Oil tanker shipping and container shipping. Waiting for 2020 / Global demand growth in TEU is weak, but very unevenly distributed.
Tanker shipping: While we wait for 2020 to kick in, it’s all about politics
The tanker market is – even more so than before – all about geopolitics. Iran, Libya and Venezuela face export limitations because of sanctions and internal political troubles. At the same time, US exports of crude oil are growing fast because of pricing and politics.
“We have mobilised all of the country’s resources and are selling oil in the ‘grey market’,” Iran’s deputy oil minister Amir Hossein Zamaninia is quoted as saying by state news agency IRNA, according to Reuters.
Among the main official buyers left, the main ones are China, India and Turkey. BIMCO doesn’t expect that crude oil exports out of Iran will fall much more than they already have – whether “waivers” are in place or not. Exports have averaged around one million barrels per day since US sanctions were reintroduced on 4 November 2018 (source: Lloyds List Intelligence). BIMCO monitors other sources as well to verify what is happening, as it recognises that data on issues such as this come with a high degree of uncertainty.
In the oil market, global refinery throughput fell by 1.5m barrels per day in March compared with February. The throughput reached a low point in March, but the International Energy Agency (IEA) expects higher throughput in the coming months through to September. Higher throughput is – obviously – positive for oil tanker demand.
The current maintenance season for refineries is more extensive and longer than usual. The extension is likely to indicate an effort to reduce the corresponding maintenance period in the autumn, to capitalise on an expected increase in demand caused by shipping’s switch to low-sulphur fuel.
US export of oil products fell by 2.0% in Q1-2019, which was a result of either low export demand or reduced throughput in general. US exports remain a solid driver of demand for oil-product tankers, despite most of the export destination being shorter haul to South America and Europe.
Why do we focus that much on fleet growth? Because it’s working against a market recovery – and it’s the only fundamental factor that shipowners can affect. Oil-product tanker fleet grew rapidly in the first four months of 2019. In total, 3.4m dead weight tonnes (DWT) was delivered in that period. That level is a 10-year high, in volume terms, and matches the influx of 2010-11 and 2015-16. The fleet growth of 1.9% was made up of 14 LR2 tankers, 27 MRs; a couple of handfuls of LR1s and Handysize tankers also entered the active fleet.
The crude oil tanker fleet grew by 3% in just four months (Jan-Apr). The market got 13.2m DWT of new tonnage, with a limited offset from one million DWT sold for demolition. The participants in the market seem to have very high expectations for a recovery, as the fast fleet growth is only countered by insignificant demolition activity. BIMCO is not so optimistic. In terms of the number of ships, the market gained 25 VLCCs, 21 Suezmax and 15 Aframax, while one Aframax and three VLCCs left. Currently, 16 of those Suezmax tankers trade in clean cargoes – illustrative of the dynamics of the oil tanker fleet. You cannot be too rigid in your fleet analysis, as these ships can shift between dirty and clean cargoes, depending on market conditions.
The politics are what matters. A business-as-usual scenario in the oil market is only delivering a steady, but not high, demand growth for the oil tanker market. Any upside to the tepid demand growth in 2019 is coming from the IMO 2020 regulation – again, politics – and trades affected by sanctions.
Oil majors are regularly announcing the specs for the range of new compliant fuels they offer to the industry, …
If US sanctions on Iran shifts oil exports to South Korea from Iran and to the Gulf of Mexico, it will have a positive effect on the market. Every VLCC cargo that departs from the Gulf of Mexico for South Korea instead of from Iran is a 150% gain in ton-miles demand. As an example, a VLCC sailing at 12.5knots spends 54 days sailing 15,000Nm (+5% sea margin) from Houston, US (largest crude oil export port) to South Korea (Busan) – while it takes only 22 days sailing from Kharg Island in Iran to South Korea.
Another potential upside to the crude oil tankers would be a resolution of the US-China trade war – one that would restart Chinese imports of US crude oil. China grew its crude …
After rapid growth in 2017, when annual US oil-product exports grew by 12.5% (372,000 barrels per day), exports grew by only 3.3% in 2018. Of the incremental growth in 2018, 44% (156,000 barrels per day) was distillate fuel oil (15, or below, parts per million [ppm] sulphur content).
Container shipping: The many pitfalls in the coming months will decide the fate for the year
Demand drivers and freight rates:
The number of boxes being shipped around the globe by sea grew 0.5% – 191,000 twenty-foot equivalent units (TEU) – in the first quarter of 2019 compared with the same period in 2018. The growth figure is massively below those of earlier years, where the global demand in Q1 2017 grew by 6.6% and in Q1 2018 by 3.6%. The timing and impact of Chinese New Year always affects business during the first three months of the year – this is a first glimpse at the real trend, as we now have three months of data to smooth the seasonality and not only two.
A growth rate as low as 0.5% is a critical issue for an industry used to much higher growth – double digits for many of the years between 1999 and 2007, growing by an average of 10.2%, and coming down to an average of 4.3% between 2012 and 2018.
Having said that, the underlying numbers reveal a somewhat confusing demand picture.
Volumes on the intra-Asian trades fell during Q1 (-0.2%). The drop is a sign of weakening volumes in the supply chains and, ultimately, the result of fewer new export orders received by Asian manufactures in recent months – something that will impact outbound volumes in the coming months.
Fewer export orders mean less transport of semi-finished goods between the Asian countries. So the freight rates on intra-Asian routes going from Shanghai to Japan, Korea and Singapore are increasingly relevant to keep an eye on, to spot the knock-on effect on the regional semi-finished goods market – and they are mostly moving sideways or slowly in decline.
Within fleet news, ordering activity is the most interesting. Of the 53 ships that have been ordered year to date, 14 have a capacity between 11,000 TEU and 15,000 TEU, and 39 have a cargo capacity between 653 TEU and 2,500 TEU.
In March, Chinese leasing capital provided full financing of (yet another) full string of ultra large container carriers (10 ships – 15,000 TEU) for the already crowded Far East to Europe trade lane. The 10 ships represent a 40% jump in the estimate for deliveries in 2021. The active fleet grew by 1.1% during the first four months of 2019, if measured by capacity.
Our forecast is now for the fleet to grow by 3.1% in 2019. This would be the second-lowest fleet growth on record.
At the beginning of the year, BIMCO expected a small amount of capacity to be demolished. That amount is now predicted to double – to 200,000 TEU – on the back of much weaker than expected freight rates across the board for the year so far.
Overall, BIMCO has low expectations for demand growth in 2019. A protectionist’s approach to global trade – as mentioned in the article on macroeconomics – and a high sales-to-inventory ratio in the US set limits for how strong peak-season import will be.
The peak season for transported volumes is July to September for the Far East to Europe and North America trade lanes. To get an early indication of how well the peak season on the long hauls in 2019 will perform, we watch the intra-Asian trades closely. As discussed earlier in the report, we have started to see some weakness. This is the downside risk for which we are watching out.
As the idle fleet comes down fast, it’s important to note that it is not a response to fast-growing demand – it is merely the result of fleet managers responding to margins that improve from highly negative to only slightly negative, which apparently prompts action among the owners.
The correlation is striking and simple: reactivation of idle ships limits the upside to higher operating margins. Just as margins reach positive territory, the balance tips and another downturn begins. Ship owners’ and operators’ fleet management, much more than the changes in demand for container shipping, triggers these “cycles”. During 2011-2018, the main container carriers posted an average operating margin that was negative in 19 out of 32 quarters.
As BIMCO forecasts weak demand growth for the coming quarters, the container shipping industry is set to return to negative margins.
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