Clarksons Business Review
The freight market during the first half of 2019 was a huge disappointment due to severe seaborne trade disruptions. The seasonal first quarter downturn was amplified by the impacts of the Brumadinho dam rupture at Vale’s mine in Brazil and subsequently adverse weather in the northern parts of Brazil and in Australia’s Pilbara iron ore region. As a result, iron ore seaborne trade suffered a 4% decline compared to the same period last year. African swine fever, which requires infected pigs to be culled, reduced the soybean feedstock demand significantly and the US-China trade war stifled industrial production.
The average of the BDI was 26% weaker than the first half of 2018 and 40% weaker than the second half of 2018. This market weakness led to accelerated demolition of older uneconomical tonnage, which reached 4.5m dwt, almost double the volume of the first half of last year. More robust new delivery volumes however resulted in expansion of the fleet by 2.5% year-on-year.
With the incoming IMO 2020 regulations, some ships took an early opportunity to enter ship repair yards to fit exhaust gas cleaning systems (scrubbers), which reduced the active fleet. That, together with the recent recovery in iron ore volumes and a robust East Coast South America corn season, assured the normalisation of rates and sent the BDI to 1,858 which is 42% above the rate at 30 June 2019.
Ongoing economic growth in emerging Asian countries and China’s infrastructure stimulus support dry bulk seaborne demand. With the tightness in the active fleet prevailing as ships prepare for the monumental shift in the industry fuel usage requirements, freight rates should remain more buoyant than the first half.
Containership market conditions overall saw some degree of progress in the first half of 2019, but, with the exception of vessel earnings at the larger end of the charter market, this was more gradual than expected. The container freight market experienced a difficult first half; spot box freight rates generally trended downwards (as they did in the first half of 2018) though started to stabilise towards the end of the second quarter. The key Shanghai Containerised Freight Index fell by 9% between December 2018 and June 2019, although the first half average was still up 6% year-on-year. Despite this backdrop, containership charter rates improved in the first six months of 2019 with the ‘basket’ containership charter rate index up 12% between early 2019 and the end of the first half; although the average index was still down 15% yearon-year, the trend is now clearly upwards and sentiment has improved. Charter rates in the larger sizes saw by far the greatest gains, up on average c.40% since early 2019, with improvements for the smaller ships significantly more limited in the first half. The one year charter rate for a 6,800 TEU containership, for example, increased from US$11,000 per day at the end of 2018 to US$20,250 per day at the end of June 2019.
In terms of fundamentals, global seaborne box trade growth appeared relatively soft in the first six months of 2019; clear headwinds from the world economy, including the US-China ‘trade war’, had an impact and projections have been downgraded. Box trade growth is now expected to reach 3.4% in TEU terms (2.9% in TEU-miles), although significant risks remain and further downgrades are possible. On the supply side, growth is now clearly slowing. Total fleet capacity expansion stood at 1.8% so far in 2019 (compared to 5.6% in full year 2018) and is expected to reach a more moderate 2.9% for the whole of 2019 (and 3.2% in 2020), alongside a slower pace of deliveries. Boxship time ‘out of service’ for scrubber retrofit started to reduce available ‘active’ capacity in the first half of 2019 and is currently estimated to absorb c.1% of capacity across the whole of 2019 (c.2% above 8,000 TEU in size). Boxship contracting has remained subdued in the first six months of 2019 at 0.3m TEU and the order book remains historically limited at 11% of fleet capacity. Overall, fundamental re-balancing has been limited so far in 2019; however, there appears to be some upside for demand growth in the second half, although significant risks clearly remain. Improvements are expected in the remainder of 2019 and into 2020, but further re-balancing is likely to be gradual. Nevertheless, vessel scrubber retrofit time and other impacts related to the IMO 2020 regulations could support further market gains, and earnings for larger charter market vessels in particular.
Crude tanker earnings in the first half of 2019 were significantly stronger than the very weak earnings seen in the first half of 2018, although somewhat weaker than the stronger levels seen in the second half of 2018. Clarksons assessed earnings for VLCCs trading on the main Middle East-Far East route were 146% higher than in the first half of 2018 but 28% down on the second half. Clarksons assessed average suezmax and aframax earnings increased by 117% and 91% respectively year-on-year in the first half of 2019, and were 25% and 17% lower respectively when compared to the second half of 2018.
In the early part of the year, crude tanker markets continued to feel residual benefit from the high levels of oil production and exports seen in the fourth quarter of 2018, as well as record levels of both reported US crude exports in February and delays in the Turkish Straits. Earnings weakened in the second half of March, with contributory factors believed to be: heavy newbuilding deliveries in the early part of the year; the OPEC and non-OPEC production cuts; the further decline in Venezuelan exports; easing of vessel delays; and seasonal refinery maintenance.
