Peter Sand
BIMCO Shipping Market Outlook Feb 2020: Dry Bulk and Container Shipping
Today BIMCO publishes the 2nd half of the February Shipping Market Overview & Outlook 2020 with focus on Dry Bulk and Container Shipping
The 1st half of the report went out yesterday with focus on Oil Tanker Shipping and shipping-relevant macroeconomics. Find it here: https://www.bimco.org/news-and-trends/market-analysis
On Wednesday (that’s today) 10am CET a free market analysis webinar is held: Sign up here:https://www.bimco.org/events/20200226-market-analysis-webinar
Below extracts only, as full reports are attached as pdf. Comments and questions are welcome.
There reports are part of the digital BIMCO Bulletin magazine which goes out on 2 March: https://www.bimco.org/about-us-and-our-members/publications/bimco-bulletin
Dry bulk shipping: seasonality, higher fuel costs, and coronavirus disruption behind poor start to new decade for dry bulk earnings
The fundamental balance will continue to deteriorate in 2020, offering little support to operators hoping to pass on higher fuels costs, caused by the sulphur cap, to shippers.
Demand drivers and freight rates
The start of the new year has, as is often the case for dry bulk shipping, been marked by falling freight rates. The seasonal slump, typical in January after a strong Q4, has been exacerbated by the additional cost of fuel resulting from the IMO 2020 sulphur cap.
The steep drop in average Capesize earnings that began in early December continued into the new year. The Baltic Capesize Index fell into negative territory for the first time on 31 January, and average earnings stood at USD 2,660 per day […]
For the shipping industry, developments in average earnings are much more important than changes to the BCI, which is an important tool in the financial markets, but provides little information to the shipping community.
These sharp declines reflect more than just the underlying freight market dynamics. The earnings figures also take into account the cost of fuel, which has risen significantly since the implementation of the 2020 sulphur cap. The higher cost of low-sulphur fuels means earnings have taken a substantial hit. Earnings on a time-charter equivalent basis are based on a non-scrubber fitted ship. Scrubber-fitted ships’ earnings have remained higher because of the lower cost of high-sulphur fuel, rather than premiums for scrubber-fitted ships. What matters is who pays for the fuel. The steep drop in earnings illustrates that passing on the extra fuel cost has been near-impossible to implement on voyage charters.
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Outlook
China increased its imports of all its major commodities in 2019, but there is no guarantee this will continue in 2020. Chinese iron ore imports were down in the first 11 months of 2019, but record-breaking imports in December of 101.3 million tonnes, resulted in full-year growth of 0.5%. Total imports in 2019 were 6.5 million tonnes lower than the record-breaking 1,075 million tonnes in 2017.
China’s coal imports fell to 2.8 million tonnes in December, around a tenth of average monthly imports recorded during the rest of the year. The drop reduced overall year-on-year growth to 6.3%, down from 10.4% after 11 months. While the fall looks dramatic, it derives from delays in customs clearance rather than from volumes not being shipped.
Before the coronavirus outbreak, BIMCO estimated that demand for dry bulk shipping would grow by between 1.5% and 2.5% in 2020, compared with only 1.1% growth in 2019. The higher growth in 2020 is much needed to mitigate the increased costs associated with compliance to the 2020 sulphur cap. However, demand growth at the lower end of the range now looks more likely to be a best-case scenario following the outbreak. As fleet growth will be higher than even the best-case scenario for supply growth, the fundamental balance is expected to continue worsening in 2020.
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Container Shipping: carriers struggling with higher fuel costs face little support from market fundamentals
Low demand growth will continue into 2020, with carriers struggling to increase freight rates enough to cover the additional costs of the IMO 2020 sulphur cap compliance. Fleet growth is lower then last year, but still too high compared to demand growth.
Demand drivers and freight rates
In January, unaffected by the coronavirus (COVID-19) outbreak, freight rates rose, as per their usual seasonality, with rates traditionall rising in January from December.The hike this year was not enough to cover the additional costs of the IMO 2020 sulphur cap, with the market offering little support to carriers attempting to pass these on fully.
The comprehensive Shanghai Containerized Freight Index (SCFI) rose to 1,022.6 in the second week of January, up from 850.3 at the start of December 2019. Since then, the spot market index has fallen, down to 981.2 on 24 January 2020. Similarly, the China Containerized Freight Index (CCFI), also covering long-term contracts and more ports, rose to 965.3 on 24 January 2020, from 822.7 at the start of December.
What should really be made of these increases? If we compare the average January 2020 with average readings of the indices over the past six years, the SCFI is 91.3 points (10.1%) higher and the CCFI 55.8 points (6.4%) higher. Both indices were higher in January 2015.
The Bunker Adjustment Factors (BAFs) have been widely criticised for not being transparent or for being too complex to understand, leading to carriers having trouble implementing them. Those that have succeeded may have done so by lowering the underlying freight cost, such that the total price shippers’ pay has not changed much.
The strong freight rates come from the seasonality linked to volumes out of China being frontloaded ahead of the widespread factory closures for the Chinese Lunar New Year holiday. Volumes tend to fall during the holiday period, before ramping up again once the holiday ends.
This year will be different. Following the outbreak of the coronavirus in China, manufacturers have been much slower returning to capacity after the holiday. Many have stayed closed for weeks past their planned reopening date, and the return of workers has been delayed by widespread closures of inter-city transportation. As exports fall, carriers have been blanking sailings to reduce the capacity on routes out of China, despite the demand for goods being – as yet – unaffected by the virus, as it is driven by overseas buyers.
Disruption to Chinese manufacturing trades will also have consequences for neighbouring countries, as supply chains are deeply interconnected; manufacturers in one country often rely on those in another. This interconnectedness is the reason why intra-Asian container volumes are an early indicator of what will be exported on the long-distance trades out of Asia. Manufacturing in China, therefore, is not alone in facing problems; knock-on effects will be felt by manufacturing and exports throughout the region.
Fleet news
BIMCO expects the container shipping fleet to grow by 2.5% in 2020, marking the first time in four years that deliveries will be below 1 million twenty-foot equivalent units (TEUs). On top of a fall in deliveries, demolitions are set to rise to 200,000 TEUs.
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Outlook
Global container shipping demand growth slowed to 0.8% in 2019. The factors behind this contraction remain the same:
- Despite GDP growth set to recover in 2020, the trade-to-GDP multiplier remains low, limiting the growth in container traffic, as much of the growth comes from services, rather than the goods needed to lift the seaborne market. Furthermore, growth in developed economies, which drive demand for container shipping, is projected to slow further in 2020.
- The trade war drags on, although further escalation has been avoided. The “Phase One” agreement between the US and China is primarily focused on Chinese imports of dry bulk and agricultural goods from the US. While all US tariffs are still in place, others set to be implemented on 15 December 2019 were avoided.
The fundamental balance of the container shipping market will once again deteriorate in 2020. Although fleet growth has fallen, it still exceeds the expected growth in demand. This comes at a time when, even during the seasonally strong pre-Lunar New Year period, carriers had difficulty passing on the extra fuel costs – a situation that, given the lower demand, has continued to worsen.
