, “this improvement in rates, combined with only ten newbuild orders last year, gives us confidence in the sustainability of the current market recovery. While we expect there to be seasonality in both LNG prices and LNG shipping spot rates during 2018, the longer-term outlook for LNG shipping day rates remains positive”.
According to GasLog, “the fourth quarter of 2017 witnessed the start-up of Chevron’s Wheatstone LNG project in Australia, Novatek’s Yamal Train 1 in Russia, and Dominion’s Cove Point project in the United States, building on the momentum in the expansion of global liquefaction capacity seen throughout 2017. In total, over 30 million tonnes per annum (“mtpa”) of new nameplate capacity came online in 2017, an increase of 11% over 2016. Looking ahead, Ichthys, Wheatstone Train 2, Cameroon, Elba Island, Prelude and Yamal Train 2 are expected to begin production this year, adding a further approximately 25 mtpa of nameplate capacity, a projected increase of 9% over 2017”.
The shipowner added that “further out, the long-term outlook for incremental LNG supply and demand continues to gather momentum as witnessed by Cheniere’s recent sale and purchase agreement with Trafigura under which it agreed to supply 1 mtpa of LNG over 15 years beginning in 2019 and Tohoku Electric’s 0.2 mtpa off-take contract with Area 1 in Mozambique. While only one final investment decision (“FID”) was made last year (ENI’s 3.4 mtpa Coral FLNG), various sources project a shortfall of LNG by between 2021 and 2023, implying the need for additional project sanctions over the next 1-3 years”.
According to GasLog, “demand for LNG in 2017 was stronger than expected, growing an estimated 12% over 2016. More specifically, Chinese demand grew by almost 50% year-on-year, overtaking South Korea as the world’s second largest consumer of LNG as the country seeks to introduce more natural gas into its energy mix. Elsewhere in Asia, demand from Japan remained steady while South Korea and Taiwan grew 10% and 14%, respectively. Strong seasonal demand from Asia drove spot LNG prices to over $11/mmBTU in recent weeks, widening the west-east arbitrage window for sending Atlantic Basin LNG into Asia, expanding ton miles and driving incremental demand for LNG shipping capacity.
It may take time before the strength in the spot market observed this winter translates into the multi-year charter market as we are in the early stages of the recovery. However, we are observing increasing levels of tendering activity for charters ranging from multi-month to multi-year, an encouraging development as we look to fix our open days for GasLog Partners’ three vessels whose current charters end in 2018. In addition, some off-takers for LNG projects scheduled to begin production over the next two years have yet to secure their shipping requirements. We expect a number of vessels for these projects to be sourced from vessels currently operating in the short-term market, but also expect the coming increase in LNG supply to require additional LNG carriers beyond those currently on the water and in the orderbook”, the shipowner concluded.
Although hardly a surprise, as most market delegates and shipowners were expecting a weak tanker market anyhow, January has proven to be quite the disappointment for tanker owners. Freight rates have fallen at below operating expenses rates, despite the fact that this part of the year should be a positive seasonality factor. In its latest weekly report, shipbroker Gibson said that “for quite some time the consensus in the crude tanker market has been that 2018 will be a disappointing year in terms of industry earnings. However, the extreme weakness in spot TCE returns across all tanker categories in January still left many surprised, taking into the account the traditional support lent to the market during the winter season. Spot TCE earnings on the benchmark VLCC trade from the Middle East to Japan (TD3) averaged just under $13,000/day at market speed last month, an unprecedented level for January since the turn of the century. The performance on key trades for other crude tanker segments was even worse. Spot earnings for Suezmaxes trading West Africa to UK Continent (TD20) averaged $6,500/day, while Aframaxes trading across the North Sea (TD7) returned on average $4,500/day over the course of last month, in both cases insufficient to cover fixed operating expenses”.
The shipbroker added that “without doubt, such a poor performance is largely attributable to OPEC-led production cuts, coupled with the rapid growth in the crude tanker fleet. Crude production in the Middle East, the largest load region for VLCCs and an important demand source for Suezmaxes and Aframaxes, is now at similar levels relative to volumes produced in early 2016, while the fleet size is notably bigger. At the start of 2018, the VLCC fleet stood at around 720 units, nearly 80 vessels more than in the beginning of 2016. In addition, back in 2016 a sizable portion of the VLCC fleet was tied up in Iranian and non-Iranian storage. This is no longer the case. VLCC storage of Iranian crude and condensate ceased to exist in November 2017, while storage of non-Iranian crude declined dramatically over the past three months. Overall, over 20 VLCCs were released from floating storage duties between January 2016 and January 2018, with the vast majority of these tankers resuming trading operations”.
