A snapshot on the economic and shipping environment
Saturday, 04 August 2012 | 00:00
Italy and Spain, the euro zone's fourth and third largest economies, bring intense worries on the ongoing sovereign debt crisis with U.S. raising pressure on eurozone leaders to take decisive action to solve the region’s debt crisis by lowering troubled members’ borrowing costs on the upcoming crucial European Central Bank’s meeting. In Greece, the leaders of the coalition government have reached a consensus over a decision on EUR11, 5billion spending cuts over the next two years, while they are seeking an extension of the country’s bailout program.
Under the severe euro financial downturn, cross-border lending by Germany to the weaker parts of the eurozone has dropped by nearly a fifth since January and now stands at the lowest level since 2005. Between January and the end of May, German banks cut their net lending to Greece, Ireland, Italy, Portugal and Spain by €55bn to a total of €241bn, Morgan Stanley’s analysis of Bundesbank figures show. The shift reflects growing fears that a breakup of the eurozone will lead to capital controls in exiting countries as well as regulatory pressure on banks to reduce their reliance on wholesale funding and match their local lending more closely to their local deposits.
In the meantime, eurozone’s manufacturing activity hit a three year low with the Purchasing Managers’ Index (PMI), compiled by Markit, falling to 44 from 45.1 in June indicating recession. Germany’s PMI fell to a three year low at 43, while Republic of Ireland was the only country showing expansion with PMI being at 53.9. The slowdown of growth in euro zone’s economy comes from the hard efforts of all the governments across Europe for introducing a set of austerity measures, including tax rises, spending cuts and pension reform, to reduce the high debt levels that have been accelerated from the financial crisis in 2008.
In U.S., economic growth slowed at an annual rate of just 1.5% from April through June, as Americans reduced sharply their spending, while the pace of hiring in July failed to reduce the US jobless rate that remains persistently above 8%. Furthermore, US manufacturing activity remained slightly unchanged in July under the key 50% mark for the second straight month indicating contraction rather than expansion.
The index that measures the strength of the manufacturing activity, produced by the Institute for Supply Managed, ISM Index was at 49.8% in July from 49.7% in June. The US Federal Reserve raised hopes that it will act to boost the economy in September as it kept policy on hold, but showed a strong bias towards further easing. The rate-setting Federal Open Market Committee forecast that it will keep interest rates low until late 2014, defying market hopes for an extention in 2015. “The committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery”, said the FOMC’ statement. The move suggests that the FOMC is ready to move aggressively if a crisis in Europe spills over into the US economy, but does not yet feel that it has enough evidence for a big decision such as QE3.
Asian economies are crawling with South Korean exports dropping by nearly 9% in July from a year earlier from weak global demand, the fifth consecutive fall in the first seven months of the year and by far the largest decline reflecting the slowing growth of key economies, China, Europe and U.S. However, country’s consumer inflation fell to a 12-year low, 1.2% year-on-year, which is outside the Bank of Korea’s target range of 2%-4%, and strengthens expectations for an aggressive monetary easing by the Central Bank.
July ended with the dry market being again in recession, tanker facing miserable earnings for very large crude carriers and a sense of optimism for boxship units from the improvement in the freight spot market compared with 2011. BDI closed at 897 points at the end of July, down by 11% from end of June at 1,004 points, with capesize average time charter earnings about $4,500/day, up by 14% from the end of June, when they were standing at $3,988/day. The troubled financial performance of shipping players from over glut of ships, limited chartering opportunities and lower cargo demand leave mixed feelings for a firm rebound in their earnings during the last two quarters of the year. Japan’s three major shipping groups, MOL, NYK and K Line, managed to report lower net losses from April to June, by reducing the size of their fleet and sending for disposal even younger units that could not afford profitable earnings.
MOL reported a net loss of ¥5bn ($64m), an improvement over the loss of ¥8bn recorded in the same quarter of 2011. NYK recorded a net loss of ¥1.3bn during the three months, versus ¥7.2bn loss in a similar period of 2011, while K Line suffers the deepest losses by reducing net loss to ¥674m in April-June, from ¥3,7bn a year ago.
In the dry market, the downward momentum of previous weeks continues with the Baltic Dry Index loosing further ground by hovering below 900 points and all vessel categories showing a retreat in earnings. Capesize vessels are in the frontline as bigger losers, while supramax units are still showing a stronger resistance and handysize units earning more than $8,000/day compared with panamax that have lost 15% of their strength from July 10th, with earnings falling to less than $8,000/day.
