Shipping Market Report Summer 2019
Container trade – strong enough to cope with tariffs?
At the moment container trade growth is rather disappointing, with year-on-year growth in the first quarter no higher than 0.5 %! There is no clear explanation, though, why traffic growth has been lagging expectations. All we can say for sure is that seasonal volatility (i.e. the trade volume reductions during the first quarter) was greater than expected and greater than it was in former years. The increased global uncertainty will have played a role, putting off traders – as the old saying goes: in doubt just stay out! Just lately, the Sino-American trade conflict took center stage again as both sides took the elevator of escalation. The US administration hiked tariffs on $ 200 bn worth of goods more or less immediately in a bid to keep pressure up, blaming China for back-tracking during the negotiations. As a consequence, China – eager to maintain face – launched counter measures on $ 60 bn worth of US goods in a typical tit-for-tat. Currently, we are still in a transitional period as all shipments that had already been in transit ex. China were exempt from the new US tariffs. Thus, the US bought a final grace period of three additional weeks (the time the cargo is in transit…) until the new sanctions start to bite. Looking at last year, container volumes in the transpacific trade were very good as companies were eager to build buffer stocks before the tariffs were raised. At one point of time, volumes were running 20 % (!) ahead of levels 12 months earlier. This cargo rush has meanwhile tailed off and volumes are clearly under pressure due to the additional tariffs, but trade is only flat and not declining year on year.
To put things into the right perspective, the US-China-trade is severely imbalanced: In 2018 the US imported $ 540 bn worth of goods from China, whereas China imported just $ 120 bn from the US, so the trade deficit runs to a whopping $ 420 bn for the US. Trump says this trade deficit is a no-go for him. However, he misses a few vital things: Part of the increased trade deficit simply results from the stronger dollar, and one of the main reasons for the stronger dollar is higher interest rates in the US compared to all other developed markets. There is even room for more appreciation of the dollar given the disparity in interest rates versus other leading currencies. Americans prefer foreign goods to domestic goods, or to put it more bluntly: American products are simply not competitive! According to official statistics, the US economy is under full employment anyway which begs the question: How is the US supposed to cope with a return of production as envisaged by Trump. There is simply no spare capacity left in the US economy. It means American consumers only have two options – pay increased prices for tariffs affected goods, i.e. they are indirectly importing inflation, or import less. Just as a side note, a trade deficit is not such a bad thing from the American perspective. The US is the only country in the world with the unique opportunity to export its own green paper to fund its trade deficit given that it is nominated in its own currency. In fact, they can print as much as they want.
Chartermarket Comment - May 2019
Amid all the geopolitical and trade tension, flagging world economic growth, Brexit and other uncertainties, the charter market had a pretty steady month. In normal times you would expect timecharter rates to climb higher fixture by fixture during the month of May as liner operators beef up their fleets ahead of the Q3 peak season. But, of course, these are not normal times. The dichotomy, that characterized the market for some time already, became more pronounced during the last weeks. Basically, it has been a flat market for all smaller and midsize ships up to panamax class, and it’s been a hot and firming market for post-panamax vessels. Big is beautiful in the eyes of carriers as they seek to consolidate volumes and utilise the largest possible ships in the respective trades. Apparently, the looming 0.5 % sulphur cap on marine fuels and related cost increases have sparked another race for efficiency and economies of scale. 8,000 - 9,000 TEU vessels were the first to benefit, with charter rates for one-year periods gaining another circa $ 2,000 to reach $ 26,000 in May. This is more than 20 % higher than peak rates fixed for these ships last year. Our brokers tell us that there are still uncovered requirements out there amid zero spot availability, so fixing levels may increase once more when the next prompt positions pop up. Following in the wake of the 8,500 TEU type, the 6,500 - 7,000 TEU designs saw demand go up as well. Rate levels have improved to $ 19,000 for medium-old vessels in this class by now.
