Shipping Market Report Spring 2019
1. General economic developments
The global economy has been growing steadily since the summer of 2016 and growth remains robust. Contrary to general reports, the baseline is positive as before. In Q1 2019, the International Monetary Fund (IMF) once again confirmed its clear forecast for growth at a virtually unchanged level of 3.5% in 2019 and 3.6% in 2020 (-0.2% and -0.1% respectively compared with the previous forecast). The global economy grew at 3.7% in the previous year. Influences on global economic growth emanate as before from the trade talks between the USA and China, the conclusion of which is imminent, however, and at present major job relocations are not expected. In the industrial nations, individual developments may lead to negative impact on the respective economic growth. An unregulated 'hard' Brexit threatens to have a negative influence on economic development in Europe. It is expected in this case, however, that more investments will be made in USD (instead of in EUR or GBP). In addition, a postponement of the UK's exit from the EU is becoming increasingly likely (position: 14.03.2019). Likewise, in the emerging and developing countries, the IMF is expecting practically constant economic growth of 4.5% in 2019 (-0.2% compared with the previous year's forecast); the prospects for growth of 4.9% in 2020 remained unchanged. Inflationary pressure fell recently in some countries due to developments in the price of oil. The forecast for China also remained unchanged at 6.2% for 2019 and 2020. Fiscal stimulation continues to have an effect here. An agreement with the USA may also ensure further growth in China. This means that China is still the fastest growing economic region in the world in absolute growth terms. India is another growth region on the starting blocks, with growth rates close to 9%. Global trading volume forecasts of 4% for 2019 and 2020 continue at a high level.
The huge slump in the price of crude oil since the beginning of October 2018 from around USD 85 per barrel to USD 45 per barrel at the end of 2018 recovered at the end of February to USD 65 per barrel. Forward sales of the relevant futures not arising from the relationship between supply and demand were also responsible for this, particularly in December 2018. According to current estimates made by the International Energy Agency (IEA), demand for crude oil will increase by 1.3 million barrels per day or around 1.3% of the daily global yield in 2019 from a recent figure of 99.7 million barrels per day. The expectation from the last quarter therefore remains constant. This growth in demand is justified by the currently low price of crude oil and the launch of various petrochemical projects in China and the USA in 2019. The IEA is therefore not expecting a significant increase in the price of oil in the short-term. However, rising oil prices can be expected in the medium-term. Significant drivers of this may be China and India as their energy requirements are expected to increase further in line with economic growth and an increase in prosperity. The oil imports required here will not only come from Russia and the OPEC countries, but also from the USA, which will increase its yield significantly in 2019 and have become a net energy exporter in the interim. The consequences of the current political crisis in Venezuela on the price of oil should be fairly minor, as yield has already been slowing down significantly there for several years.
In the course of economic recovery in the USA, the Federal Reserve (FED) has been increasing the federal funds rate (key interest rate) since December 2015. It has made a total of nine changes to the interest rate arriving at the latest figure of 2.5% in December 2018. In March, the central bank committee said that in the light of the potential risk of a global economic downturn, further economic developments should be monitored before taking any further action. The low rate of inflation in the USA also represents another determining factor for exercising caution towards short-term interest hikes. There is a similar picture in Europe. At its meeting in March, the Governing Council of the European Bank (ECB) kept the main refinancing rate (key interest rate) at 0%. In its outlook, the ECB is expecting this interest level to remain at least over the course of 2019 as, in the Council's opinion, the low inflation in the eurozone and financial risks will not allow any changes to interest rates in this period either. The interest spread between the USD and the EUR therefore continues at the historically high differential of approximately 3% and will maintain this level over the coming months.
