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The world needs daring and decisive political leadership, especially in the EU and the US, for confidence and optimism to find its way to the consumers. Unfortunately, the political stalemate in the US continued throughout 2011
Global economy: Tackling unpleasant issues remains vital to bringing back optimism and spurring demand
The world needs daring and decisive political leadership, especially in the EU and the US, for confidence and optimism to find its way to the consumers. Unfortunately, the political stalemate in the US continued throughout 2011, bringing with it new uncertainty and doubledip horror stories and whereas the EU found ways to stabilise the Southern economies, the unease regarding the size of the problem and the question as to whether the EU has found the cure is still lurking. Emerging and developing nations, in particular China and India, stayed on the growth track despite the large Western economies slowing down imports as a result of hesitant private consumption. With a slowdown as well in exports, China and other Asian economies heavily relying on exports will have to stimulate focus even more on domestic consumption. The need to nurture domestic demand in all Asian nations, even more than today, is a natural counterbalancing exercise.
Consumers and governments are saving more and cutting costs, which are sound actions by themselves but not really helping economic growth to kick in. This is evident also when looking at JPMorgan Global Manufacturing PMI, which is now in limbo around the threshold level of index 50. The US Manufacturing sector is edging closer to stagnation while the Eurozone’s ditto continues the sharp downward movement deeper into contraction. Mixed signals from Japan and China blur the picture, as they too are faced with very difficult domestic challenges.
With a 4% World GDP growth in 2011 and the prospects of a similar level for 2012, shipping will continue to be impacted by significant oversupply of tonnage in all segments, but ship owners have traded in harsh market conditions before – not an unusual scenario in a cyclical business environment – and there are of course remedies in the form of idling and recycling of tonnage to bring better balance between supply and demand, a condition for improvements in freight rates.
When addressing the effects of the weak world economy on individual shipping market segments, it is first and foremost the container and tanker sectors that have taken the beating, whereas the dry bulk markets appear to have suffered less with considerable lower but acceptable rates by the end of the year.
The good news is that the world is still turning and trade is growing, albeit at a slower pace; if the political will returns to the US and EU, perhaps confidence can be restored in the financial sector, a necessary condition for investments, consumption and overall economic growth.
Ship supply: Deceleration from all-time peak
Newbuilding deliveries in 2011 surpassed an only one year old record. The dry bulk fleet topped the ranks, growing by almost 75 million
DWT. Had it not been for a record high level of large vessels being recycled, the glut of tonnage would have created even greater challenges for owners.
Looking forward, our crystal ball tells us that the dry bulk fleet will grow by not less than 12% in 2012, while the containership fleet is set for another year of growth close to 8%. As regards oil tankers, crude oil tankers are facing one more very challenging year as the fleet is set to grow by 7%, whereas product tankers have left previous years with a high inflow of new tonnage behind to see only 3% increase of the fleet in 2012.
Taking all the three main shipping segments into consideration, none of them are able to deliver comforting sounds from a large-scale recycling potential to counterbalance the amplified pace of newly-built vessels about to enter the world fleet. A potential positive surprise
could come from the dry bulk segment as it did in 2011.
Financing of business, as well as of the orderbook, will be key issues on every owner’s agenda. As the traditional large European shipping banks are undecided regarding their future exposure to the industry, alternative sources of finance from all over the world and in many guises have stepped in. We certainly see this trend continuing throughout the coming year.
Dry bulk shipping: Will this be the year when India takes off?
The year 2011 had barely started before a series of unforeseen events took place across the globe. Most of them affected dry bulk shipping negatively and the large Capesize vessels were particularly under pressure. Amongst the events were the flooding in Australia and South Africa, the triple disaster in Japan and the “Arab Spring” that also affected the supply of oil into Europe.
Half a year down the road, during which many Capesize vessels had earned less than any other dry bulk vessel size, the unexpected happened again. Strong demand for iron ore and coal from China and the recovering Japan, sourced from Brazil and Australia, ignited freight rates for Capesize vessels. A tight tonnage situation in the Atlantic basin combined with increased congestion in loading and discharging ports pushed average rates above USD 30,000 per day. A far cry from the peaks of the super cycle, but surely an indication of the peak levels we have in sight for the near- to mid-term future as the supply side remains a considerable burden for
The demand side is set to be relatively stable in 2012 although it’s likely to grow somewhat slower than in 2011 – at least in volume terms. Overall iron ore demand is likely to slow. Still, a lower world market price as compared to the domestic costs of mining it within China holds the key to provide positive demand shocks for this valuable steel ingredient. Growing demand for thermal coal from large Asian consumers is said to be a steady demand driver.
