Tanker owners are set to see an increase in freight rates in the second half of 2018, a welcome rebound from the historic lows over the recent months.
Seasonal demand should support the market in Q3 and, especially, in Q4, according to BIMCO. However, a long-term recovery is highly dependent on removal of outdated capacity from the fleet through demolition.
"For crude oil tankers to really enjoy solid earnings, however, patience is required, as overcapacity is currently significant. The fundamental balance could worsen in 2019 if demand growth does not pick up, as the fleet could grow by 2.5% unless extensive demolition activity continues,” BIMCO's Chief Shipping Analyst Peter Sand said.
Unfortunately, despite high demolition prices owners have not been that eager to part from their older ships as they still believe market will turn for the better in the second half of the year.
During the first half of the year, 13.1 m dwt of crude oil tanker capacity has been demolished, a level equal to the total for the preceding 40 months, BIMCO's data shows.
But, there has been a reversal in demolition trend in the second half of the year with only one VLCC broken up in July, and little more that 1 million dwt demolished in total.
"BIMCO expects that there will be a cooling in demolition activity in the final six months of 2018, as the market is likely to deliver somewhat higher freight rates on the back of increased demand in the second half of the year,” Sand said, saying the expected demolition for crude oil tankers is 19 million dwt and 2.5 million dwt for oil product tankers.
Fleet growth year to date has been muted by the massive demolition activity. The crude oil tanker fleet was 0.2% smaller by early August than it was at the start of the year. The oil product tanker fleet has grown 1.7% in the first seven months of 2018.
"Our fleet growth forecast for the full year of 2018 is at 0.8% for the crude oil sector and 2.4% for the oil products sector," Sand concluded.
Transporting crude oil and petroleum products across the oceans is expected get significantly more expensive for charterers from 2020 due to new sulphur regulations.
Charterers, who will get to choose from scrubber-fitted ships and those running on compliant low sulphur fuels, are expected to foot the majority of these costs.
Charterers of very large crude carriers (VLCC) that opt for marine gas oil (MGO) to comply with the new sulphur regulations will need to pay a 33% premium come 2020, when compared to VLCCs fitted with scrubbers, Poten & Partners said in their latest tanker report.
The report looked at the potential impact of IMO 2020 at a number of tanker segments and calculated the expected freight costs. The estimates were based on the average 2016 tanker rates: a Time Charter Equivalent (TCE) of USD38,520 per day for VLCCs.
On this basis, an owner of a VLCC consuming low sulphur MGO, costing USD657 per ton, would need to charge a charterer USD14.87 per ton to move its cargo from the Arabian Gulf to the Far East.
The owner of a vessel equipped with scrubbers only needs to charge USD11.14 per ton to generate the same TCE of USD38,250/day, because it can fuel its ship with much cheaper HFO, costing USD326 per ton, Poten said.
The analysis used the average prices for 3.5% sulphur fuel oil FOB Rotterdam Barges and 0.1% Gasoil FOB Rotterdam Barges in 2020 based on yesterday's forward curve.
"In this example, the charterer of a VLCC that runs MGO will need to pay a 33% premium. The differentials for the other segments are also significant, ranging from 16% for MR's on the UK/Continent – US Atlantic Coast route to 41% for LR2's on the Arabian Gulf – Far East route, with Suezmaxes and Aframaxes somewhere in between," the report said, adding that the premium is higher on longer haul routes.
It is expected that a small percentage of vessels will be equipped with scrubbers by January 1st, 2020 when the new IMO rules go into effect.
"We expect that tanker rates will initially be negotiated based on the assumption that vessels use low sulphur MGO," Poten said.
"This could provide a windfall to vessels that are equipped with scrubbers. Assuming that charterers are indifferent to whether vessels have scrubbers or not, a VLCC could generate a TCE of USD51,000/day, a USD12,500 premium based on the same freight (USD14.87/ton).”
The capacity of the containership fleet is growing too fast for the demand side to keep up, exerting further pressure on the freight rates and hopes of market recovery.