Declining activity both in Atlantic and Pacific markets influenced the strength of panamax earnings, while limited activity in Indonesian coal market led supramax vessels to lower earnings given the growing supply list. The limited Chinese iron ore activity still drives the capesize market to vessel earnings below $5,000/day, while the elevated iron ore and coal stockpiles in major Chinese ports and the instant increase of China’s hydropower production do not yet stimulate a prompt recovery in the freight market status.
The price of iron ore has declined to a 30-month low as Chinese steel mills are trying to offload the existing excessive port stockpiles before resuming their buying appetite. The Steel Index price for 62 per cent grade iron ore declined to $115.2 on Wednesday, August 1st, its lowest level since December 29th, 2009. The Chinese government has urged state-owned steel companies to make destocking a priority in the second half of the year to avoid further restocking. Chinese small and medium sized steelmakers, who represent about half of the country’s 550 mt of annual steel output, are stepping up maintenance in an effort to cut production and reduce losses from a slump in steel prices and a surge in inventories. A
large number of Chinese steel mills have started to idle some of their capacity, following record output levels over recent months, as there are no signs of an early recovery in demand for steel. Approximately 97,7 million tons of iron ore is estimated to be stockpiled at Chinese ports, 800,000 tons less than a week ago, while inventories of both iron ore and various steel products have slumped by up to 46$ so far this year. There are estimations that Chinese iron ore port stockpiles will fluctuate between 95mt and 101.5mt.
One more headwind for the dry bulk industry is the ongoing drought is US grain reducing US crop yields for soybeans, wheat and corn, leading to fewer loading cargoes for panamax and supramax vessels.
The magnitude of the impact is not yet known, but the US drought is said to be the worst in more than a half century. According to the U.S. Department of Agriculture, global trade in grains will drop 4.9% in 2012-2013 period, with supramax average time charter earnings averaging for this year about $10,000/day, while there are fears that supramax segment may experience new lows during the second half of the year.
The BDI keeps a constant fall from July 10th and closed on Friday, August 3rd at 852 points, down by 8.6% from last week’s closing and down by 32% from a similar week closing in 2011, when it was 1,260 points. All dry indices are still on a downward incline with August appearing to be tough for all vessel sizes, from capesizes to handysizes. The highest decline has been for a second consecutive week in the panamax segment, BCI down by 0.7% w-o-w, BPI down 12% w-o-w, BSI down 6.9% w-o-w, BHSI down by 8.3% w-o-w.
Capesizes are currently earning less than $4,500/day, when at similar week in 2011; they were earning $9,744/day, while panamaxes are earning less than $7,500/day, from $11,823/day in 2011. Supramaxes are trading at less than $11,000/day, when at similar week in 2011; they were getting $13,094/day, hovering at 34% higher levels than capesizes. Handysizes are trading at less than $ 8,200day; when at similar week in 2011 were earning $9,770/day.
In the wet market, the distressed freight market momentum leaves limited room for expansion of the tanker fleet via newbuilding investments and allows intense disposals and eager secondhand buying appetite from low asset prices. According to Nanjing Tanker Corporation’s boss Li Wanjin, oil tanker owners need to be rational when it comes to ordering new ships during the present market downturn if they hope to see a recovery over the next two years. He admitted in Seatrade Asia that owners might be tempted to place new orders due to considerably lower newbuilding prices and claims on fuel saving technology on new ships, but such moves would only suppress market recovery over a longer period.
The weak activity in the Arabian Gulf persists and VLCCs vessels are facing severe downturn at WS 34 in AG-SPORE and AG-Japan with time charter equivalent earnings at less than $5,000/day, while in AG-USG time charter equivalent earnings are floating below zero levels at WS24. The overcapacity issue pushes further the market downwards as the forward supply of VLCCs in the Arabian Gulf remains high at 97 vessels. In the suezmax market, the weak Atlantic activity results in a build up of ships in the West African and Mediterranean markets, with no significant improvement in rates with WS62.5 in WAFR-USAC route at $12,700/day time charter equivalent earnings. In the aframax segment, rates remain also flat with WS87.5 in N.SEA-UKC at $14,100/day time charter equivalent earnings. The firm Japanese product demand contributes in the outperformance of MR and LR1 product tanker vessels with WS107 in AG-Japan route for 75,000dwt units at more than $20,000/day time charter equivalent earnings and WS121 in AG-Japan route for 55,000dwt units at less than $20,000/day time charter equivalent earnings.