Earnings for VLCCs and suezmaxes strengthened somewhat once again in June, influenced by recent incidents involving tankers in the Middle East. The crude tanker market is expected to remain significantly stronger than in 2018 overall, supported by: increasing US crude exports, particularly in the second half of the year; a lower level of newbuilding deliveries in the second half of 2019; retrofitting of vessels with scrubbers; significant expansion of refining capacity in Asia; further restrictions on shipments from Iran and on Iranian tonnage, leading to additional shipments from elsewhere using spot market tonnage; and pre-IMO 2020 disruption in the fourth quarter.
In the clean tanker market, assessed earnings for LR2s on the benchmark Middle East-Far East route increased by 98% year-on-year in the first half of 2019 when compared to the first half of 2018 and also increased by 38% when compared to the levels seen in the second half of 2018. Assessed earnings for LR1s on the same route increased by 73% year-onyear in comparison to first half 2018 earnings and increased by 35% against the second half 2018 level of assessed earnings for LR1s on this route.
Assessed average clean MR earnings increased by 39% in the first half of 2019 compared to the first half of 2018 and by 45% compared to the second half of 2018. These increases should be seen in the context of a weak market in all but the last two months of 2018 however, they do demonstrate that the expected stronger market in 2019 is materialising. The stronger earnings have coincided with the forward curve for gasoil being in contango, with forward prices at higher levels than current prices, which is generally considered beneficial for trading, as well as strong demand for gasoline imports into the US due to a combination of planned and unplanned refinery outages.
Looking forward, the closure of the largest oil refinery on the US East Coast is expected to support higher imports of gasoline into that region, and the commissioning of new refining capacity in China may drive increased products exports from the country. We also continue to anticipate an increase in overall products trade volumes and changes to trading patterns due to IMO 2020, leading to increased products tanker demand towards the end of the year. On the supply side, a lower level of newbuilding deliveries, together with retrofitting of LR2 products carriers with scrubbers, are also expected to support markets in the second half of the year.
The first few weeks of the year began with a reasonable earnings environment, however this soon gave way to a much more challenging backdrop, with owner earnings at a five year low for the balance of the first half. One of the key drivers keeping the market subdued has been the performance of the heavily linked petroleum products tanker market, which remains stuck in neutral across much of the globe. We are once again seeing instances of part-capable IMO MRs competing with chemical carriers for bulk cargoes, particularly in arterial routes ex-Middle East Gulf.
Benchmark spot rates have declined with the Clarksons Platou Specialised Products Bulk Chemical Index recording a 5% decrease over the first half of 2019 and the Clarksons Platou Specialised Products Edible Oils Index showing a steeper decline of 10%. The latter is particularly influenced by the ebb and flow of the petroleum products market due to the transient nature of tonnage trade between the two sectors. In a similar manner to the prevailing spot markets, the period charter and secondhand sectors were also bereft of activity with little deal flow. Continued uncertainty surrounding the impending IMO 2020 regulations and their impact was undoubtedly a persistent driver of lower liquidity in the chemical tanker projects space.
The volume of specialised products seaborne trade growth remains encouraging, with an upgraded annual growth figure of 6.3% year-on-year in 2018. While earnings and market sentiment are lacklustre, a combination of vast infrastructure spending, urbanisation rates, growing populations and increasing social mobility are positive mega-trends which we expect to continue driving specialised products trade in the medium and long-term. The US and Middle East’s downstream liquid chemical investment schemes continue, with a raft of key project announcements showing no signs of weakening. We continue to believe in robust seaborne volume growth of around 5% in 2019 and 5% in 2020. Average trading distances are expected to increase marginally this year, thus giving tonne-mile growth of just greater than 5%. USChina trade wars have thus far had little direct impact on our overall market as the trade lane only accounts for just over 0.5% of total seaborne trade. That said, arguably it has decreased the productivity of the fleet during the period due to some re-routing of vessels and cargo, meaning more ships are required to transport the same amount of cargo.
On the supply side, with the inclusion of swing tonnage, real net fleet growth is expected to be marginally lower than tonne-mile growth this year. The overall chemical tanker order book now stands at just 6% of the in-service fleet by dwt, the lowest across all major shipping sectors and well below the long-run chemical tanker average of 16% over the last 18 years. Overall, we expect average annual net fleet growth to marginally decrease from 5.4% in 2018 to 5.3% in 2019, before falling to a little more than 2% in 2020.