2. The container market
2.1 Developments on the supply side
The global container fleet comprised 5,285 vessels as at February 2019 with a transport capacity of 22,437 million TEU. The capacity of the container fleet thus increased by 5.1% year-on-year. 18 units with a total slot capacity of 138,599 TEU were delivered in January 2019. At the same time, 14 vessels with a transport capacity of 23,824 TEU were scrapped. Order books currently include units with a total capacity of 2,655 million TEU. This corresponds to 11.8% of the existing fleet. Orders for 20 units with a total slot capacity of 27,200 TEU were placed with shipyards in January 2019. The further capacity growth of the container fleet is expected to be 3.2% in 2019 and 3.5% in 2020.
2.2 Developments on the demand side
Compared with 2017, global container handling experienced significant growth of 4.3% in 2018 as a whole. Trade flows to North America and Europe in particular achieved decent growth rates in connection with this. In order to bypass the announced import duties on certain products, US importers gave priority to consignments moving unusually large volumes of goods. However, a one-off effect seems to have emerged here. Furthermore, imports from sub-Saharan countries in Africa as well as Central and South America proved stronger than expected. Imports from the Asian region on the other hand were disappointing. The ban on imports of certain waste from Europe and the USA to China as well as a weaker Indian market had a significant impact here. Continued strong growth of global container handling of 4.1% is expected for 2019.
2.3 The time charter market
The mood on the market improved during Q1 2019 and charterparty activity has increased significantly again since the Chinese New Year. Almost 300 charterparties were signed in February 2019 alone which represents an extremely high level of activity compared with previous years. The liner shipping companies are therefore expecting significant trade growth and are stocking up on additional tonnage in good time. It should be noted that the larger vessel classes are currently experiencing extremely robust demand and the segment above 8,000 TEU is almost fully booked. Charterparties for a standard 8,000 TEU to 8,800 TEU container ship were in the region of USD 22,000 per day at the end of February, compared with USD 17,000 per day in January. Due to the low availability of larger vessels, demand also had a slightly delayed positive impact on the segment below of between 5,500 TEU and 7,000 TEU. Rates of USD 11,500 per day have recently been achieved in the Asian region for an older 6,000 TEU vessel. The rate increase did not continue in the next smallest size class of vessels below 5,000 TEU due to a larger number of vessels being available (currently 40 vessels). However, rates remained at a stable level here. Panamax vessels currently achieve rates of between USD 8,000 and USD 10,000 per day. There was increased activity here, particularly in the Asian region. A positive trend has recently emerged in the European feeder market in size class 700 TEU to 1,100 TEU. It has been possible to agree rate extensions for virtually all vessels due to be freed up in the 1,100 TEU size class.
The outlook for the container market for 2019 and 2020 continues to be assessed as positive with growth in container handling of 4.1% and 3.9% respectively. There will be fairly moderate growth on the main traffic routes and consequently trade on the secondary traffic routes, forecast at 5%, will be the growth driver. Stable growth of 4% is expected on the important North-South connections. The persistent strong growth of container handling in comparison with the current fairly moderate growth of the fleet reinforces the positive trend towards a recovery of rates in the individual container Segments.
3. The bulker market
3.1. Developments on the supply side
The bulk carrier fleet comprised 11,388 vessels in February 2019 with a transport capacity of 844 million dwt. Compared with the last 12-month period, the bulk carrier fleet has grown 2.73%. In the Capesize sub-segment, four vessels have been delivered and three vessels scrapped so far this year. In the Panamax sub-segment, 17 vessels have been delivered and so far, none have been scrapped. In the Handymax class, no vessels have been scrapped and nine new units have been delivered.
In terms of new build orders, there were a total of 21 orders over the three segments mentioned above in January 2019; five Capesize vessels and 16 Panamax vessels. In the Panamax class, orders were placed primarily for Kamsarmax vessels (80,000 dwt - 89,999 dwt).