Bunker pricing remains above $600/barrel for the cost of 380 fuel in Asian ports, Fujairah and
Singapore, with the brent crude spot price floating above $100/barrel in July, from 122/barrel at the end of the first quarter of the year. Summer season seems that will ended with a higher cost of bunkering, as OPEC oil production falls for a second month in July from a 22-year low in Iranian output. A Bloomberg Survey showed that OPEC oil production fell 393,000 barrels, or 1.2%, to an average of 31,165 million barrels/da this month from 31,558 million in June. This is the second straight decrease after daily output reached 21,62 million barrels in May, the highest level since October 2008. Iran pumped 2,86 million barrels per day, down 300,000 barrels from June and the lowest level since February 1990. “Increasing sanctions are going to result in further declines in Iranian oil production,” said Rick Mueller, a principal
with ESAI Energy LLC in Wakefield, Massachusetts. “The Iranians are going to struggle to find buyers and will have to shut in production. There are only so many countries that are willing to go against both the U.S. and Europe and purchase Iranian oil.”
In the gas market, spot prices for liquefied-natural- gas supplies to Japan dropped 2.2 percent in June from the previous month on lower demand and declining crude costs. The cost of spot and short-term supply fell to 71,811 yen ($916) a metric ton for the month, according to data on the website of Japan’s Ministry of Finance. That’s equivalent to $18.85 per million British thermal units, 28 percent higher than last year’s average. Total shipments declined to 6.65 million tons in June from 6.9 million tons in May. Prices of LNG imported into Japan are falling from a 41- month high in April because of a decline in oil prices and a gradual restart of shuttered nuclear facilities, reducing the need for LNG. Overall prices, including both short-term supplies and long-term contracts, rose to 70,944 yen ($906) a ton in June, up 17 percent from a year earlier.
In the container market, the Shanghai Container Freight Index remained flat for the week ending July 27th, with decline of rates in main linehaul and secondary trading routes, while North Shanghai-Europe route was the only one with an increase of 3.6% to US$1,728/TEU, from $1,667/TEU in previous week. The Shanghai Container Freight Index fell to 1,327.08 points, by losing 0.37 points on a weekly basis, while is up by 31% from a similar week’s closing in 2011, when it was at 1,013 points. Rates on Asia-Europe route have shown a soft rise as the proposed General Rate Increase (GRI) for August appears to have a positive impact, but the increase is expected to be short lived, while rates on Asia-Mediterranean showed almost no change by loosing only $2/TEU and falling to $1,649/TEU from
$1,651/TEU on a weekly basis. The main routes, North Shanghai-Europe and North Shanghai-Mediterranean are 114.4% and 76.2% up respectively from a similar period last year, when rates on North Shanghai-Europe were at $806/TEU and $936/TEU on North Shanghai-Mediterranean. Furthermore, they are still standing at much higher levels than the first quarter of the year with with the Shanghai-Northern Europe paying $1017/TEU more than this year’s lowest level on February 17th, when rates were at $711/TEU and 11% down from this year’s peak of $1934/TEU on May 4th. Asia-Mediterranean is recording a 124% upward movement from this year’s bottom low of $735/TEU on February 17th, while rates are 19% down from this year’s peak of $2033/TEU on May 4th.
In transpacific routes, rates on Asia-USWC route are 0.8% lower than previous week by sliding to $2,368/FEU, but 49.4% higher than similar period in 2011, when they were standing at $1,585/FEU. On Asia-USEC, rates have shown a 1.2% weekly decline by falling to $3,513/FEU from $3,559/FEU, while they are 13.6% higher than similar 2011 period levels, when they closed at $3,093/FEU.
The low trading volume in Europe during July, at a time of a traditionally peak summer season, threatens the prosperity of boxship freight market. The depressed euro economy and the fragile European consumer demand have affected the growth of container transportation, while the long term employment of boxship units holds a great risk of uncertainty with a charter period fixed not more than one year. According to statistics released from Alphaliner, of the 218 containerships currently idle, 57 units have been unemployed for over 6 months, 18 of these are carrier controlled and the other 39 remaining units are owned by non operating owners. A large number of the long term unemployed units belong to financially troubled owners, who are unable to find any profitable employment for these units.
