Fitch Ratings: Global Shipping Outlook Worsens on Lower Container Freight Rates
The easing of supply chain pressures has led to the near normalisation of container freight rates, which suggests that profits in 2023 will be much weaker than they were over the last three years, when they were supersized. The main risks include the potential for a harsher recession than expected and the continuation of pandemic-related lockdowns in China that could lead to further weakness in demand and manufacturing. Though not likely, any port capacity limitations in China in excess of lockdown-related production limitations could be positive for container freight rates. The Ukraine War has been an important driver for Dry Bulk and Tankers, broadly negative for the former and positive for the latter. Along with any other disruption that may affect trade flows, the war could continue to be a major driver into 2023. A potential increase in trade protectionism (or “friend-shoring”) could also see changes in trade flows and limit demand across a few high-margin or critical products.
International Maritime Organisation’s (IMO) strategy for Greenhouse Gas (GHG) emissions, the mandatory implementation of short-term measures (on vessel design and carbon intensity) in 2023 as well as EU marine emissions regulations could affect the near- to medium-term outlook for cost structures or earnings capacity.
Raman Singla, Director
‘Next year is set to mark the end of an exceptional three years for container shipping, although the future may be brighter for tankers, which may surprise and end up having a stronger year.’
What to Watch – Economic Recovery Trajectory
Profitability will be driven by macroeconomics and supply chain normalisation, especially in container shipping, with geopolitical developments also affecting the bulk and tanker markets. Demand is likely to remain subdued into 2023, reflecting weaker private consumption and manufacturing. The supply chain disruption (particularly port congestion) has eased substantially and is likely to improve further, limiting the potential for the kind of outsized profits experienced throughout the pandemic.
A faster economic recovery than our projections could be positive, although may lead to higher bunker prices. Any impact on supply is hard to estimate due to the effect vessel scrappings have on asset prices.
What to Watch – Emissions Regulations
We are now closer to the IMO’s final GHG strategy, which is due to be announced in mid-2023 and could have significant and long-term consequences in the adoption of new propulsion technologies, associated costs and capital expenditure for infrastructure and vessels and consequently credit quality. We expect the regulations to be introduced in such a way as to minimise operational disruption. IMO’s short-term measures (on ship design efficiency and carbon intensity) calculation and reporting will also become mandatory in 2023.
The IMO and EU continue to aim for a 40% cut in shipping-related CO2 emissions by 2030 compared to 2008 levels. The European Parliament continues to work on including GHG emissions from ships in the EU’s emissions trading system (ETS) from 2023, which will lead to a phased inclusion of marine shipping in the EU ETS in 2023–2026. We continue to estimate any implementation of this proposal would have a limited financial impact on global shipping in the near-term.
Demand Under Pressure
We expect container transport volumes to decline dramatically from the strong 7% rise in 2021 to around 1% in 2022 and revert closer to normalised levels, with 2.5% growth in 2023. The trajectory is driven by the shift of consumption back to services from goods that was caused by pandemicrelated limitations to travel and leisure in 2020-2021, as well as the recent high levels of inflation and the weak macroeconomic outlook, which, in turn, is putting pressure on household budgets.
The multiple of container shipping to GDP has been falling towards 1x over the last couple of decades, with the pandemic merely a temporary disruption to this trend. The 2.5% container volume projection compares with Fitch-projected 1.7% rise in global GDP (0.5% for the US and -0.1% for Europe). On a regional basis, we expect this weakness in GDP growth in the West to be replicated in container volumes, supported by the Purchasing Managers’ Indexes, which are around 50 in the US and 46 in Eurozone, as well as business inventory levels reaching pre-pandemic averages.
Supply Demand Balance Could Turn Worse
We forecast that the supply and demand balance in 2023 will likely be worse than in 2022 due to a combination of weak demand growth and a large increase in supply driven by the easing of port congestions and deliveries of new ships ordered in late 2020. In 2022, capacity growth is projected to exceed demand by 3.6 percentage points, which could increase to over 5 ppts in 2023. The key potential limitations to this increase are a slippage in deliveries, a rise in scrapping and an increase in fleet idling or blank sailing.
