Shipping Market Report Winter 2018/19
1. General Economic Developments
The global economy has been steadily growing ever since the summer of 2016. The prognosis for the years 2018 to 2019 is for economic growth to continue at the 2017 level. The current prognosis for growth is at 3.7%. Compared to April this year, this prognosis has been adjusted downwards by a marginal 0.2 percentage points. Fiscal stimulation has resulted in strong current growth in the US with the prognosis for growth in 2019 to exceed that of 2017. The International Monetary Fund (IMF), however, assumes that customs restrictions amounting to USD 200 bn will have a slightly negative impact on economic growth. The IMF assumes constant 4.7% economic growth for developing countries and emerging markets overall, with higher prices of raw materials improving the prospects for growth in some of these countries and markets. Special factors were dimming the prognosis somewhat in Argentina, Brazil, Iran and Turkey. Global growth has over a ten-year period exceeded the long-term average, causing downside risks to exceed upside risks - yet the point of view is decisive: Contrary to ongoing reporting, the basic conditions are positive! Prospects for growth are generally positive in Asia. Whether Chinese economic growth will continue at 6.9% as in 2017 or fall to 6.6% as forecast for 2018 will be relatively insignificant. The key message is completely different: China’s share of the global economy is at almost 20% and, at 6.6%, this will continue to grow. Comparing global volume of trade to that of April, the IMF is somewhat more pessimistic, adjusting the prospects downward to 4.2% - by 0.9 percentage points.
Crude oil price tendencies were dramatic in the fourth quarter. The trend for oil prices has been clearly rising ever since February 2015 - from lows of USD 30 per barrel to over USD 85 on 3 October 2018. In the six weeks that followed, the price dropped to below USD 60 per barrel - by over USD 20. The last comparable drop in prices occurred in December 2014 when the price of crude dramatically corrected downwards from over USD 100. Compared to the last correction, the fundamentals are much vaguer this time round. The prevailing opinion in October was that the oil market may experience supply bottlenecks as a result of the situation in Venezuela and Iran. In anticipation of US sanctions on Iranian oil exports after 4 November, Saudi Arabia massively increased production. After exceedance of all the red lines in international politics, the incident at the Saudi Embassy in Turkey strongly distorted international crude oil markets. Three political decisions by the US President severely impacted supplies to crude oil markets. There was the ongoing support of the Saudi royal family with the simultaneous announcement on Twitter of “support to keep prices down” on the one hand whilst, on the other hand, exemption from US sanctions for eight countries importing Iranian oil. The oil market overall was now massively oversupplied, allowing prices to drop by over 30%.
Remarkable changes also occurred in interest rate markets during the fourth quarter. The interest rate policy of the US Federal Reserve (FED) has for some time now differed from that of the European Central Bank (ECB). Overall, the interest rate spread between the US Dollar and the Euro is at a maximum. The FED has since December 2015 successively increased short-term interest rates. In this fourth quarter the three-month US-LIBOR has also now for the first time advanced to around 2.5% again to reach an 11-year high. These interest rate increases have now once again raised US interest rates out of their lowest levels into a region of global average. Within a year, the three-month US-LIBOR increased from 1.62% to 2.80%. Further moderate interest rate steps by the FED cannot, against the background of US full employment, be excluded.
2. The Container Market
2.1. Developments on the Supply Side
In December 2018, the global container fleet comprised 5,286 ships with a transport capacity of 22.298 million TEU. The container fleet capacity thus increased by 5.9% over the first eleven months of the year. Shipyards worldwide supplied around 155 ships with a total transport capacity of ca. 1.25 million TEU, with more than 87% of new constructions boasting capacities in excess of 8,000 TEU. 65 container ships at around 106,000 TEU total capacity were scrapped in the same period.
Current order books reflect a historic low of 12% of the current total fleet. Orders for 212 new units adding a total capacity of 1.2 million TEU to the existing fleet were placed in 2018. Order books are thus at a slightly higher level compared to the previous year but nevertheless lower than in the period 2013 to 2015.
2.2. Developments on the Demand Side
Growth in 2018 of the global container turnover is estimated at 4.6% - influenced, among other, by positive global economic growth. The growth in trade continues aside from major trading routes, since the major regular services are strongly expanding their capacities on auxiliary routes. It is evident that fourth quarter transpacific trade was absolutely driven by the possibility of future interest rate hikes, since various shipments apparently took preference. Shipping volumes for the first quarter of next year will show whether this reflects general growth or temporary prioritization. No significant decline in booking activity is currently in evidence. This would be very positive. Traditional north-south traffic developed more than proportionately well this year, constituting the main source of the increased demand for containers. It is thus likely that the positive fundamentals of global container traffic will overcome current seasonal weaknesses to once again develop positive momentum in 2019.