The delivery of newbuilds has been rampant since the beginning of this year, especially of ultra large container vessels (ULCVs). What is more, newbuild deliveries for the remainder of the year are still biased toward ultra large ships but not as much as in the first seven months.
The yards have delivered 947,000 TEU of newbuilt containership capacity, according to the figures from BIMCO, with only 36,833 TEU of capacity demolished by early August.
"During Q2-2018, just five ships (9,608 TEU) were taken out. It’s been 10 years since we last had such a low level of capacity removed. Only small and old ships have been broken up. In 2018, the average ship being demolished was 24 years old, with a capacity of 1,754 TEU. In 2017, the average ship was 21 years old and 2,807 TEU in size,” BIMCO’s Chief Shipping Analyst Peter Sand says.
To cap it all, considerable portion of the idle fleet has been reactivated fuelling further the supply growth and pushing freight rates down.
BIMCO said that the idle fleet dropped from 417,000 TEU at the beginning of the year to 341,000 TEU at the end of July 2018.
Sand explained that due to the ongoing trends on the market BIMCO has downgraded its demolition estimate from 250,000 TEU to just 80,000 TEU. This results in an estimated nominal fleet growth of 5.5% for 2018.
"If you keep demand growth and idle fleet fixed, the fundamental balance will deteriorate if the fleet growth goes up from 5.5% to 5.7%,” he added.
Due to faster fleet growth and slower demand growth, the expected improvement of fundamental balance seems to be a long way ahead. What is more, demand growth is bigger in the short intra-regional hauls than in the longer-distance trades for which the ULCVs are intended for.
With 3.8%, global demand growth and a year-to-date fleet growth of 4.4%, BIMCO expects a worsening of the fundamental market balance, resulting in lower freight rates.
However, things are looking brighter for next year.
"Currently, 2019 is on target for much more manageable fleet growth, that not even a very low level of demolition would be capable of putting off track, unless a sudden rush by shipowners towards the yards emerges. Contracting interest tends to come in waves, and its been low so far in 2018,” Sand added.
Hull losses recorded in the first half of the year stood at their lowest level since 1996, according to a report from The Nordic Association of Marine Insurers (Cefor).
Major claims impact continued to be low in the first half of 2018, despite one grounding with a cost of USD 25 million in the first quarter of the year. The overall claims frequency continued its positive trend and stabilized at a relatively low level.
Cefor said that, although it is too early to conclude for the whole year 2018, the general trend over the last eight years has been a stabilization of the total loss frequency at low levels, with some oscillation between 0.05% and 0.10%.
Insured values dropped on average 2.5% on 2018 renewals, compared to a drop of 5.8% in 2017 and 7.% in 2016. The report showed that the improvement is especially due to some recovery in the supply/offshore segment in 2018 after an increase in the oil price, following a recovery in the bulk market in 2017. However, Cefor noted that there is an increasing gap between the development of vessel values as compared to the average vessel size.
The number and impact of major and total losses has remained low since 2016. This trend continues into the first half of 2018. As of June 30, three losses exceeding USD 10 million were reported, the largest of which was USD 25 million. During the whole year 2017, eight claims exceeding USD 10 million were registered (two of these exceeding USD 20 million), compared to fourteen in 2016.
After the substantial drop in insured values on renewals from the last quarter of 2008, the annual reduction stabilized between 4% and 7% between 2011 and 2014. From 2015, the average reduction accelerated again. Especially two-digit value reductions on bulk and supply/offshore vessels contributed to this. The bulk market recovered somewhat in 2017, while the supply/offshore market still was under the influence of the low oil price level.
In 2018, also the supply/offshore market showed some signs of recovery, thus bringing the overall annual value change on renewed vessel back to a more moderate level. Under unchanged market conditions, a certain reduction in the insured value of a vessel, compared to the previous insurance period, is expected due to the aging factor.