In our view, development of the average haul and productivity of the fleet, so important in the relatively complex chemical tanker world, continue to be two major factors for freight rates in future years. The fourth quarter of 2019 and 2020 remain set to be key periods for the chemical tanker market, with an expectation of increases in fleet utilisation.
2019 began on a relatively weak note for the VLGC carrier market, much in line with the traditional seasonal trend. This was compounded by lower exports from the US in February and March due to fog delaying loadings through the Houston ship channel and later, as a result of a chemical spill. Over February, more of the Asian volumes were sourced from the Middle East, which served to reduce tonne-mile demand. As we progressed into the second quarter, however, the knock on effects of the delays started to be felt. As a result of tight availability of tonnage, combined with a slower pace of newbuilding deliveries, in the first half of 2019 relative to 2018 freights started to move steeply upwards, reaching a peak of just shy of US$80 pmt Arabian Gulf-Japan at the beginning of July. This is the highest spot freight seen since October 2015 and year-to-date earnings are currently 173% up year-on-year, averaging US$33,446 per day. Despite the dip in February, US export volumes have continued to rise this year as the build out of volumes from the new Marcus Hook was more rapid than expected and as we have seen higher throughput through Mariner South and the P66 terminal in Freeport.
Partially on the back of a stronger VLGC market, but also due to a slowdown in newbuilding deliveries, we have also seen freights for the midsizes start to show some signs of improvement. In the first half of this year, the assessed 12 month time charter rate for a 35,000 cbm vessel averaged US$511,000 pcm compared with US$423,000 pcm last year and the premium for the modern 38’s has continued to grow and has averaged US$67,000 pcm above the 35’s this year compared with US$27,000 pcm for the first half of 2018. This has also supported the handysize market, which has become increasingly reliant on petrochemicals trade, and freights in this segment have risen 8% compared to the first six months of 2018.
LPG trade is continuing to grow, underpinned by healthy NGL production in the US and the continued expansion of terminal capacity. Both Targa and Enterprise in the US Gulf Coast have expansions planned this year and next, and the existing terminals have also been running at high utilisation levels. Despite the imposition of US sanctions on Iran, volumes from the Middle East have also held up well. Additionally, we have seen new volumes starting to flow from Australia and the start-up of Canada’s first LPG terminal located on the West Coast. The impact of tariffs is continuing to impact trade flows with US tonnes redirected to other Asian import markets, whilst China has been sourcing more volume from the Middle East.
Ammonia trade has proven fairly disappointing so far this this year, although the new volumes from Indonesia have been flowing well. Supply side factors have also helped to support the freight market this year as the pace of newbuilding deliveries has slowed across all segments, although there have been very few units removed from the fleet this year.
The smaller size semi-refrigerated vessels have continued to face competition from the larger handysize units, which have become increasingly reliant on these trades as the midsizes have competed for LPG volumes. Yet, despite this, assessed time charter rates for the 8,250cbm carriers have remained fairly flat. Pressure carrier rates, in contrast, have strengthened slightly on last years’ levels as a result of a marginal contraction in the fleet. However, they have remained flat overall since the start of this year.
The near-term LNG spot market was slightly softer in the first half of 2019 compared with the same period in 2018, with spot rates for conventional 160km3 Tri-Fuel Diesel Electric tonnage around 15% lower at an average of US$52,096 per day. Although global LNG traded volumes were higher, LNG freight rates were being pressured by lower northeast Asian LNG spot prices.
More specifically, the narrower price spread between European natural gas and Asian LNG prices meant that Atlantic cargoes were making shorter-haul voyages and staying in the Atlantic Basin. This contrasts with last year, where high Asian demand resulted in Atlantic Basin cargoes making the longer-haul voyage to the Pacific Basin.
The spread between northeast Asia LNG and UK natural gas narrowed to US$0.76 per million BTU in the first half of 2019, compared with US$1.71 per million BTU in the equivalent period in 2018. While China continued to increase LNG purchases, Japan and South Korea reduced imports with a mild winter reducing gas consumption. Meanwhile, Europe nearly doubled LNG imports to nearly 41m tonnes as it started to absorb Atlantic Basin cargoes, especially new production from the US.
Seasonal patterns means that rates usually rise from the second half of the year as the northern hemisphere enters winter. Discussions for multi-month periods to cover winter have been active this year, with some market participants keen to secure tonnage.