Freight Rates to Continue Falling to Pre-Pandemic Levels
Container freight rates, which peaked at the beginning of this year, have been in decline ever since, initially due to Chinese lockdowns that resulted in lower outbound demand, and then at least a partial easing of port congestion and weakening of demand. Global composite spot rates are close to those in August 2020 although vary regionally. Among the main trade lanes, Far East to Europe and Far East to US West Coast rates are reverting to pre-pandemic levels, although Far East to US East Coast is still high, reflecting the continuing congestion in US Eastern seaboard ports.
Weakening demand and an adverse supply-demand balance tend to lead to freight rates falling below break-even levels for shipping companies. Furthermore, break-even freight rates should be higher than pre-pandemic levels due to higher bunker fuel prices as well as general cost inflation. However, there is higher level of consolidation as the top three alliances have over 80% market share, compared to less than 60% a few years ago, and this was reflected in the blank sailings during the peak of the pandemic in 2Q20 that held the rates stable. Nevertheless, we believe it unlikely that blank sailings can arrest the decline in rates to pre-pandemic averages. Container shipping companies will also likely face a decline in earnings in 2023 as their annual contract rates, which are higher than current spot rates, reset at the beginning of the year.
Dry Bulk and Tanker Shipping
Demand to Remain Sluggish
We expect demand growth for crude tankers to be similar to 2022. While oil consumption in 2022 rose to 100 million barrels per day (bpd), from 96mbpd in 2021, the International Energy Agency forecasts it will rise only to 102mbpd in 2023. The slowdown will, however, be partially offset by the rise in tonne-miles for oil exports from Russia, which are now mainly supplied to Asia (China and India) compared to Europe earlier.
Dry Bulk volumes, on the other hand, are likely to remain weak (almost flat to 2022), although better than the 1.6% decline forecast for 2022. The decline in volumes was broad-based, with iron ore suffering from lower steel production in China on the back of lockdowns and a weak real estate market. Coal suffered from the halt of imports from Russia to Europe, although this also created alternate routes with higher tonne-miles, this was offset by the increased coal imports to China which are mostly land-based.
Demand for grains suffered due to high prices; and there was disruption to trade flows due to a hit to Black Sea export volumes. All these factors could continue in 2023, although at a lower intensity.
Orderbooks Remain Small
Orderbooks for both Dry Bulk carriers and Tankers remain at historic lows, close to 7% for Bulk and 4% for Tankers of their vessel fleets. This might continue for a while as the availability of yard slots for new orders is limited over the next three years. Furthermore, the application of the IMO’s regulations on vessel design (EEXI) and carbon intensity (CII) from January 2023 will likely lead to some of fleet fall short of requirements, further lowering capacity.
On the flip side, the easing of port congestion could free up capacity. Tight supply for bulk and tanker markets is reflected in the record high market values of existing vessels.
Flattish Rates Seen
Dry Bulk rates increased significantly in the first half of 2022, although demand and trade flow disruption then pulled them down. If continuing, Chinese pandemic-related lockdowns could keep demand flat and ensure these rates continue into the beginning of 2023 despite tight supply. Tanker rates rose recently due to expectations of an embargo and a price cap on oil exports from Russia that would lead to market dislocations. Global oil inventories are about 11% below the last five-year average but with the recent OPEC+ production cut and expectations for 2023, the oil market is expected to remain tight. As such, we see tanker sentiment remaining positive into 2023, but, given the increase in tanker rates, we prudently expect them to remain flat.
Clean and LNG tankers will also likely continue to benefit from demand as a result of the War in Ukraine, which has resulted in higher seaborne gas demand in Europe and also led to diesel shortages.
Source: Fitch Ratings