SUMMER HOLIDAY SNAPSHOT
A canter round the markets and a summer holiday sale on our latest reports
Macro Situation: Vaccines Vs Variants
The IMF and other organisations – including us – have upgraded GPD expectations for 2021 and 2022. This is based partly on a view that lost GPD in 2020 was not so bad as earlier estimated, and partly on the success so far of the various vaccination programmes. Growth is especially strong in the OECD nations, changing the dynamic of the last 20 years which was all about China’s unending and increasing domination of global commodity and shipping markets.
China’s government has begun to meddle more directly in commodity markets in an attempt to ‘stabilise’ – that is reduce – prices. This will almost certainly fail and is already destabilising markets, with futures prices for iron ore, coal and steel tumbling as we go to press. China’s interference is the biggest risk to an otherwise outstanding outlook for dry bulk shipping markets.
Positive macro-economic circumstances, a strong demand rebound from the pandemic, and a benign supply outlook all point to upward momentum in freight markets, if not an outright Supercycle. We remain convinced that this market has the stamina to continue for at least another year. Our model output reflects our assumptions on GDP and our adjusted measurement of vessel activity. Those in this market for the long haul, who will patiently wait for Chinese political turbulence to wash out, will benefit most. Get full details in our latest Bulk Carrier Market Outlook Quarterly, on sale now for just £99 - normally £500!
Middle Eastern politics continue to cause wobbles in the oil markets. Iran, armed with a subscription to a global fleet database, seems to be finding ships beneficially owned in Israel, to attack. Is this a sign of a newly belligerent administration following the assumption of President Ebrahim Raisi? Either way, trouble in the neighbourhood is doing nothing to help oil tanker markets which remain in the toilet. Baltic Exchange time charter equivalent earnings for all crude oil tanker types – Aframaxes, Suezmaxes and VLCCs – have begun August in negative territory, meaning tanker operators are only making money on the bunker element of the WorldScale price (if they are paying less for bunkers than the allowance in the WorldScale freight rate calculus). VLCC earnings have been below zero all year.
Conditions are not much better for products tanker specialists. The MR Atlantic and Pacific averages are both near all-time lows; Pacific rates fell nominally below zero for the first time ever on 7th July, recovering by August 4th to an oxygen-deprived USD 5,531 per day. The MR Atlantic Basket is doing slightly better at USD 9,470 per day, and did enjoy a brief spike up to USD 20,000 per day in May due to the Colonial pipeline shutdown in the US. The hackers who interrupted the pipeline subsequently ‘apologised’ saying that their aim “is to make money and not creating problems for society.” Perhaps INTERTANKO, the independent tanker owners’ industry association, should hire them as commercial consultants.
One wonders how sustainable this situation is and when tanker owners will start going bust. Clearly there is some money about in the oil tanker markets as owners are not throwing old ships to the scrap yards. Only 132 oil tankers totalling 4.7m Mn Dwt, five chemical tankers of 71 k Dwt and 17 gas tankers of 409 k Dwt have been sold for recycling this year, a total of 5.2 Mn Dwt. Meanwhile, 270 oil and gas ships have been ordered this year including 172 oil tankers of 17.5 Mn Dwt, 68 LPG tankers of 3.1 Mn Dwt, 25 LNG tankers of 2.2 Mn Dwt and five chemical tankers of 10 k Dwt. To suffocate freight market prospects further, 17.9 Mn Dwt of new oil tankers have delivered by the end of July this year with another 15.0 Mn Dwt due in the balance of 2021.
Put the Poseidon Principles aside for one moment and ask yourself whether traditional banking principles have been abandoned….Perhaps the ship owners placing these orders have paid the deposits out of capital and will now have until the first stage payment is due to raise finance. One wonders how many of these oil tankers will be successfully financed, especially those (a majority) designed with traditional fuel oil engines and no built-in optionality to switch to low-carbon fuels in the future. Perhaps some of these orders might be better considered as options which can be dropped at a later date should market conditions suggest the ships will be economically non-viable. Shipyards may end up cancelling orders before steel cutting if owners cannot perform when stage payments become due.
