BIMCO June Outlook: Dry Bulk shipping: No quick recovery for the market as Covid-19 digs deeper. Container shipping market outlook included.
Dry bulk shipping: no quick recovery for the dry bulk market as Covid-19 digs deeper
The outlook is poor for dry bulk, as the negative demand shock and overcapacity come together to send rates to multi-year lows, even a return to work in China is not enough to support the market.
(report extracts only below – full versions attached)
Demand drivers and freight rates
The dry bulk shipping market has had an appalling start to the year, with all sectors at loss-making levels. Even as China returns to work, the Capesize market, which had found some relief in April, is again experiencing rock-bottom freight rates.
The first quarter of the year proved a mixed bag for the dry bulk shipping industry, with freight rates for the smaller dry bulk segments faring better than those in the Capesize market. April has provided some relief for the struggling Capesize markets, although rates for all ship types remain below break-even levels.
Capesize earnings have been well below the average USD 15,300 per day needed to break even, falling to just USD 1,992 per day, its lowest level since March 2016. While the smaller vessel sizes did not reach such a low point, earnings only reached break-even levels for a brief period, with most of the year at loss making levels.
The importance of China to the dry bulk market was clearly reflected when it went into lockdown, as the rates went downwards and, since its reopening, it has provided some upwards support to volumes, but the
low rates remain. Volumes of China’s major dry bulk imports have posted year-on-year growth throughout the crisis. Iron-ore imports are up 5.3% and coal up an impressive 27.8% in the first four months.
Of particular importance to the Capesize market are iron ore exports out of Brazil – and, here, the reason for the low freight rates becomes clearer. Iron-ore exports are down 8.7% in the first four months of the year, a loss of 9m tonnes, or 45 Capesize loads (200,000 tonnes).
Since the start of the year, the dry bulk shipping fleet has grown by 1.6% to reach 891.5m DWT on 19 May. BIMCO expects the fleet to grow by 3% in 2020, and we expect a further 39.3 million DWT to be delivered
to the market through the rest of the year. This reflects a higher slippage rate for planned deliveries because of the Covid-19 disruptions, which has risen to 35% from 25% before the crisis.
Demolitions have also been disrupted by the pandemic, with the major shipbreaking nations having closed their beaches to ships because of their lockdown measures. This resulted in only one dry bulk ship being demolished in April, a 28-year-old ore carrier with a capacity of 268,132 DWT. The easing of some of the measures allowed 3 ships to be demolished in May, bringing total dry bulk demolition so far this year to 5.4 million DWT.
Even as China, the biggest driver for the dry bulk industry recovers, the full scale of the demand shock for the dry bulk industry remains to be seen.
Some of the stimulus measures that have been, or are expected to be, announced concentrate on infrastructure and housing investment, which will boost demand for raw materials. But other industries that provide demand for dry bulk – such as steel and aluminium for the automotive industry – have all but collapsed.
BIMCO expects trading in all commodities to fall, including the grains trade, although this could yet turn out to be the joker for the year. Lower commodity demand comes as a direct result of the lockdowns, as well as from the ensuing economic slowdown. The International Energy Agency (IEA) expects demand for coal will fall by 8% in 2020, with lower demand coming from lower electricity consumption because of lockdowns and reduced manufacturing activity.
Given the overcapacity – which was already plaguing the market after years of supply growth outstripping demand – BIMCO already expected average freight rates to be in loss-making territory in 2020. This will only be exacerbated by the negative demand shock from Covid-19.
The outlook may yet deteriorate further if lockdown measures last longer than expected, or have to be reinstated to avoid a new wave of infections, but there is little prospect of an improvement. Even with large government investments in infrastructure, the global recession will doubtless lead to lower demand and low freight rates.
Container shipping: massive blanking of sailings has supported freight rates as demand collapses
The Covid-19 crisis has – and will continue to – hit the container shipping market hard, and the current economic situation provides no hope for a short-term recovery.
(report extracts only below – full versions attached)
Demand drivers and freight rates
The coronavirus pandemic looks set to continue to hammer container shipping demand. While the lower demand that came when China shut down much of its manufacturing in February has passed, it was been replaced by a demand shock, as almost every other country entered their own forms of lockdown.
Laden container imports into the US West Coast already show the effects of the disruptions in China, with imports in February and March considerably down. On the other hand, the poor April results mostly reflect the lower demand from the US as it went into lockdown. In the first four months of the year imports are down by 12.5% and at their lowest level since 2014.
Global container shipping volumes fell by 5.1% in the first quarter of the year compared with last year, with volumes down by 2.1m TEU at 38.2m TEU. The intra-Asian trade, a precursor for what will be exported from the region in coming months, was down by 13.1%, with lost volumes higher in March than February, despite China’s return to work. On the major lanes out of the Far East, exports to Europe were down 12.0% and exports to North America down by 9.4% in Q1.
