2017 was year of change in shipping, but caution is required in 2018

BIMCO’s chief shipping analyst Peter Sand has written that 2017 was a year of change, much of it for the better, but that a cautious approach was still needed for 2018 to maintain the progress achieved. In 2018, Sand said that 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 would continue into 2018, where fleet growth rate seemed to be matching demand growth, and as a result no big freight rate changes were expected to lift earnings. For oil tankers, Sand said that 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 – would depend on a better-balanced oil market.

BIMCO said that it expected that the world’s oil demand would only marginally outstrip the world’s oil supply, and that this would be a negative factor for the oil tanker market.

In dry bulk, BIMCO expected markets to improve in 2017, but the extent of that improvement was a positive surprise. “We didn’t expect that 2017 would see a demand growth rate of 5%, nor a fleet growth 3.2%”, Sand wrote.

Chinese demand exceeded expectations and fleet growth exceeded expectations on the downside, denting some of the upside potential. As the rest of the world either imports a steady amount of dry bulk commodities or slows down its imports – China’s importance to the market becomes even more evident. The steel industry dominated the development. Iron ore imports were up by 7% on 2016. For 2018, the challenge was for owners and operators to maintain slow steaming. BIMCO expected the supply-side to grow by around 1% in 2018 (3.2% in 2017E).

Product tankers might break even in 2018, wrote Sand. The prolonged draw down of global crude oil and oil product stocks proved to be a drag on tanker demand throughout 2017. In Q4 the oil producers gave in, playing the blame-game for a while before extending the OPEC supply deal into 2018. However, believing in the return of stronger tanker demand sooner rather than later might have prompted tanker owners to postpone demolition, said Sand.

“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. However, the first half of 2018 may pass by before that happens.

BIMCO expected 2017 to be a better year for container shipping compared to 2016, and this turned out to be the case. 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 a rise of 5%, the highest in six years.

BIMCO said that 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. This meant that the nominal fleet growth level for the container shipping industry over the next few years was set for around 4%, which left little room for fundamental market balance improvements. “As a result, increased earnings must come from: continued cost-cutting exercises and permanent slow-steaming to keep fuel costs on a tight leash”, said BIMCO.

BIMCO expected the container shipping segment to see a net fleet growth of around 4.1% in 2018 (3.3% in 2017E).