Increased global traded volumes also provided some support to the LNG shipping market. Around 170m tonnes was traded in the first half of 2019, up by 10.1% compared with the first six months of 2018. As well as production ramping up from projects that started last year, Australia’s 3.6m tonnes per annum Prelude project and the US’ 4.5m tonnes per annum Cameron T1 unit also started exports in 2019 and added to tonnage demand.
An additional five liquefaction projects with a total export capacity of 16.8m tonnes per annum are scheduled to start in the second half of 2019. In total, 20 LNG carriers were delivered in the first half of 2019 and another 18 LNG carriers are scheduled for delivery before the end of the year.
Meanwhile, LNG newbuild ordering activity remains on par with last year. In the first six months of 2019, 24 orders were placed compared with 25 in the same period in 2018.
Three new liquefaction projects have been approved in 2019: US Golden Pass, US Sabine Pass T6 expansion, and the Mozambique LNG export projects. These should result in additional demand for tonnage in the longer-term when the facilities start production in around mid-2020.
Sale and purchase
In line with recent years, we have found the first half of 2019 to be more challenging than expected when it comes to concluding sale and purchase business and we once again look to the second half of the year to be more productive than the first, which it is already proving to be.
There are various reasons for lower activity such as the dam disaster at the Vale mine in Brazil in January, which resulted in significant disruption to that country’s iron ore production, reducing the seaborne tonne-mile equation and thus driving down freight rates in the dry cargo market all at the same time. Further, there is the well reported on/off trade war between the US and China, which has created uncertainty across all shipping sectors and given potential buyers more reason to be cautious.
The continued difficulties for owners to access finance from either the traditional shipping banks or the capital markets only goes to reinforce why there has been such a dearth in sale and purchase activity across the board. Simply put, it has been a case of not having enough buyers combined with sellers’ reluctance to discount their price ideas in order to tempt them.
However, with the fast approaching dates for both the new IMO fuel regulations, and the requirement to install Ballast Water Treatment Systems we are starting to see a real urgency for some owners to transact as many simply do not have the capacity to cover these huge capital costs across their entire fleet within such a short space of time. When this pressure is added to a rising optimism in the freight market, then we see those with cash returning as buyers look to leverage their position to find interesting opportunities to purchase tonnage.
The first half of 2019 has been challenging for shipyards and as of the end of June 2019, the global order book totalled 3,172 vessels of a combined 198.0m dwt and 78.9m cgt, representing a 13% decline in dwt terms since the end of 2018 and the lowest level since the end of September 2017. Due to firm deliveries and limited ordering, the global tanker order book shrunk significantly in the first six months of the year, by 24% in dwt terms, to stand at 602 vessels of a combined 53.3m dwt as of the end of June 2019. The VLCC order book shrunk by 25% in dwt terms in the first six months of the year, driven in part by firm deliveries from South Korean yards, to stand at 81 units of a combined 24.9m dwt as of the end of June. This represents the lowest level since the end of December 2013.
Whilst the conventional dry and wet markets have remained challenged, the LNG carrier sector has remained relatively active and accounted for 21% of newbuild contracts placed in the first half of 2019 in cgt terms, with 30 vessels of a combined 2.4m dwt and 4.3m cgt reported ordered globally. Whilst this is down 27% year-on-year following record ordering in the sector last year, there has still been some speculative endeavour against a bullish forward outlook.
There remains some optimism for an improved second half as yards push to sell pockets of more imminent capacity that remains uncommitted, as well as the continued drive towards LNG and greener propulsion that may well catalyse further investment into newbuilding as we push into the second half of the year and into 2020.
The first six months of 2019 have been challenging for the offshore oil services sector, though as usual, with certain subsegment differences and signs of optimism. During the first half of the year, the oil price has been relatively stable ranging between US$60 and US$68. Even though we have seen production interferences or involuntary production cutbacks from Iran, Venezuela, Libya and Nigeria, it has become evident that the market suffers from potential oversupply and that discipline from OPEC is still required to balance the market. During the first six months of 2019, we have seen a steady increase in rig tendering, fixing activity and slightly improving utilisation for selected rig and offshore support vessel (OSV) segments. Field development activity is however still progressing slowly and operators in general did not increase sanctioning of new developments notably compared to last year. Offshore contractors and suppliers however regained some optimism and seem to be preparing for increasing activity levels forward. This is visible, for example, through increasing sale and purchase activity and to some extent secondhand values in certain segments. In spite of the cautious optimism, utilisation and rates in general across the different offshore service segments remain at depressed levels.
Total offshore rig demand continued to improve in the first half of 2019 having bottomed in early 2017 and gained momentum through 2018. The global offshore rig count (rigs on contract) was at 494 units as of the end of June, up from 457 units at year-end 2018. Active utilisation is currently around 72% (end of 2018: 69%) for jackups and 74% (end of 2018: 65%) for floaters.