Maintaining some stability in freight rates has only been achieved by large capacity withdrawals from the market, with blanked sailings sending the idle container shipping fleet to record highs of 11.3%. Even when excluding ships that are having a scrubber retrofit, the idle fleet is record high. Despite this, not all rates have been able to remain elevated. While spot and contract rates from the Far East to the US have remained close to, or above, levels at the start of the year, those to Europe have fallen. Spot rates to Europe have dropped by 29.9% since the start of the year and contract rates by 5.4%. In fact, the fall in spot rates and underlying volumes was so steep that in April the average freight rate for sending a container from Europe to the Far East was higher than sending one from the Far East to Europe, a reversal of the usual fronthaul/backhaul trades on this route.
In these times, charter rates for container ships are a better gauge for the container shipping market than freight rates. The collapse in container shipping demand caused a jump in the number of ships available for charter, which sent charter rates – especially for the large vessel sizes – down. The daily hire for an 8,500 TEU vessel has fallen by 38% from the start of the year, from USD 30,000 per day to USD 18,500 on 15 May 2020, with rates likely to continue falling until higher cargo volumes return. Rates for a 6,500 TEU ship have fallen the most: down 42% since the start of the year, to USD 14,500 per day on 15 May.
In what can only be defined as terrible timing, the record for the world’s largest container ship was broken in April, when a 23,964 TEU ship set sail for its first voyage. At 400m long and 24 rows across, the HMM Algeciras breaks the previous record of 23,756 TEU. It was the first in a series of 12 ships all with a capacity of either 23,000 or 23,964 TEU due to be delivered this year, adding 282,746 TEU to the market. The second ship, the 23,000 TEU HMM Oslo, was delivered in May.
Including these two new ultra-large container ships, 62,922 TEUs of new capacity entered the market in April, with the rest of the volumes made up of much smaller feeder ships. Year-to-date deliveries were down 57.6%, to 175,920 TEU, by 19 May compared with the same period last year.
Demolitions have also faced severe disruptions from the coronavirus crisis. The now-extended lockdown on the Indian subcontinent means ships scheduled for demolition are not being accepted at the facilities. Only two ships totalling 6,534 TEU was demolished in April.
So far this year, the containership fleet has grown by 0.6% and, as of 19 May, stands at 23.1m TEU. BIMCO expects the fleet to expand to 23.4m DWT by the end of the year, an annual growth of 2%, half of the growth rate in 2019. This comes after adjustments to the slippage rate for deliveries from 20% to 25%, and BIMCO’s demolition estimate rising from -199,000 TEU to -299,000 TEU.
There were no new orders for container ships in April and the first half of May, with owners more likely to want to delay ships that are scheduled for delivery in the coming months than to add to their future fleet. In the year to date, new orders for container ships have fallen by 36.8%, to 153,422 TEU compared to last year.
The idle container ship fleet reached a new record in May, at 2.65m TEU, because of blanked sailings as a result of the shutdown of manufacturing in China in February. With demand now being severely affected, BIMCO expects the idle fleet to remain at around 10% for the rest of the year. The large idle fleet has, so far, been enough to support freight rates, temporarily hiding the losses for carriers. While savings are made by not sailing – with voyage costs and some operating costs avoided – the empty ships are still generating a loss on a daily basis, with some of the operating costs still present and financing costs unchanged, while not providing any income.
The recession and drop in consumer spending that this crisis has provoked will hit the container shipping industry hard, with no sudden bounce back in demand expected. Even under the WTO’s optimistic scenario, container shipping demand will fall by 10% in 2020.
BIMCO expects that, much like on the Far East to Europe route, spot rates and contract rates will fall in the coming months, with average earnings for the year at loss-making levels.
In particular, the ultra-large container ships delivered in recent years face a big challenge. Their size means many of them can only be deployed on the Far East to Europe route, and with demand here falling, the ships will have nowhere to go. The jump in idle fleet also shows that cascading to other routes in present market conditions is not an option, as demand has evaporated across the board. In the charter market, the biggest losers in the short term are those who charter their ships on short-term contracts.
One positive factor that carriers can lean on in these otherwise dark times is the lower bunker price – resulting from the collapse in oil prices – reducing voyage costs. In some cases, the combination of lower shipping demand and bunker fuel prices has led carriers to sail around the Cape of Good Hope, avoiding the cost of transiting the Suez Canal (which can be upwards of USD 600,000 for a one way trip for a ULCS) and soaking up some more capacity by extending sailing times. On record, 20 ships have done that trip in the year to date.