2.3. The Time Charter Market
Time charter rates clearly regressed in the last quarter of 2018 to virtually eliminate again a strong increase in the first six months. This regression is due to typical seasonal weaknesses of the container time charter markets. It is noteworthy that the demand for larger categories of ships is currently clearly predominant and that the segment above 8,000 TEU is almost fully booked. The majority of container ships engaged in December were in the 4-digit region again. Average time charter rates per quarter weakened in all market segments. For a 1,100 TEU ship, the average time charter rate of USD 6,700 is ca. USD 1,000 lower in the fourth quarter than in the previous. The average loss for a 2,500 TEU ship is thus USD 1,100 on USD 10,350 and USD 1,300 on USD 10,900 for a 4,250 TEU ship. Generally positive basic trends should not be overlooked against the background of short-term declining seasonal time charter markets. The 1,700 TEU and 2,500 TEU segments overall are ca. 30% better this year than last. The annual average of the Panamax segment even improved by almost 50%.
Prospects for the coming quarters are positive for the container market and the overall economy. The container feeder segment between 1,000 and 5,000 TEU in particular is likely to benefit from broad economic growth in the emerging markets and the simultaneous stagnation of the fleet due to the arising supply-demand gap. The strongest seasonal market upturn generally occurs in spring. We thus expect that the generally positive trend will continue into the next year and that the container markets overall will reach at least the time charter rate level of last summer.
3. The Bulker Market
3.1. Developments on the Supply Side
The December 2018 bulk carrier fleet comprised 11,337 ships with a transport capacity of 839 million dwt. The bulk carrier fleet grew by 2.9% over the last 12 months. In the Capesize ship sub-segment, 48 ships were delivered to date this year and 15 ships were sent for ship breaking. 63 ships were delivered in the Panamax sub-segment and only 2 were scrapped. In the Handymax/Supramax ships sector, 162 new units were delivered and 37 scrapped.
Due to this year’s positive time charter rate developments, the number of effectively demolished ships trailed the prognoses by far. Due to a time charter market that exceeds variable operating costs, ship breaking will not be economically attractive in the coming year either.
3.2. Developments on the Demand Side
The demand for bulk shipments dwindled noticeably towards the end of the year. This clear regression may be attributed to various factors, including logistical problems due to a derailed train in Australia and curbs on the import of coal into China. This strongly impacted especially the larger categories of ships. Global bulk shipment is expected to increase by about 2.7% in 2018. The coal sector expects solid 4% growth, underpinned by strong imports by China and India. Maritime trade is expected to increase by at least 3% also for the coming year, against a background of solid global economic growth.
3.3. The Time Charter Market
Strongly declining time charter rates over the last quarter characterised the large bulk carrier market. Average Capesize segment time charter rates dropped from a level of USD 22,207 per day in the third quarter to USD 15,748 per day in the fourth. This corresponds to a 25% decline on the previous quarter. The average rate in the Panamax segment is USD 12,532 per day, slightly above third quarter levels. In the smaller Supramax and Handysize ship sector, the market remained relatively stable with average time charter rates of USD 11,943 and USD 11,471 per day. The Bulker market overall has improved between 10% and 25% on the previous year.
It currently appears that demand side growth will outstrip supply side in the next two years, meaning that time charter rates are likely to increase. This positive trend will furthermore be supported by a special effect kicking in towards the end of next year: The switch to low-sulphur fuels. This will probably lead to the entire global merchant fleet sailing marginally slower, for more efficiency. Overall, this effect could lead to 3% additional growth in demand.
4. The Tanker Market
4.1. Developments on the Supply Side
The tanker fleet as at 1 November 2018 comprised 14,600 crude, product and chemicals tankers with a total transport capacity of 610.8 million dwt. A slight decline in the crude oil tanker fleet is assumed for 2018. Order books delivered 92 ships with a capacity of 18.5 million dwt to date. 96 ships, 17.4 million dwt capacity, were over the same period sent to ship breaking yards, virtually balancing overall additions and scrapping. Since 84 product tankers with a capacity of 5.4 million dwt were supplied in 2018, a slight 2% growth may be assumed for this fleet. Over the same period only 47 ships with a capacity of 2.1 million dwt were scrapped, resulting in a slight growth of the product tanker sub-segment overall.
4.2. Developments on the Demand Side
Developments on the demand side are separated into oil products and crude. A moderate increase of ca. 1.9% in maritime trade is assumed for crude in 2018, whilst the demand for oil products is expected to increase by ca. 2.3%. Whilst the year appeared quite moderate on the demand side, the October Chinese demand for crude was particularly strong, thereby increasing imports by up to 30% on the previous year. It is assumed on the product side that higher refinery capacities will increase 2019 growth to ca. 3.2% again.
4.3. The Time Charter Market
The spot time charter market for VLCC recently rebounded strongly. Daily rates averaged USD 27,171 in December, clearly above averages for the previous year. The slightly smaller class of Suezmax tankers recorded an even stronger increase, listing USD 50,000 per day in December. Rates like this had not been achieved since January 2016. In line with general trends in the crude tanker sector, time charter rates for Aframax tankers also improved significantly. The average for December was USD 40,436. Whilst the spot time charter market for product tankers managed to improve slightly it still fell clearly short of crude oil tanker rates. The fourth quarter average was ca. USD 15,550.
A supply-demand gap as in the bulk market may develop since the fleets remain virtually unchanged and slight growth is expected on the demand side, with fundamentals predicting early improvement in the tanker market as well. As impressively demonstrated by the crude oil sector already, improved fundamentals can potentially increase time charter revenue quite rapidly.