A good example of service consolidation through deployment of bigger ships is the restructuring of the Europe-Latin America / Central America trade led by CMA-CGM, Maersk and Hapag-Lloyd. A number of loops operated with ships of 2,200 - 4,500 TEU got closed or merged to make room for deployment of 6.500 - 7,000 TEU ships and for increased transhipment using 10,000 TEU vessels. What’s good for the big ships, is bad for the smaller ones… The result is that a dozen vessels of 2,500 - 3,500 TEU might be freed up and returned to tramp owners in the Atlantic. Clearly, it will take more fixing activity than today to keep supply and demand reasonably balanced during the coming weeks and months. Our monthly count of fixtures stood at only 210 by end of May. This is a lot less than during the same month last year (346). Despite the slowdown, the impact on spot tonnage availability and idle-fleet capacity could be contained so far. By the middle of May, there were no more than 40 vessels immediately available to charterers across the whole size spectrum worldwide. By end of May idle capacity decreased further. Will we see a rebound in activity before or just after the summer? Or will it all go down hill from here? General sentiment seems to be that the second half of the year will be better for the charter market as some of the current political and economic issues get resolved or disappear. In fact, we sense some optimism among charterers some of whom have declared forward interest in tonnage, prepared to extend or fix ships – even standard designs such as 4,200 TEU panamaxes – for delivery dates between September and November. However, there is not much of a premium available for owners for fixing so far ahead. Most owners seem to prefer waiting for the market to go up before committing themselves.
Moving down to the smaller feeder sector, the Continent Mediterranean probably remains the most interesting spot for owners, albeit with its challenges. There is still a lot of volatility and disparity between different vessel classes and designs even within the same trading range, yet Europe has been pulling more than its weight when looking at the amount of fixtures. Below 1,000 TEU, May was off to a good start by and large but losing momentum as the month progressed. There were growing imbalances between the „North“ and the „South“ when it came to specific vessel classes. Take the 700 TEU types: While tonnage in North Europe found it easy to fix or extend employments, ships in the Mediterranean were struggling, with 6-7 vessels running prompt with no new periods in sight. As a result, rate levels remained under pressure in the low $ 5,000’s – somewhat irrationally spot earnings were just as low on the more active Continent. In the class of 800 - 1,000 TEU, the situation was vice versa: A couple more ships on the Continent had difficulty securing new periods whilst vessels in the Med found takers immediately upon expiration of their charters. In fact, there is such a lack of larger feeders in the Med, that ships keep getting positioned there from other areas. Over the past months, a number of ships between 900 TEU and 1,300 TEU already left Asia and the Caribbean to start trading in the Mediterranean. However, this constant influx of larger feeders poses a problem for the smaller 700 TEU and even for the Sietas 168 type vessels in the same region. They simply don’t get a chance to fill any of the gaps. By contrast, the Caribbean showed next to no demand for tonnage around and under 1,000 TEU lately. In Southeast Asia and the Far East, the focus is purely on economical designs, with standard ships always playing second fiddle. Even so, following the evacuation of feeder tonnage over the past two months, Asia does look a little more balanced now, albeit on a low level.
Bulk Carrier - Chartermarket Comment - May 2019
Capesize spot earnings are now well into 5-digit-territory again following another $ 1,800 rise (+16 %) in the 5tc during May. There appears to be a steady positive momentum in the market with the forward curve suggesting continuous improvement over the coming months. The recovery seems to have been driven largely by increased iron ore business out of West Australia with repeated bouts of fixing by the majors. Apparently, the market gradually gets to grips with missing volumes out of Brazil. Of course, all eyes are still on Vale which is facing controversy and even higher scrutiny in its home country. Corporate governance naturally takes centre stage, above all else. Volume wise not much has changed. The outlook is for Vale’s production to fall by 50 mill. tons to 307 mill. tons this year. The miner advised in a press release that it could take 2 years for volumes to fully recover from the Brucutu mine incident.
Things are also looking up for panamaxes as average time charter levels increased by $ 1,400 (+12.6 %) throughout the month. The grain season ex. East Coast South America continued to offer good support over the weeks, but what will happen when the season concludes? Normally, the US-Gulf and North America West Coast grain business kicks in, but this time it all looks more complicated. On top of the trade conflict between the US and China, the fundamentals for the grain seaborne trade have soured due to the spreading of African Swine Fever in China. The hog population is reportedly down a whopping 200 million animals to just 500 million animals, causing a massive drop in feedstuff requirements. It looks as if the disease plays nicely into the cards of the Chinese in their trade conflict with the US. They simply don’t have to buy so much soybean volume for meat production. Already, the USDA estimates another potential 22 mill. tons reduction in the soybean trade this year. Further, due to bad weather, the crop in the US is lagging far behind. Normally 80 % of the crop would have been planted by now – this year it is less than 50 %. Therefore we expect, first of all that the grain season will start later than normal, and secondly that it will be a lot smaller. For panamaxes, this could mean that late summer positions in the US-Gulf will be faced with a dull market.