A deeper analysis of the rig market displays significant regional and sub-segment variances. In shallow water, we see increased rig demand in the Middle East, Asia and West Africa. For the deep water and ultra-deep water floater segment, we see indications of demand growth in Brazil, West Africa and Asia. The North Sea Harsh Environment (HE) semisubmersible market remains the strongest floater segment, especially in Norway. This segment has experienced pronounced tightening due to rising demand and significant supply side attrition, resulting in day rates in this segment having generally doubled from trough levels.
Re-balancing of the broader rig market continues to progress further on the back of low utilisation and rates, financial stress and contractors’ realisation of the need to reduce capacity across the industry. As such, contractors have retired approximately 40% of the total floater fleet since late 2014. We expect the retirement trend to continue as the industry is still looking to cut costs. Retirement of assets in the jackup segment has been less pronounced and unless this picks up, re-balancing of the jackup segment may likely be pushed further out in time.
The subsea and field development market
In spite of improved oil prices during the first half of 2019 and leading operators generally reporting very strong cash flow, sanctioning of new offshore field developments has not yet seen a significant uptick. This is likely related to the underlying oil market balance and the operators’ perception of how this is likely to evolve going forward. A large share of offshore oil projects seem to be economically viable even after oil prices have dropped strongly from peak levels, and as such, should not prevent operators from increasing sanctioning activity. Actual sanctioning level in 2019 seems to have been broadly in line with that observed in 2018. There are a number of ways to gauge this, but number of sanctioned projects, total sanctioned capex, number of new floating production unit contracts and level of subsea equipment awards are all good indicators. With certain exceptions and nuances, these indicators are broadly in line with 2018 levels, suggesting a stable development in sanctioning activity, rather than an uptick. This impacts the subsea and field development market, with the backlog for leading contractors only being moderately up from year-end levels, but with hints of trending upwards. The order backlog is however down significantly from levels seen in 2015 and 2016, and as a consequence, fleet utilisation for leading subsea contractors has continued to be low so far in 2019. This has adverse knock on effects for vessel providers, leading to low global subsea fleet utilisation. A slight increase in the market for subsea inspections, maintenance and repairs and strong activity in the offshore wind segment has compensated somewhat, but this is far from sufficient to cover the shortfall in subsea engineering, procurement, construction and project work.
Offshore support vessels (PSV and AHTS)
The market for OSVs also remains challenging, still characterised by vessel overcapacity. Rate improvements in key regions combined with an uptick in OSV utilisation has encouraged reactivation. The number of OSVs in layup has decreased in net terms by more than 350 vessels since the peak 18 months ago. Global fleet utilisation (also taking into account stacked vessels) for large OSVs is currently around 65% and 74% for AHTS and PSV respectively, while active utilisation levels in some regions naturally remain substantially higher (84% and 90% globally for AHTS and PSV respectively). Most vessel operators are struggling significantly, and we have continued to witness high corporate activity in terms of refinancing, restructuring and consolidation. Some of the US players have managed to reduce their debt substantially as a result of these processes, making them more competitive going forward. Increased consolidation and significant vessel attrition bodes well for the longer-term re-balancing of the segment, but on back of the overcapacity, we anticipate a recovery to more sustainable day rate levels to still be some time out. As for rigs, regional differences do apply, and rates have come up already in several regions with, for example, the North Sea experiencing significant rate strengthening for large PSVs in particular.
Dry index values were adversely impacted in the first half of 2019 by the dam collapse in Brazil and the ongoing trade dispute between the US and China. Capes averaged US$10,034 (against US$13,963 for the first half of 2018), panamax US$8,243 (2018: US$11,030) and supramax US$8,203 (2018: $11,113).
Volumes on all dry markets increased with capes totalling 263,014 lots (compared with 199,229 lots in the first half of 2018), panamax 331,362 lots (2018: 277,662) and supramax 85,708 lots (2018: 79,273). Option volumes have marginally fallen to 138,556 lots (2018: 141,971 lots).
Iron ore has experienced significant market growth with a daily average volume of 4.9m tonnes year to date compared to 3.5m tonnes per day over 2018. Options volumes have similarly grown to 1.9m tonnes per day from 0.9m tonnes per day in 2018.
On the wet FFA side, volumes of clean have improved to 82,623 lots (2018: 62,309 lots) but the significant volume growth has been in the dirty side, where volumes shot to 135,793 lots (2018: 62,526 lots).Full Report