Mixed Fortunes and Future Thinking Make for a Confused Picture

Malcolm Latarche
Malcolm Latarche

04 June 2018


After the low points of 2017, this year has seen a rise in optimism across most sectors of shipping. That is leading to growing confidence for owners to make fresh orders and the impact of new regulation may spur even more but the clouds have not yet cleared.

There seem to have been many low points in shipping over the last decade, but most analysts agree that 2016 was one of the worst across all sectors. Last year saw some signs of improvement but advancements were erratic although generally a good lead in to the recovery that had been forecast for 2018-2019.

Ship Owners Confused

The issue in achieving a balance today is less concerned with declines in trade levels as occurred in 2008 and immediately after and more with forecasting the rate of improvement in trade volumes that are generally upwards and matching orders for new vessels accordingly.

Overcapacity is a perennial problem for shipping and one that is almost impossible to solve without determined efforts from owners, especially those at the top of the ladder.

In most sectors vessels change hands and work their way down the league of operators before being scrapped.

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To solve the overcapacity issue requires those that order new tonnage to maintain the balance. So long as they prefer to sell to owners lower down the league rather than scrap then they are only increasing the competition for cargoes and relying on continual growth in trade volumes.

In general freight rates across most sectors rose sufficiently last year to delay scrapping of vessels that in 2016 were loss making but which could operate reasonably profitably through 2017. A big factor in the reduced scrapping rate was the decision by many owners to delay the need to install ballast systems by decoupling the IOPP certificates from the five-year cycle and renew them early. The MEPC’s decision to allow further time for the retrofit for owners which had not taken advantage of decoupling was another.

Having just come to terms with the ballast treatment issue, the next challenge for owners is the 2020 sulphur cap and beyond that they have just been given a new worry following the MEPC 72 decision to embark on the decarbonisation o shipping.

Signs of optimism in some sectors

Different factors are affecting different sectors and recoveries and the consequent fleet renewals will develop accordingly. Bulk carrier prospects are covered in greater detail elsewhere in this issue but in general owners have been restrained in new ordering for some time now even if enthusiasm for scrapping waned slightly last year. In April Drewry published its latest edition of Container Forecaster and said in it that subtle changes to the orderbook, mainly in the form of delivery deferrals, have softened this year’s new capacity burden and had a positive effect on Drewry’s supply-demand equations for both 2018 and 2019.

Simon Heaney, senior manager, container research at Drewry and editor of the Container Forecaster said the top-heavy delivery schedule for 2018 with the majority of ULCVs being delivered in the first quarter has depressed Drewry’s supply-demand index, but the balance will improve as the year progresses. Heaney added that renewed newbuild contracting activity is not yet at the level that risks worsening the supply-demand balance. “For now, we are optimistic that new investment in containerships will be appropriate to the demand needs,” he said.

Because of the ‘arms race’ among the major players in the container sector, attention has been focussed on the ultra-large size ships where each new order leapfrogs the last by a competitor. However, the container sector analyst SeaIntel has identified that orders for feeder vessels are not keeping pace and could lead to a shortage of feeder capacity within a very short time. To prevent this, SeaIntel believes an ordering spree for feeder vessels could be on the cards.

Based on the existing fleet and orderbook and on the assumption that the approximately 9% of feeder vessels that will be older than 25 years of age in 2020 are scrapped, SeaIntel calculated that the global fleet will see a reduction in ratio of feeder vessels to large vessels of 5.4 to one large container ship by the end of 2020 compared to 7.9 currently.

In the tanker sector, OPEC’s decision along with Russia to force a price rise by tight squeeze on crude production could have a detrimental effect on the crude and product sectors although the latter has positive factors that would offset that. In February, Standard & Poors said it could see a cyclical upturn for oil-product tanker rates just around the corner, as the new vessel delivery schedule for 2018 is historically low. Crude tanker rates, on the other hand, will likely remain under pressure this year because of OPEC oil production restrictions and a spike in vessel orders in 2017.

A decline in tanker rates in 2017 was the result of the accelerated delivery of new tonnage outstripping relatively stable tanker tonne-mile demand. Demand was constrained by the reduced oil production by OPEC and non-OPEC exporters and by high oil and petroleum-product inventories, which suppressed export volumes.

In 2018, S&P expects supply growth for product tankers to noticeably slow, in particular for medium-range tankers. At the same time, demand should be enhanced by tightening oil product inventories, leading to an uptick in charter rates. Crude tanker rates will have to wait longer for a meaningful rebound. OPEC recently extended its production restrictions until the end of 2018 (with a review in June 2018), which will hamper oil supply. In addition, there’s a firm order book for larger crude tankers after an unexpected spike in orders in 2017. These orders were driven by attractive vessel prices but did not take into account the weak rate conditions and gloomy prospects. And they will be only to some extent counterbalanced by enlarged vessel scrapping.

In the offshore sector, picking up the slack caused by the decline in oil prices over 2013 – 2016 and the subsequent effect on offshore production is a gradual process. The upward trend in crude oil prices is making offshore profitable again although not sufficiently so for there to be a new ordering spree anytime soon. However, with improved production offshore, the need for new FSOs, FPSOs and related shuttle tankers will build slowly.

In the more specialised sectors such as gas carriers and car carriers, the more limited number of operators usually makes for a better balance in supply and demand. However, there has been overcapacity issues building in the LNG sector for some years resulting in delayed delivery or newbuildings on order and with many of them now due for delivery this year and next, the need to make new orders is at a low level.

Subsidies and support spark anger

The current world order book for all vessel types is somewhat subdued compared to just a few years ago and this has caused a crisis of confidence in the yards in many countries. All major shipbuilding nations have suffered as the building boom of the first decade of the 21st century has ended and levels of building returned to more normal in terms of ship numbers. However, because modern ships of most types tend to be larger than previously, the same number of ships built in 2018 will have a much larger total deadweight than was the case in 2008.

Even so yard closures and cutbacks are inevitable, and this process has already begun in China where private yards rather than those of the state-owned concerns have been hardest hit. China has relied on its low-cost base to win the number one spot in shipbuilding and has not needed to subsidise its yards to the extent that South Korea was accused of at the turn of the century. That said, the main operators in China including giants such as COSCO are state-owned so any building for domestic owners will be subsidised in any case.

Subsidies do look to return to South Korean yards as in early April it was announced that the government plans to help local shipping companies through a ship purchase assistance programme as part of efforts to lift the industry out of its slump. Through various incentives and grants, the programme is expected to see around 140 bulk carriers and 60 container ships being built for South Korean operators at yards in the country.

Japan has criticised the subsidies and so top have some major operators. Addressing Singapore Maritime Week's 12th Maritime Lecture in late April, AP Moller-Maersk CEO Soren Skou called for an end to all state subsidies especially in the container sector where they are creating overcapacity and cost cutting. “I don’t think any government needs to throw money at container shipping, building ships that are not needed,” Skou said.

Europe’s shrinking shipbuilding industry is less likely to be affected because it no longer builds container vessels and while there are still cargo ships of different types built, the main focus today is on the passenger sector and in particular cruise ships and large ferries.