Italian shipbuilding major Fincantieri and China State Shipbuilding Corporation (CSSC) have signed a Memorandum of Understanding for the extension of industrial cooperation to all segments of merchant shipbuilding.
Under the agreement, the two parties are planning to expand cooperation beyond the cruise sector into the oil & gas industry; cruise-ferries; mega-yachts; special vessels; steel infrastructures; marine engineering and equipment procurement. The plan also covers the establishment of a supply chain in the cruise segment in China, according to a joint press release.
To this end, Fincantieri and CSSC will establish a joint working group, composed of 6 members with appropriate technical expertise, 3 selected by each side.
The group aims, by the end of the year, to conclude the preliminary activities: to define potential opportunities for each of the areas identified for the collaboration, to analyze the market size and to identify preferential sales channel, to analyze potential partnership among CSSC and Fincantieri group companies or its network of suppliers.
“This agreement is a further recognition of our decision to access to the great potential represented by China. Acting as a first mover for the shipbuilding, today we are able to create new opportunities for small and medium-sized companies of our supply chain, through the successfully consolidation of the relations with the major groups of the country in this sector, and, at the same time, to continue to do the same in the West, taking advantage of the cruise segment boom and maintaining the acquired leaderships," CEO of Fincantieri Giuseppe Bono said.
In February 2017 Fincantieri, CSSC and Carnival Corporation signed a contract for the construction of two cruise ships, with an option for additional four, at the Shanghai Waigaoqiao Shipbuilding (SWS) shipyard.
The group also signed a letter of intent (LOI) with CSSC and the Shanghai City's district of Baoshan for the development of the supply chain mainly dedicated to cruise activities, as well as shipbuilding and maritime. The Italian shipbuilder has also inked a deal with Huarun Dadong Dockyard (HRDD) in the field of ship repair and conversions, aimed at serving the cruise ships based in China.
I summarized China's current LPG shipping industry on Aug. 20 in terms of data, regulations and capacity limiting policy. Today, let's talk about the prospects for the industry in 2019 from the aspects of oil price trend and market demand.
Oil Price Trend
In the first seven months of this year, bunker prices jumped amid high international crude prices driven up by many factors including OPEC's production reduction, the United States' exit of the Iran nuclear deal and the deterioration of Syria's situation. Brent crude oil reached a four-year high of USD80 per barrel. Data collected by Eshiptrading.com show that during the period, prices of fuel oil 180CST ranged from RMB3,500 per ton to RMB4,700 per ton, compared with the range of RMB3,100 per ton to RMB3,800 per ton witnessed during the same period a year earlier.
International crude prices have started to go down since mid-August due to OPEC's forecast cut for global oil demand and the appreciation of the U.S. dollar. However, it is worth noting that the U.S. will carry out the sanctions on Iran's crude export on Nov. 4, which will cause a supply crisis. Therefore, international oil prices are expected to surge in the fourth quarter of this year, and those of China are forecast to go up accordingly. In this case, the operating costs of China's shipowners, including LPG carrier owners, will increase.
Refining and Chemical Integration Projects
The first phase of the huge refining and chemical integration project invested by Zhejiang Petrochemical Co., Ltd. will conduct its trial operation this December. The next phase, which is the final one, will be kicked off around 2020. Upon the completion of the project, the refining capacity will hit 40 million tons per year. Additionally, the annual outputs of arene and ethylene will reach 1,040 tons and 280 tons respectively. It is said that the total investment in the project hits as high as RMB173 billion.
In addition, many other projects of this kind are underway in China. Therefore, the domestic demand for LPG shipping is anticipated to rise.
Thus, the operating costs for China's LPG carrier owners are forecast to climb, but at the same time, refining and chemical integration projects will boost the demand for LPG shipping, which will push up freight rates and rents.
Greek dry bulk shipping company Diana Shipping has secured more work for one of its Capesize dry bulk vessels, the m/v Semirio.
The company inked a time charter contract with Hong Kong-based Pacific Bulk Cape Company for the 174,261dwt ship.