Looking forward: expect the unexpected, as has been the lesson learned. Maybe even India will begin to influence the market as a significant importer. This would fulfil the prophecy and release a vast potential that has been simmering for a very long time and provide a much-needed second major demand driver. Supplementing China as the dominant factor in the market would create a more sustainable freight market going forward. However, this will not happen in just one year; moreover it appears destined to remain a long and dusty road for several years to come. An optimist would surely name India as the best thing that could happen to the dry bulk shipping industry. In the meantime, volatile iron ore exports and strong demand for thermal coal is likely to characterise India’s contribution to the dry bulk markets.
Tankers: Slow economic growth dampens oil demand
Growing demand for crude oil tankers is originating from countries close to the large crude oil producers. That in turn provides fewer tonne/miles as compared to demand emerging from the Western Hemisphere, where slowing demand continuously offers fewer long hauls. As a rule of thumb, volume demand in the East must grow by a factor two to offset the decline in volumes that used to go to the West. On the oil product side, refineries in the Far East or Middle East are coming on stream later than expected, which means that the export volume will be lower than previously expected.
The product tanker sector holds optimistic prospects for the near future, but it is a complex business and ever changing business conditions and opportunities can be difficult to forecast. But as the “demand stories” of Atlantic gasoline arbitrage, Winter markets, and refinery dislocation are struggling to perform to expectations, the focus has turned towards a wider range of products. Moreover, demand for oil products with a lower sulphur content than the local refinery is capable of producing provides for trading of the same product with different sulphur content between nations. This leads to a growing demand for oil product transportation despite the overall lower oil demand.
Amongst the swing factors that could improve earnings in both tanker segments are slow steaming, virtual arrival, longer hauls, e.g. to avoid the growing threat from pirates and of course a faster than expected recovery in the large oil consuming nations. The slow steaming of any tanker would ease the pressure from the supply side, as it remains the least bad option for the cash-strapped owner as he attempts to maintain his cash flow. Moreover, being at the right place at the right time continues to be crucial to take advantage of any non-planned-for events that would provide a window of higher earnings, e.g. shortage of prompt tonnage in the Mediterranean due to Bosporus Strait congestion.
Taking the longer perspective, should the world decide to move away from using nuclear power plants for generation of power faster, this could improve tanker demand. Recent evidence from Japan has provided better days for LNG carriers, but demand for other fossil energy sources will be advantageous for tankers and bulkers should the demand arise from nations without a regasification facility or a grid able to handle LNG. Moreover, the trend of the US becoming more and more self-sufficient with oil will potentially affect the tanker industry in a farreaching fashion.
Container shipping: We have been here before …
…and liner companies know the most effective medicine that will make the pain disappear, but not cure the decease. Will they start idling tonnage again…? Looking at the market during 2011 – “no” is the unfortunate answer. The amount of laid up tonnage is noticeably distant from the level that made 2010 a very good year.
Going into 2012, the sector is battling on two fronts from the trenches. A bad global economic weather forecast is the main demand threat, while the oversupply issue is an internal problem to handle.
Demand is very unevenly distributed; while the volume of inbound loaded containers to US West Coast Ports is barely growing, the intra-Asia trades and new-market trades are growing briskly. This difference in growth rates is very illustrative of the underlying market.
The battle against oversupply has to be fought simultaneously with low demand and in a tough competitive environment. On the world’s largest trading lane from the Far East to Europe, it has been possible to observe the “open exchange of punches” between the market participants. Vessels of ever increasing sizes have lowered the cost per transported unit – and triggered a massive cascading from this trade of sub-optimal vessels. This trend will only become more severe. 2012 will see another 50% increase in capacity in the segment for Ultra Large Container Ships (ULCS) capable of carrying more than 10,000 containers.
A very high number of newbuilding contracts have made this sector stand out from the tramp shipping segments, which have avoided a repeat of last year’s astoundingly high contracting activity. Half of the new box ship orders are for 2013-delivery, which is the earliest possible delivery. It is not clear whether it is pressure from shipyards or owners that has pushed delivery dates closer – instead of further away which probably would be more prudent. 62 of the orders in 2011 are made in the ULCS segment – bringing the total to 174. That is an increase of 50% of vessels bound for the Far East – Europe trading lane, which is already the mostly challenged market.