According to Gibson, “the Suezmax and LR2/Aframax supply also witnessed a spectacular growth, with the fleet size up by 50 and over 75 units respectively over the past two years. In addition to the developments in the Middle East, crude trade on the Suezmax key route from West Africa to Europe remains weak, despite recovering Nigerian output. This is primarily due to the rebound in Libyan output, which has reduced the European refiners’ appetite for West African barrels. Furthermore, more crude is also being shipped from the US to Europe. The same factors aid Aframax demand; however, at the same time there has been a decline in Aframax trade from Latin/South America to the US, mainly due to lower flows from Venezuela. Finally, generally favourable weather conditions in January in a number of regional markets meant less weather driven delays and disruptions, one of the key support factors to the market during this time of the year”.
The shipbroker noted that “going forward, there could still be a few weather driven spikes in rates, particularly in the Northern Hemisphere. However, the rapid fleet growth will continue, as the anticipated pick up in demolition activity will provide only a limited relief from plenty of new deliveries expected to enter the trading market this year. To reverse the current fortunes, owners need notable increases in trading demand. At the moment, rising crude exports out of the US is the key area for growth but the industry also needs to see strong gains in exports in other parts of the world”.
Meanwhile, in the crude tanker market this week, Gibson said that it was “another difficult week for VLCC Owners here as Charterers see no reason to fix too far forward as the oversupply of tonnage again dictates. We may start to see Owners become apathetic and withdraw from the field of play until there is a necessity to fix. Currently levels achievable going East are 270,000mt by ws 39 and 280,000mt by ws 18 cape/cape to Western destinations. Suezmax rates have come under further pressure this week and in the earlier part of the week rates to the West bottomed at 140,000mt by ws 25 and after a flurry of activity rates only slightly rebounded up to ws 27.5. The East has seen little activity and levels remain suppressed at 130,000mt by ws 62.5/65. The Aframax outlook in the East remains bleak with rates slipping further this week. AGulf-East runs are now down to 80,000mt by ws85 even after a flurry of activity in the Agulf”, the shipbroker said.
The liquefied petroleum gas (LPG) shipping market has been under a considerable pressure over the past two years, especially due to the rampant delivery of new ships in 2016.
Speaking of the current orderbook that is lined up and market balance between supply and demand during a Capital Link webinar, Dorian LPG CEO, John Lycouris, said that he was worried about the ordering spree as so many ships are scheduled for delivery in 2019 and 2020.
A substantial amount of new tonnage has been amassed, according to Lycouris, with the orderbook standing at almost 12 percent of the fleet.
However, some ease is expected to be provided by the scrapping of older ships.
“There are indeed 35 ships ready for scrapping in next two years that are going to be put out of the picture no matter what,” he added.
The market is going to be balanced, probably only because of the additional supply of product coming in and more demand in the East for LPG, Lycouris explained.
With regard to the potential ordering of small pressurized LPG carriers, CEO of Epic Gas, Charles Maltby, said that the pricing of newbuildings in the sector is not compelling at the moment. Hence, it is not expected that many owners would be tempted to order new tonnage.
When asked about the new regulations coming into effect soon such as the Ballast Water Treatment Convention, IMO Tier III and the 2020 sulfur cap, Maltby said that no pressurized LPG vessel has been ordered which features duel-fuel engine capability so far.
“Some shipyards have designs available and are in discussions with various potential buyers, but nothing has actually been done. It doesn’t look like something we are going to be at the forefront of when it comes to implementation,” he added.
Global average reefer freight rates recorded only increases over the last 12 months, even during off-peak seasons, according to Drewry.
Although reefer trades have a reputation for volatility in volumes and freight rates, the shipping consultancy’s Global Reefer Freight Rate Index showed that these rates were up for the 4th consecutive quarter, as shipping lines “gain control of shippers’ purses.”
“The recent wave of carrier consolidation, which will continue well into 2018, is having a direct impact on global market structure,” Stijn Rubens, senior consultant at Drewry Supply Chain Advisors, said.
“As shipping lines gradually regain control of prevailing freight rates, the markets are becoming increasingly tight with behaviours one would more commonly associate with oligopoly conditions. The recent drop in investment in reefer containers only lends further weight to our expectations of further rate increases during 2018,” Rubens added.
South Korea’s Hyundai Merchant Marine (HMM) has seen its capacity decrease by 23.9 percent amid a rise in total vessel capacity operated by the top 15 carriers in 2017.