As informed, the gross charter rate is USD20,050 per day for a period of minimum ten to about twelve months. This is a considerably higher rate given that the 2007-built ship is currently chartered to Koch Shipping at USD14,150 per day.
The new charter is expected to commence on Aug. 30, 2018.
According to Diana, the employment is anticipated to generate approximately USD 6.02 million of gross revenue for the minimum scheduled period of the time charter.
Diana Shipping's fleet currently comprises 50 dry bulk vessels. As of today, the combined carrying capacity of the company's fleet is approximately 5.8 million dwt with a weighted average age of 9 years.
A.P. Moller Maersk has always been an industry front runner when speaking about the exploration and adoption of innovative technologies and trends.
Therefore, it is safe to say that the Danish shipping major has dared to go places where others haven't, which is definitely the case with its latest test run through the Northern Sea Route.
Even though the trip is of exploratory nature, if a company like Maersk is exploring the commercial viability of the route, this could indicate a pick up in the route’s attractiveness for container shipping, as Arctic waters have so far been used mostly by tankers and, most recently, by passenger ships.
Taking into account that container shipping is currently looking into the ways of boosting profitability and cutting costs especially for fuel, the lane would be very attractive as it shortens the duration of the trip from Northeast Europe to Asia, by around 24 percent, when compared to the Suez Canal.
Hence, container shipping companies would be able to save time and money, assuming they had already invested in ice-class ships.
Nevertheless, there are numerous constraints to consider, including the shipping lane's availability and capacity.
The melting of the ice in the Arctic Sea makes the Northern Sea Route, which connects the Atlantic Ocean to the Pacific Ocean, partly free of ice during the summer months. Even though the frozen ice sheet is absent, there will still be broken off ice sheets in various sizes in the Arctic Sea during the ice-free periods. Therefore, ships using the Northern Sea Route require ice breaker support, which might prove to be costly.
Maersk's ship will also be escorted by an ice-breaker through the route.
However, various projections indicate that the ice-free periods are likely to increase in the upcoming years making the area longer available for commercial shipping. In the long-term, it could be something worth looking into for container shipping companies.
Capacity-wise, the route can be no alternative to the Suez Canal, as it can accommodate ships of up to 4,500 TEU, while the Suez Canal can accommodate much larger vessels, including ultra large container vessels.
As such, the industry agrees that for the time being the lane is more of a seasonal complement rather than a replacement to the Suez Canal.
Commercial drivers aside, the environmental aspect of the route is very important to consider, due to the lack of available infrastructure in the area because of its remoteness to deal with a potential oil spill and shipping incidents.
To that end, in April 2018, the International Maritime Organization's Marine Environment Protection Committee agreed to move forward on consideration of a Arctic ban on heavy fuel oil.
The meeting directed a sub-committee (PPR6) – which will meet in early 2019 – to develop a ban on heavy fuel oil use and carriage for use by ships in the Arctic, “on the basis of an assessment of the impacts" and "on an appropriate timescale”.
In view of the above, Maersk said it would use ultra-low sulphur fuel throughout the voyage.
"With this week's news that the Arctic's strongest sea ice has broken up twice this year, for the first time on record, using heavy fuel oil to power shipping in the Arctic not only increases the risk of oil spills, but also generates emissions of black carbon, which exacerbate the melting of both sea and glacier ice in the Arctic region. By taking the lead in the Arctic, Maersk could lead a vanguard of companies shipping commercial goods that move towards clean and renewable forms of propulsion for shipping worldwide," Clean Arctic Alliance Lead Advisor Sian Prior said.
Maersk's ice-class ship Venta Maersk departed Vladivostok earlier today heading for the Northern Sea Route. Maersk said earlier that the ship's trip would last for over a month. The ship is expected to pass the Bering Strait on or around September 1, 2018 and its planned arrival in Saint Petersburg is set for the end September.