The prospects for the long term unemployed units are increasingly bleak, with fewer charter prospects as the idle fleet owned by non operating owners is expected to continue to rise till the end of 2012.
In the shipbuilding industry, shipyards have started to feel serious pain in their profits from the drop of newbuilding demand in 2012. Guangzhou Shipyard International has warned of an expected 50% plunge in net profit for the first half compared with similar period last year. The Hong Listed Company blamed the decline of the shipbuilding market in the first half of 2012 with a slide in newbuilding prices that caused a decrease in the profits. In addition, Chinese shipbuilder Rongsheng HI warned that it expects significantly lower profits for the first half of 2012. “Orders and prices of ships dropped sharply as compared with last year, which resulted in the decrease of profits”, the yard said in a statement.
Chinese shipbuilding industry is sinking into a serious recession from a dramatic fall in new orders for the first half of the year. "The shipbuilding industry is now hitting the bottom of downturn with a sharp decline in new orders for the first six months of the year, and the situation is unlikely to improve in the very near future," Ye Meng, vice secretary-general of China Shipowner's Association (CSA), told the Global Times. "The entire industry is experiencing the worst time in a decade and our business is not immune to the industrial slump," said a spokesman with China Rongsheng Heavy Industries Group, who declined to be named. Chinese yards are also feeling pain from order cancellations. According to a Report from China Association of the National Shipbuilding Industry, more orders have been cancelled at China’s shipyards during the first half of the year than during the whole 2011, with weak freight markets plaguing shipping lines. The Report said that 41 ships with nearly 2,6m dwt were cancelled in January-June, roughly equivalent to 130% of the full year cancellations last year as it has been more and more difficult for shipyards to complete their contracts. Shipowners have been trying to modify ship designs, delivery periods or even seeking to renegotiate prices. China’s total vessel orderbook was at 125,9m dwt at the end of June, down 30.7% from a year ago and 16% from the end-2011 level.
Japanese shipyards are also facing serious financial issues. Shipbuilder Sasebo posted ¥416M ($5.3M) in losses for the first quarter of fiscal year 2012, reversing ¥1.85Bn in profits in the same period last year. The yard neither delivered any ships nor received new orders in the quarter, which ended on 30 June. Its revenues came from repair work for naval vessels belonging to the Thai and US navies. At 30 June, Sasebo’s order backlog stood at nine ships worth ¥43.17Bn, a year on year decrease of 49.9%. The drop in business knocked Sasebo’s operating income by 90.9% y/y to ¥297M. Sasebo said its quarterly performance was the worse since the Lehman Brothers collapse in September 2008. It also warned that no uptick was in sight and said it expects to post operating losses of ¥3.5Bn for the current fiscal year. “With regard to the future world economy, and concern that economic growth in China and
other emerging countries has slowed, the economic outlook is uncertain due to instability in the economic recovery of the US and the crisis in the eurozone,” said Sasebo. “In addition, the newbuilding market is expected to continue to be severe.” The strong yen remains a concern, as it makes shipbuilding materials expensive, resulting in Japanese yards losing their competitiveness against South
Korean and Chinese yards.
Furthermore, Mitsubishi Heavy Industries posted a net loss of ¥2,4bn ($30,8m) for the period ended June 30th, against a net profit of ¥4,5bn in the corresponding period of 2011. However, revenue rose to ¥83,7bn from ¥63,2bn a year ago. The company blamed the losses mainly to the effects of the stronger yen. Orders received at the shipping and ocean development division rose to JPY23.1bn during the quarter compared to JPY12.4bn a year earlier. “Although the orders environment for new commercial ships remained difficult, orders increased from a year ago, thanks to the order for a new-type LNG carrier,” MHI said. Meanwhile, group net profit for MHI improved 95.7% year-on-year to JPY18.8bn thanks to lower taxes and a gain on sales of investment securities in extraordinary gains.
In the shipping finance, China Development Bank, a state-backed policy bank, has been confirmed as the financier behing the containership deal that Seaspan announced last year for seven 10,000 TEU boxships, plus an option for 18 more, with privately owned Chinese yard Yangzijiang Shipbuilding. The bank will provide a $520mil loan for a $700mil deal, will no revealed market information regarding further details of the loan.
Source: Golden Destiny