Outlook for the shipping industry; is the worst now behind us?
Some vessel sectors are seeing higher freight and charter rates in 2015, but these signs of optimism are being tempered by other macroeconomic factors, such as falling commodity prices, a tumbling Chinese stock market and plummeting scrap prices. James Walters of Gray Page writing in Bunkerspot where this article first appeared, analyses the complex outlook for the shipping industry.
Back in the January we considered the reasons behind the stalled recovery in the shipping sector that was seen during 2014. As we predicted, 2015 has seen continued hardship for shipowners particularly across the dry cargo sector. As a result of this and other such issues, including the collapse of the bunker trading group, OW Bunker, Moore Stephens has been right to state in its recent report that confidence in the shipping sector is at its lowest since 2008.
Despite this, there is potentially a glimmer of optimism out there that the worst may now be behind us. The US, European and Japanese economies are starting to show the long-awaited shoots of growth. Nevertheless, optimism still remains muted as these signs of hope are being tempered by the substantial levels of concern about the future direction of the Chinese economy and falling commodity prices.
Lower oil prices appear to have actually stimulated demand within the tanker sector and the potential of easing sanctions, on Iranian oil cargoes, may well improve the tanker market even further as additional cargoes become available for shipment into Europe. While the easing of sanctions has been talked about for quite some time, few predicted that a workable solution would finally come to fruition. Even now, the United States appears to be taking a more cautious approach to that taken by European governments.
As a result of these factors, tanker freight rates remain buoyant, with Chinese imports of crude rising 8% in the first six months of 2015, and average very large crude carrier (VLCC) charter rates now standing in excess of $55,000 per day for the first six months of the year. This is up from just $27,000 per day across 2014. As a result, these vessels are making a substantial profit at the moment and a relatively controlled newbuilding order book bodes well for the medium term. For owners with exposure to the loss-making dry bulk or offshore sectors, this will help enormously to stave off a financial crisis.
The difficulty comes for those public companies that have raised separate investment for their different arms of shipping. The likes of publicly-listed dry bulk operators with no access to a separate tanker income stream therefore remain exposed, unless backed by significant long term contract bases that can ensure profits even in this difficult market.
Within the dry cargo market, falling commodity prices have yet to stimulate much growth in demand. Chinese coal imports have fallen 39% in the first six months of 2015, compared to 2014. This has resulted in plenty of idle tonnage. The lack of confidence is being felt across the Chinese stock market, which has suffered heavy falls recently, particularly for the three largest steel producing companies. Iron ore prices have fallen by 10% this year to just $44 per metric tonne (mt) CIF and this has come just at a time when Australia and Brazil’s investment in new export facilities are coming on stream, leading their exporters to continue to push increased quantities into an already saturated market.
This has resulted in the bottoming out of freight rates for capesize bulk carriers. In the year to date, these vast behemoths have earned just over $7,000 per day. This figure is likely to be less than operating costs, especially if allowances for docking and full maintenance programmes are taken into account. The good news has been that, despite moving into the traditional summer lull, current spot rates in July 2015 actually improved somewhat to around $15,000 per day. It remains to be seen if this level can be sustained if export quantities start to fall and, even at this rate, it is unlikely that full financing costs can be covered. When you consider that the losses of the last six months will still need to be made up, we can see the uphill struggle that will continue to face bulker owners.
This depressing prospect is compounded when you consider that despite these low freight rates and limited cargo demand, the new building order book still remains stubbornly high. Clarkson’s Research reports that there remains 18.3 % of the capesize fleet on order at present, and only 8% of the current fleet is over 20 years old, with a further 7% over 15 years. The collapse in scrap prices is unlikely to help owners take the decision to scrap further tonnage when the fleet age profile is so skewed to vessels under 10 years old.
These rates therefore remain unsustainable for any spot market owner. As predicted, we have seen a spate of further bankruptcies, with the likes of Samsun Logix Corp. filing for Chapter XI protection for the second time in six years. If the talked of rise in US and UK interest rates comes into effect, thereby restricting the flow of cheap investment money into shipping, and increasing the need for banks to deal with overdue payments, then there may be a further spate of collapsing businesses yet to come, particularly within the dry cargo and offshore sectors.
Within the container market the fall in oil prices and the return of economic growth in Europe and the United States have helped to stabilise the market. The sustained period of hardship seen between 2012 and 2014 has finally started to improve as the market consolidation, albeit somewhat restricted in its scale, has born dividends. The likes of Seaspan, which has recorded substantial profits despite its huge newbuilding programme, are a good sign for the future direction for the sector. An average 5% growth per annum in container volumes globally has helped charter rates for container vessels to increase by 20% year on year, and rates are now above operating costs and close to covering full financing costs as well.
While all of this bodes relatively well, and shows signs that the worst may be finally behind us, there are still some concerns hanging in the air. Much will depend on who will step into the shoes of China following the declining demand for imports from there. This has already had a knock on effect with Brazil, which along with Australia has been feeding the Chinese dragon’s insatiable demand for raw materials. It is being predicted that China may seek to move its economy away from its focus on exports towards a more internally focused market. People have been looking at India as the replacement power. However, talk of its rivalling China has been discussed for years without there being any real signs of it building the momentum needed. Nevertheless, the stalling of other BRIC economies may still see India leading the pack should China’s slow down continue following the recent stock and property market problems.
All of this leads to the level of market uncertainty remaining high. As a result, the need for counterparty assessment and properly planned due diligence and risk management strategies remain key to any company’s survival. Knowing your client and seeking greater transparency from any business partner remains a key goal for any business to require from its future partners.
My own feeling is that the worst may now be behind us. However, let’s hope that the light at the end of the tunnel is not an approaching juggernaut towing shipowners out of Greece, and sucking further life out of China’s import demand, as these areas remain a key to the future of shipping demand and the recovery.
This paper is intended as a general summary of issues in the stated field. It is not a substitute for authoritative advice on a specific matter. It is provided for information only and free of charge. Every reasonable effort has been made to make it accurate and up to date but no responsibility for its accuracy or correctness, or for any consequences of reliance on it, is assumed by Gray Page.