Market woes stemming from weak freight rates have pushed oil tanker shipping company Frontline into a loss of US$22.9 million in the second quarter of 2018. Frontline said that the average spot time charter rates for the three months ended June 30, 2018 were US$17,000 for ECO VLCCs and US$13,200 for VLCCs younger than 15 years. Nevertheless, Robert Hvide Macleod, Chief Executive Officer of Frontline Management AS, believes better days are ahead for tanker rates.
"The factors supporting our expectation include continued scrapping ahead of 2020 offsetting new deliveries and increased demand for seaborne trade as a result of expected growth in both US exports and OPEC production of crude oil. Additionally, crude oil demand remains strong, and the end of the inventory draw cycle seems increasingly inevitable,” he said.
The global crude oil tanker fleet was expected to grow by 8.3 pct in 2018, with 57 VLCCs scheduled for delivery. However, only 24 have been delivered so far, and it is likely that some deliveries will be delayed into 2019, Frontline said in its market outlook comment.
On the other hand, 25 VLCCs have been scrapped so far and an additional 14 VLCCs have been sold for near-term scrapping. The company believes that weak freight market and high scrapping prices will continue to entice owners to continue scrapping older vessels.
Taking into account that 20 percent of the existing VLCC fleet is over 15 years of age, which are likely candidates for scrapping, the fact that the current VLCC orderbook equals approximately 15.8 pct of the global VLCC fleet, is not worrying, the shipping company estimates.
"If the pace of scrapping continues, we estimate that the global VLCC fleet will see negative growth in 2018. (…) As we have stated previously, older vessels are less desirable to charterers and earn a discount compared to newer, more fuel-efficient vessels,” Frontline said.
In preparation for the new regulation coming into force in 2020, Frontline announced in June that it had inked a deal to acquire a 20 pct ownership interest in FMSI, a scrubber manufacturer. The move secures Frontline the capacity to source a large volume of scrubbers.
"We will continue to look for the right investment opportunities to further position the company for the expected recovery,”Macleod added.
Dubai has been selected as one of the world's top five shipping centers in the International Shipping Centre Development Index (ISCD).
With a number of initiatives focused on the maritime sector, innovative free zones, infrastructure and high maritime and logistics capabilities, Dubai aims to become a major global maritime destination.
“We are working hard to create a vibrant maritime center to attract industry leaders and to promote Dubai's status as a global shipping center supported by a series of leading quality initiatives,” Sultan Ahmed bin Sulayem, Chairman of the Ports, Customs and Free Zone Corporation (PCFC) and Chairman of Dubai Maritime City Authority (DMCA), commented.
According to a recent report by the London-based Baltic Exchange and the Xinhua News Agency, Dubai has overtaken Hamburg, which fell from fourth to seventh place.
Reflecting on the new achievement, Bin Sulayem added, "This is in part the result of our fruitful partnership with the public and private sectors forged to enhance the confidence of regional and international investors in the competitiveness of the local maritime sector and promote its components based on the pillars of research and development, innovation, and smart transformation. The components include shipping and ports, engineering and training, maritime support services and ports, and the operation and maintenance of giant maritime vessels.”
Bin Sulayem also noted that the emirate was the first and the only Arabic city to become one of the world's five most competitive and attractive maritime clusters. Last year, Dubai ranked the fifth on the list of the world's top ten maritime capitals.
As explained, the emirate is on track to make more such achievements under the strategy envisioning a safe, integrated, and sustainable maritime sector. This is in support of the UAE's economic diversification policy in preparation for a post-oil future.
“We are working hard to create a vibrant maritime environment to attract industry leaders and to promote Dubai's status as a global shipping center supported by a series of leading quality initiatives, including the Dubai Maritime Virtual Cluster (DMVC), Dubai Maritime Cluster Office (DMCO), and Maritime Dubai. These initiatives would help pave the way for establishing Dubai and the UAE as an influential player within the global maritime economy,” Bin Sulayem concluded.
The International Shipping Centre Development Index used a methodology assessing the sector's competitiveness, ability to attract maritime businesses, development of efforts in relation to creativity and innovation, and key role in advancing growth of the global shipping sector.