3.2. Developments on the demand side
2019 got off to a poor start for bulk shipments. This is due to various factors, such as weak trade in cereals between the USA and China due to customs restrictions and unusually muted Asian coal trade which further reinforces the seasonal lull. The burst dam at an iron ore mine belonging to mining company Vale in the small Brazilian town of Brumadinho close to Belo Horizonte could dampen prospects particularly for the larger vessel classes. However, we expect the output of the mines affected to be increased as quickly as possible and consequently the medium-term impact should be contained. Global bulk shipments are expected to increase by around 2.2% in 2019.
3.3. The time charter market
Sharply declining time charter rates continued to characterise the large bulk carrier market at the beginning of 2019. Average time charter rates in the Capesize segment dropped from a level of USD 15,748 per day in Q4 2018 to USD 5,600 per day in February 2019. This corresponds to a further decline of 45% compared with the previous month and is significantly below vessel operating costs. In the Panamax segment, the February rate was USD 9,875 per day and thus around 23% below the level in December 2018. However, the first signs of a recovery are noticeable in the Pacific. The market has developed positively in the smaller Handymax class with time charter rates of up to USD 11,750 per day in January 2019 compared with an average of around USD 11,000 in December 2018.
Balanced growth of supply and demand according to transport capacity is expected in 2019. Whilst the current rate level is disappointing, there have been initial signs of slow recovery since the Chinese New Year, at least in the Panamax and smaller unit segments, which should continue to consolidate in 2019. Slower fleet growth compared with growth in demand is expected for 2020 and this may result in stimuli for improving bulker revenue. The impending conversion to low-sulphur fuels also in 2020 should have a positive impact on vessel revenue as a result of slower vessel travel, temporary unavailability owing to conversion measures and additional scrappages.
4. The tanker market
4.1. Developments on the supply side
The tanker fleet, consisting of crude oil, product and chemical tankers, comprised 14,724 vessels in February 2019 with a transport capacity of 619.2 million dwt. The tanker fleet showed moderate year-on-year growth of 1.4%. The crude oil tanker sub-segment has seen only slight growth of 0.4% since February 2018 to 2,031 units. Order books were down 12% due to deliveries in the last 12 months and currently comprises 235 units of this class (corresponds to around 12% of the existing fleet). The product tanker fleet also showed slight growth of 1.1% over the last 12 months to a current figure of 8,510 vessels. Order books in this segment currently stand at 265 units or around 3% of the existing fleet. Order books here were also down -11.2% year-on-year.
4.2. Developments on the demand side
After slowing to 2.4% in 2018, it is expected that demand for crude oil tankers will pick up again to 3.8% in 2019. In spite of the pressure from coordinated production cutbacks and falling exports from Iran and Venezuela, it is expected that growth will be maintained. Strong growth of US and Brazilian export volume, which is expected in the long-term, will contribute to this combined with a new number of refinery start-ups in South East Asia. Growth in capacity demand of 3.5% is expected in the product tanker segment in 2019 supported by the return of Asian arbitrage opportunities and an increase in stocks.
4.3. The time charter market
The time charter market (one-year charters) for the VLCC size class has recently shown somewhat weaker trends. The average daily rate was USD 26,000 in February 2019 and as before was significantly above the average level in the previous year. Following a significant increase in 2018, the time charter rates in the slightly smaller Suezmax tanker class showed a sideways trend recording USD 23,750 per day in February 2019. In line with the general trend in the crude oil tanker segment, the time charter rates for Aframax tankers also recorded a significant improvement in Q4 2018. On average, the rates developed at a more or less uniform level of USD 18,800 per day until February 2019. As the spot time charter market for product tankers was also able to register a slight improvement in 2018, these have recently reached consistent rates of USD 15,570 per day.
Tanker fleet growth is expected to slow down considerably in 2020. It is expected that demand for tankers will increase significantly in response to the IMO 2020 sulphur cap as an increase in refinery throughput is anticipated which has to be both handled and moved. This should increase demand for both crude oil tankers and product tankers significantly. It is also expected that more tankers will be used for storage. Consequently, higher time charter revenue is anticipated from 2020.