2017 was year of change in shipping – caution required in 2018 – BIMCO Reflections

In the latest BIMCO edition of “Reflections” , the international shipping association said that 2017 had been a year of change, much of it for the better, but that a cautious approach was still needed for 2018 to maintain the progress already achieved.

Economic growth had accelerated in Europe, Asia and the Americas since mid-2016, and the IMF now expected global GDP growth to increase slightly in 2018 to 3.7%, up from 3.6% in 2017.

In 2018, the dry bulk sector was likely to improve the fundamental market balance further, if operational speeds do not increase.

For the container shipping sector, the improvement in 2017 was likely to carry through into 2018, where fleet growth rate seemed to be matching demand growth, “and as a result no big freight rate changes are expected to lift earnings”, BIMCO said.

For oil tankers, there was a potential upside in low fleet growth for both crude oil and oil product tankers. The growth in demand – coming from increased oil consumption and a return of more price arbitrage-driven trading activity – depended on a better balanced oil market. BIMCO said that it expected the world’s oil demand only marginally to outstrip the world’s oil supply, and thought that this would be a negative factor for the oil tanker market.

China was at the centre of shipping activity, being the one driver of dry bulk shipping demand growth, China had also taken a giant leap in hiking crude oil import levels during 2017. By introducing robotics into its enormous manufacturing sector, China also aimed to remain the world’s top exporter of containerized goods.

The world trade volume growth rate (goods and services) is expected to drop from 4.2% in 2017 to 4.0% in 2018. BIMCO observed that the shipping industry had adapted quite well to a lower level of demand growth over the past couple of years. The next challenge was to understand that this was as good as it it was going to get, said BIMCO, adding that the industry needed to avoid wishful thinking that demand levels would increase significantly – as that would not happen.

BIMCO said that the biggest risks to the forecast remained on the downside, fleet growing too much or demand growing too little.

Dry bulk improved more than expected in 2017, with a demand growth rate of 5%, and fleet growth of 3.2%. Chinese demand exceeded expectations on the upside while simultaneously fleet growth was lower than expected, denting some of the upside potential. Once again it was the steel industry dominating the development. Iron ore imports were up by 7% on 2016, as steel production grew by 6.3% to 9m.

BIMCO’s third update to its “Road to Recovery” market analysis noted that 2018 could become the first year since 2011 where the industry returned a profit, “but we shouldn’t be too hasty”.

BIMCO said that for 2018 the challenge is for owners and operators was to maintain slow steaming. BIMCO expects the supply-side to grow by around 1% in 2018 (estimated 3.2% in 2017).

Product tankers might break even in 2018, said BIMCO. The prolonged draw down of global crude oil and oil product stocks proved to be a drag on tanker demand throughout 2017. BIOMCO said that this was not a surprise, but many PR departments from oil producers were busy telling the world oil market fundamentals would balance “any day now”.

BIMCO said that believing in the return of stronger tanker demand sooner rather than later might have prompted tanker owners to postpone demolition. “Not until we see global oil stocks at a much lower level can we expect a renewed interest in seaborne oil trading activities that will lift oil tanker demand from its current subdued level”, said BIMCO, predicting that the first half of 2018 might pass by before that happens.

BIMCO said that the rise of US crude oil exports to long-haul destinations was markedly the positive story in 2017. That development increased tanker demand on top of the expected increase of oil imports into India. Chinese imports of crude oil also went beyond expectations, increasing tonne mile demand by as much as 13% in the first nine months of 2017. Such a high growth rate was not expected for 2018. Increased demolition activity amongst crude oil tankers and oil product tankers wasn’t enough to prevent freight rates from falling; scrapping reached a four-year high, but still fell slightly short of BIMCO’s forecast. The association noted that shipowners postponed the lion’s share of demolition until the second half of the year, “never really biting the bullet to reduce fleet growth significantly”.

Tanker demand growth in 2018 was expected to prolong the trend seen in 2017; growing imports in the Far East and growing exports from the US. This was set to benefit VLCC and to a lesser degree suezmax. The fate of aframax was closely linked to regional Asian and European demand where the growth rate was expected to be lower.

BIMCO said that it expected the crude oil tanker segment to see a net fleet growth of around 2% in 2018 (estimated 5.1% in 2017). It estimated that the supply side growth rate of the oil product tanker fleet would be around 1.8% (estimated 4.2% in 2017). With demolition of oil tanker capacity on a par with 2017. “Overall, we see oil product tankers operating in an improved market, whereas crude oil tankers will continue to struggle”, said BIMCO.

Container:

In 2017 freight rates went up and their volatility reduced. Demolitions went down, and the idle fleet was generally reactivated. The 2017 demand growth rate was heading for +5%, the best in six years. After a terrible 2015, port throughput had grown by as much as 7.7% quarter-on-quarter in Q3-2017 (source: Alphaliner).

As demand rebounded, combined with a multi-year low fleet growth rate in 2016, the fundamental market balance improved. In 2017 BIMCO said that the industry had not seen such an improvement. The fundamental balance seemed almost unchanged, as reactivation of idled ships lifted actual fleet growth beyond the nominal TEU growth rate of 3.3%. In September, the ordering drought came to an end. Twenty new orders for 22,000 TEU ships broke a 21-month lull in newbuild activity. They will be delivered in 2019-2020.

BIMCO noted this meant that  the nominal fleet growth level for the container shipping industry over the next few years was set to hover around 4%, which left little room for fundamental market balance improvements.

Any increased earnings therefore would come from:

  • continued cost-cutting exercises and
  • permanent slow-steaming to keep fuel costs on a tight leash.
  • operational efficiency gains and positive demand growth gain more boxes on the individual ships.

BIMCO said that the latter would mean harvesting some of the economies of scale the industry relied upon heavily – with the large volumes coming from front-haul trades. Profitability was up for grabs across the container shipping industry, if demand growth remains in the region of 4-5% and actual fleet growth was handled with care. BIMCO expected the container shipping segment to see a net fleet growth of around 4.1% in 2018 (estimated 3.3% in 2017).

https://www.bimco.org/products/publications/free/reflections