The carrier’s vessel capacity fell from 456,000 TEU in 2017 to 347,000 TEU at the beginning of 2018, according to Alphaliner.
The reduction was mainly due to the withdrawal of numerous HMM ships from the Asia – Europe and Asia – East Coast of North America routes. The ships were chartered out to Maersk and MSC under a strategic cooperation agreement, known as 2M+HMM, that took effect on April 1, 2017.
Over the course of 2017, the top 15 carriers’ combined share of the global container ship capacity increased from 78.6 percent to 85.1 percent, as their grip of the global container trades continued to strengthen.
The total vessel capacity operated by the top 15 container carriers grew by 12.6 percent in 2017, rising from 16.27 million TEU to 18.32 million TEU on January 1, 2018, data from Alphaliner shows. This figure includes capacity operated by companies that were acquired during the period.
Over the same period, the global liner capacity increased by 3.9 percent from 20.69 million TEU to 21.51 million TEU. However, not all of the carriers recorded gains, as two carriers posted reductions in their operated capacity.
The main gainer last year was the Maersk Group, whose operated capacity grew by 26.8 percent to reach 1.8 million TEU on January 1, 2018, up from 1.62 million TEU twelve months earlier.
In case of Maersk, the recent takeover of the German carrier Hamburg Süd contributed to the increase, however, even without the purchase Maersk would still have grown by some 10%.
Environmental organisations and the global shipping industry have joined in calling for an explicit prohibition on the carriage of non-compliant marine fuels when the global 0.5% sulphur cap takes effect in 2020.
In a joint statement ahead of International Maritime Organisation’s (IMO) Sub Committee on Pollution Prevention and Response from 5-9 February, at which proposals for a carriage ban will be discussed by governments, environmental and shipping organisations assert that such a ban would help ensure robust, simplified and consistent enforcement of the global sulphur cap.
A number of international associations representing the global shipping industry, as well as the Cook Islands and Norway, have already submitted proposals to IMO to ban the carriage of non-complaint fuels. These proposals call for an amendment to Annex VI of the MARPOL Convention, stipulating that ships should not carry fuel for propulsion with a sulphur content above 0.5%, unless they are using an approved alternative compliance method.
The International Maritime Organisation (IMO) has agreed that from January 1, 2020 the maximum permitted sulphur content of marine fuel outside Emission Control Areas will reduce from 3.5% to 0.5%.
Unless a ship is using an approved equivalent compliance method, there should be no reason for it to be carrying non-compliant fuels for combustion on board, according to Transport & Environment, a member of the Clean Shipping Coalition organization.
The 2020 sulphur cap will provide substantial environmental and human health benefits as a result of the reduced sulphur content of marine fuels used from January 1, 2020. At the same time, the 2020 cap will significantly increase ships’ operating costs and present major challenges to governments that must ensure consistent enforcement across the globe.
To secure the intended environmental and health benefits, the organisations say it is of utmost importance that enforcement of this standard is efficient and robust globally. Any failure by governments to ensure consistent implementation and enforcement could also lead to serious market distortion and unfair competition.
The call for a prohibition on the carriage of non-compliant fuels is now supported by BIMCO, Clean Shipping Coalition, Cruise Lines International Association, Friends of the Earth U.S., International Chamber of Shipping, International Parcel Tankers’ Association, INTERTANKO, Pacific Environment, World Shipping Council, and WWF Global Arctic Programme.
Although spot rates recovered in the Asia-US East Coast trade in the past few weeks, on the back of a demand growth in 2017, they remain well below the same period last year, according to Drewry.
Container shipments from Asia to the US East and Gulf coasts grew by a stellar 7.9% in 2017, far outpacing imports to the West Coast, which mustered a mere 1.3% uplift, Drewry cited data from PIERS.
The mismatch in the growth rates saw the East/Gulf ports increase their share of the market to 34.4%, up from 33% in 2016. The shift in the coastal balance eastward has been a constant trend in the past five years, but having slowed in 2016 it reasserted itself last year following the expansion of the Panama Canal mid-2016 that spurred lines to upgrade ships on that route.
Combined flows from Asia to all US coasts surpassed 15 million TEU last year, rising by 3.5% against 2016. When data for the faster growing Canada and Mexico markets becomes available, Drewry expects the annual rate for the total eastbound Transpacific to inflate to just shy of 6%.
Additionally, headhaul Transpacific volumes are expected to increase again this year, but at a slightly lower rate of around 4.5% with East and Gulf coasts taking further bites out of the West Coast’s dominance.