For supramaxes, the market has been trading sideways, although nearby momentum and sentiment is rather negative. It has been a fairly bleak picture overall since Easter, particularly in the East. Every week was punctuated by national holidays worldwide, which acts as a natural brake on activity as some kind of volume was missing all the time. This may change after 7th June (Eid) when all countries will finally be back to business as usual. The market should pick up then. Coal volumes in the Pacific – especially ex. Indonesia – were missing lately which meant that the backlog of spot and prompt tonnage in Asia could never be cleared out. The North Pacific remained conspicuously quiet, too, due to swine flu in China and reduced needs for grain imports from North America West Coast. Business is rated at very modest levels although we feel that the Baltic Index is even painting a too rosy picture. North Pacific rounds are assessed at $ 8,500 basis index whereas charterers in reality only pay $ 6,000’s. Cargoes bound for India fetch a meagre premium of $ 500 per day but beware, you are sending your ship straight into the monsoon region with poor prospects of consecutive business. The brighter spots were in the Atlantic lately, in particular ECSA grain liftings. Here we find the exact opposite, with business indeed paying more than the index suggests. For ships delivering in West Africa for fronthauls via ECSA to Far East (S5) we see $ 14k levels getting concluded – way above the current index rate of $ 13,500. On the period side, it is quite a standoff between owners and operators, the former seeking $ 11,000 basis one year while the latter are looking for bargains of $ 10,000 for a year. Operators demand a discount for the first 30-45 days, willing to pay no more than $ 6,000’s. The want to avoid a huge gap between spot and period levels, conscious of making a loss on their first paying cargo. Ultramax tonnage is rated at $ 13,000 in the Pacific and $ 13,500 for period in the Atlantic. Average spot earnings for ultras are at a premium of $ 1,000 to standard 58,000 dwt supras, while discounts for Chinese designs are also at $ 1,000, rather than $ 750. As far as larger contract business is concerned, there is not much to write home about. We expect the next Indonesian coal CoAs after 7th June.
A sideways trend was also recorded in the handysize sector although by the end of the month the market was back to more positive momentum. A lot of the attention among chartering professionals is on the index migration process at the Baltic Exchange. The organisation is in consultation right now over the transition from the old 28,000 dwt to the new 38,000 dwt index. It seems like an impossible task given that the size classes are operating in isolated markets. These days we see cargo stems as follows: 40,000 mt ±10 %, 35,000 mt ±10 %, 30,000 mt ±10 % and 25,000 mt ±10 %. Together the two index-type vessels only compete on 25,000 mt stems, but there are three others for the larger handies to pick from. Would it be better to continue both handy indices? The challenge for owners and operators is to deal with changing market premiums. For a long time the premium for 38,000 dwt versus 28,000 dwt was at $ 1,500, recently it moved up to $ 2,800. Our fear is that people make wrong calculations, giving the 38,000 dwt type away too cheap. On the period side, market levels are at $ 9,000 (Pacific) and $ 10,500 (Atlantic). Operators are in the same quandary as those in the supra sector: they will make $ 3,000 loss per day at least for the first 30-45 days with their first spot cargo. As a result, the period market is quiet. CoA activity is meanwhile dominated by alumina, of lot of which is pushing into the market, there is not much happening on clinker business, though.
What are the consequences for the container trades?
- Opinion on this is split. Due to full employment of the American economy, substitutional effects (domestic instead of foreign product..,) are limited.
- Others believe the implications of the trade war are very substantial. Additional tariff of 25 % on $ 200bn worth of goods might reduce the import volume by $ 75 bn or some 13 %. Under a worst-case assumption of 25 % tariff on all trade goods, the trade volume might reduce by $ 170 bn, equivalent to 0.9 % of GDP growth in China.
- At any rate, the prospects for the transpacific trade are quite muted. However, as pointed out in our recent editorial comments,
- News bias is one of the key problems. From our point of view, far too much emphasis is put on this trade dispute. At the end of the day, The US-China-trade accounts for no more than 15 % of global container liftings. In other words, 85 % of all box trades are not affected by the trade spat. We would even go a step further and argue that people in many third countries couldn’t care less! It shouldn’t be forgotten that the rest of the world still enjoys very solid growth rates.
- Also we can already see China trying to depreciate its own currency in a bid to offset the impact of the tariffs. This represents a huge opportunity for other consumers to buy additional Chinese merchandise, for example in other countries in the region.
If this plays out, it could mean a boost for the Intra-Asia trades and in turn for the smaller container vessels that typically ply those routes!