Oil tanker owners, like Dickensian urchins at the manor house window, can only look hungrily on at the feasting going on in the container shipping markets. The liner companies are having the best year ever. The Freightos Baltic Index, a global average of container shipping costs, has hit USD 8,848 per day on 4th August having started the year at USD 3,448 and started July at USD 6,297. A year ago at the start of August 2020, the global average freight rate was about USD 1,700. The container freight market is going exponential and the traditional seasonal pattern is that the second half of the year is busier and more profitable for the liner companies.
After two decades of mergers, the liner industry is now dominated by the top nine companies, who lift more than 80 per cent of all boxes. Maersk, MSC, Cosco, CMA-CGM, Hapag-Lloyd, Ocean Network Express (a joint venture of the liner divisions of Kawasaki Kisen Kaisha, Mitsui Orient Line and Nippon Yusen Kaisha), and Hyundai Merchant Marine of Korea now stand like titans over the market. They all employ the same supply side strategy, slowing ships down, blanking sailings where the ship would sail uneconomically, adding and subtracting chartered-in tonnage to meet seasonal variations in demand. For the first time in 40 years, liner companies have real pricing power and they are exercising it.
Maersk, the worlds’ biggest shipping company, issued investor guidance at the start of August. In the second quarter of the year, unaudited revenue was up by 58% year on year to USD 14.2 Bn. EBITDA was USD 5.1 Bn, up by three times compared to 2Q20. Underlying EBIT was USD 4.1 Bn, six times higher than a year ago. Maersk attributes these phenomenal results to a 15% increase in demand which is “causing bottlenecks in the supply chains” and equipment shortages.
Shipping containers themselves have become rare as rocking horse manure. Back in the last container market boom nearly 20 years ago, one small liner company made a living shipping empty boxes on fast ships back from Europe, where there was a glut, to Asia, where there was a shortage. The same imbalance is a feature of this year’s container market. This is the result of lockdowns in the West. Consumers, unable to spend disposable income on hospitality industries have instead been renovating their home offices and gardens, creating huge demand for building materials which are now in short supply globally.
Liner companies and container leasing companies, flush with cash, are behaving in time honoured fashion and are ordering new ships and equipment with impetuous haste. 277 fully cellular container ships have been ordered in 2021 so far, comprising 3.1 Mn TEU. 51% of these are being built in China, overtaking South Korea for the first time as the leading container ship building nation. 43% are being built in South Korea and the remaining 6% in Japan. None are being built anywhere else; Europe and the US are now effectively out of the container ship building market. The seeds of the next liner shipping slump are being sown.
What’s the Prognosis, Doctor?
The Covid 19 pandemic has had some weird and wonderful effects on shipping markets. Suddenly, the OECD nations of the Atlantic are driving demand after two full decades of increasing Chinese dominance in the global commodity and shipping markets. The loose fiscal policy creating this demand cannot last forever. Indeed the taps of fiscal largesse may well be turned off by the end of 2021. Nonetheless we expect the consequences to result in elevated GDP and trade data for 2022 and perhaps into 2023. This is good news for shipping involved in the manufacturing supply chain – bulk carriers carrying raw materials and container ships carrying manufactured goods. They will have a great 2021 and probably a great 2022 as well.
It is less good news for oil tanker shipping. Global oil consumption is not yet back to pre-pandemic levels. China, the world’s biggest oil importer, cannot support the pullulating horde of oil tankers on its own. Long-term demand prospects for oil are gloomy, so the market cannot hope to be rescued by a sudden and prolonged upturn in demand. Tanker owners, like their container ship and bulk carrier owning brethren, have to learn to manage supply, or some will simply not survive.
Finally, in the light of the IPCC report this week, shipping has some serious thinking to do about getting to net zero and true zero carbon as fast as possible. Read a full, 100 - page, 50,000 word analysis here, for just £99 until 20 August!