Tanker Shipping: Winter is coming, random shocks can be powerful – but only fundamental improvements last
Demand drivers and freight rates
Crude oil tanker freight rates made an exceptional comeback in October. Monthly average earnings for a VLCC in April and May were below USD 4,000 per day; in June and July, they had moved up to a still sluggish level at USD 7,000-8,000 per day; and August and September saw levels around USD 11,000 per day – all in the loss-making territory. But then, October saw average earnings shoot up to USD 33,500 per day.
Where did that come from? In all fairness we are not sure whether this is a dead cat bounce, or winter arriving early, just as refinery maintenance has been concluded for the season. Impact has also come from the ongoing and busy typhoon season in the North West Pacific, affecting Asia at large, that has disrupted normal shipping business and may have tilted the balance in favour of owners for the time being.
BIMCO had expected freight rates to improve in Q3 and Q4, but what happened with crude oil tankers wasn’t foreseen. Oil product tankers are still suffering, despite somewhat higher freight rates in early November.
For crude oil tankers, the recent upswing in earnings caused fleet growth to rise earlier than expected.
“Demolition expectations are unchanged, but the pace of delivery is slowly going up.”
BIMCO expects the crude oil tanker fleet to increase by 0.9% in 2018. Looking into 2019, much depends on the level of demolition.
Can we expect a normal winter market for tankers where rates go up as demand for shipping increases? What we saw in October was positive, but there is likely to be volatility this winter as geopolitical issues have been piling up. However, we expect some positive seasonality to return, after last year’s absence.
The US has granted “waivers” to its sanctions against Iran to eight countries including, Japan, India, Italy and South Korea, all of which are among the top 10 buyers of US crude oil. Initially, the impact will be that oil exports out of Iran will continue. In the medium term, it will matter how much oil imports are waived and whether it is a fixed volume, or one that must be gradually reduced. A large proportion of Iranian exports go to Asia – two-thirds to India and China alone.
Dry Bulk Shipping: BDI weakness in Q4, as the trade war limits demand growth and demolitions stall
Demand drivers and freight rates
This year – 2018 – has delivered as promised. The improved fundamental market conditions in the first three quarters of 2018 have seen the Baltic Dry Index (BDI) rise significantly – up by 24%, 25% and 41% in Q1, Q2 and Q3 respectively, when compared with the same time last year.
Will Q4 go even higher? Unlikely. In October 2018, the BDI only improved by 4% compared with October 2017. The demand for Capesize is facing headwinds, with Chinese iron ore imports down by 0.5% for the first 10 months, while the Panamax long-haul trade of soya beans from the US Gulf to China is expected to fall well short of last year.
When the freight market condition improves, a certain set of dynamics comes into play: new building interest increases – we saw that in 2017; demolition activity cools down – we have seen that throughout 2018;
and, slippage to the scheduled order book comes down as new-builds are now delivered into a profitable market when compared with the previous five years.
“In conclusion: the fragile recovery is stalling because the fleet is growing too fast.”
Looking ahead, it is vital to take note of BIMCO’s early estimate of 2.9% for dry bulk fleet growth in 2020. This means that supply-side pressure is likely to be seen, as we neither expect demand-side growth exceeding 3% for 2020, nor in 2019 for that matter.
Chinese soya bean imports in November and December are normally solid, but they are not the strongest months. We note that 4.7m tonnes in November 2017 and 6.2m tonnes in December 2017 were American beans. These accounted for 54% and 61% of total imports for those months, respectively. This is equivalent to 218 Handymax loads of 50,000 tonnes or 145 Panamax loads of 75,000 tonnes.
“To date, China has almost completely shied away from US soya beans.”
Any easing of the trade tensions is likely to have a positive effect on soya bean exports from the US to China, as alternative sources are scarce. In 2017, Brazil delivered the lion’s share of Chinese soya bean imports from non-US origins. Having
exported 10.2m tonnes more to China this year already, we do not expect Brazil to export much more in 2018 as its export season has come to an end. However, it should be noted that the sailing distance between loading and discharge port is more than one month, thereby leaving room for already shipped Brazilian beans to reach China this year.
SIGN UP HERE: https://events.bimco.org/eventlist/market-analysis-112018 for the BIMCO shipping market webinar that takes place tomorrow, Tuesday 20 November 2018, at 1130am Copenhagen time.
The webinar will be spilt into three session of 20 minutes / where time will be spent on the individual shipping sector that we cover, dry bulk, oil tankers and container shipping.
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