Despite the mostly supportive conditions, spot rates on the trade have been trending down for over a year, indicative of cut-throat pricing activity. Drewry said that there is likely to be further competitive friction if SM Line fulfills its plan to launch its first all-water USEC service by May 2018.
“Nonetheless, there has been some respite from the price erosion for carriers with representative 40ft spot rates adding around USD 1,000 since the start of January,” the shipping consultancy said.
“There is more room for growth before Chinese New Year when demand spikes, but the extent of the inevitable fall-off after CNY will depend on both carriers’ capacity management and pricing discipline with the final resting point setting the benchmark for annual contract negotiations.”
Carriers face an uphill battle as even after the recent upturn, spot rates remain nearly 20% down on mid-January 2017.
Tankers sold for demolition last year were one of the few silver linings, as activity rose on the back of diminishing freight rates. In its latest weekly report, shipbroker Gibson reported that “one of the few bright spots for the tanker market last year was the notable increase in recycling sales. Of course, this could be viewed as a double-edged sword as many of these sales could have been a result of poor earnings across most of the tanker market sectors. Another factor to consider is that lightweight prices gained steadily throughout 2017, closing the year just shy of $450/ldt for sub-continent sales. By the end of December, lightweight prices for tankers were approx. $100 tonne higher than the corresponding month in 2016. However, tanker recycling activity could only improve after the low level of sales recorded for 2015 and 2016 and lightweight prices have continued to rise into the new year which we hope will attract more sales”, the shipbroker said.
According to Gibson’s data, “in deadweight terms tonnage sold for demolition in 2017 amounted to 9.78 million tonnes, 86 units (25,000dwt+). The young age of the tanker fleet continues to be a barrier to sales, however, changes to OPEC production quotas began to bite in 2017 and unlike the previous year, the continuous stream of newbuildings across most sectors began to impact on earnings heaping pressure on older units. Older tankers found it increasingly difficult to get traction in the market and some owners may have found lightweight prices to be tempting”.
The shipbroker added that “last year we witnessed 11 VLCCs committed for demolition (average age 21.5 years), with the last sale in December, PLATA GLORY (built 1999) achieving the highest reported lightweight sale price at $438/ldt. Five Iranian controlled VLCCs were sold to Indian breakers, accounting for 1.5 million dwt. Of the 86 tankers sold last year, Bangladesh breakers took 46 units (5.1 million dwt), while India took 35 (4.3 million dwt). The final destination of the remaining five units is yet unknown. Pakistan remains absent from tanker demolition for the moment, following a series of explosions at recycling facilities in 2016. Twelve Suezmaxes (average age 22.5 years) and a sizable 30 Aframax/LR2 sales (average age 21.4 years) were concluded, the highest number since 2013. Our statistics above include only tankers removed from the conventional trade for demolition. However, five additional VLCCs were removed permanently from the trading fleet to take on FSO/FPSO duties, which accounted for the removal of a further 1.5 million deadweight”.
According to Gibson, “last January we alluded to the impact that pending legislation would have on demolition sector. In the event the IMO bowed to pressure to lessen the impact on owners softening the implementation of the Ballast Water Treatment convention (BWT). Owners have now turned their attention to the new 2020 sulphur limits, which we believe in combination with BWT, will exert greater pressure to increase scrapping levels as we head towards the end of the decade. The recent price hikes in bunkering costs could also heap pressure on owners to scrap, particularly for tankers with less efficient bunker consumptions. Tanker market fundamentals have changed considerably from a year ago, all of which could combine to be the catalyst for higher levels of removals in the near future”, it concluded.
Meanwhile, in the crude tanker this week, in the Middle East, Gibson said that “a lone, last minute VLCC deal to the East at the very close of last week that paid a noticeable premium, jolted the market into a vigorous, and positive, reaction at the opening bell this week, and the relief/euphoria drove rates up to a peak ws 62.5 East as a result. Thereafter, Charterers looked around to see that good availability remained, and decided to shut the taps once again, demand then softened somewhat, and older units accepted down to ws 50 also. A more cautious approach likely over the next phase. Suezmaxes bumbled along with only modest interest hitting up against easy supply – rates remained stuck at around ws 70 (18 Worldscale) to the East and sub ws 30 (18 Worldscale) West with no real cause for early change. Aframaxes kept flat through the week, but are now starting to resist ‘last done’ 80,000mt by ws 92.5 (18 Worldscale) numbers to Singapore and may add a little to the scoreboard next week”, the shipbroker said.