Taal selectie

Shipping

Out of the doldrums

The SEA shipping index (covering all types of vessels) rose 10.4% in April. Major bulk shipping companies gained 25.4% on average (on an unweighted basis), as did our selection of stocks (+25.6%). The major tanker companies gained 20.5% on average (also unweighted), while our selection of stocks was up 17%.

Graph 1 : Shipping stocks since end of October

bulkersEqualWeightedDSX, SBLK, SALT and GOGL equally weighted. Source : Bloomberg

Owners of Capesize bulkers were able to (partially) offset the hit to freight rates caused by the dam burst in Brazil earlier this year and subsequent closing of iron ore mines, which took away some 5% of cargo from the Brazil to China route, by reducing ship speed. According to market specialists, the average fleet speed dropped by over 4% in April, bringing the market more or less to equilibrium and pushing freight rates back above USD 10,000 /day. (A Capesize vessel requires ca. USD 12,000 /day to break even, before company overhead costs). After some optimism on the news that the Brucutu mines in Brazil were being allowed to resume production (30 million tonnes of iron ore per annum) – also a positive for Capesize freight rates – a higher Brazilian court decided to shut them down again. It thus seems that this issue will remain with us for some time, and continue to weigh on bulker freight rates.

One-year time charter rates strengthened somewhat in April to USD 14,300 /day for Capesize vessels and USD 11,000 /day for Panamaxes. Scrapping picked up, with 6 Capesize/VLOC ships demolished in April, bringing the year-to-date total to 16, against delivery of 13 new vessels. In the Panamax segment, however, only 2 ships have been sent to the scrapyard this year, while 47 new vessels have been delivered. The current market oversupply urgently requires greater scrapping, but shipowners are very reluctant to get rid of their older vessels so long as freight rates remain above the cash flow breakeven level. We do, however, expect much more scrapping towards the end of this year, due to the pending IMO 2020 environmental protection rule that will forbid ships to run their engine on cheap high sulphur fuel oil unless an exhaust gas scrubber has been installed. The new compliant low sulphur fuel oil will be much more expensive, making older high-consumption vessels uncompetitive. And installing a scrubber on older vessels makes no sense, as they cost USD 4-5 million (including installation costs and ship off-time). With scrap prices currently (very) high, at ca. USD 450 /ldt, we expect a “run to the breakers” during the second half of this year.

This being the low season for tankers, due to annual maintenance at the big refineries in preparation for the shift from producing mainly heating oil to that of gasoline for the upcoming US summer driving season, spot freight rates sometimes barely cover operating expenses. On top of that, a relatively large number of VLCCs has hit the water, oversupplying the dirty market. In the second half of the year, all refineries will be running at full speed, also in order to produce enough low sulphur fuel oil and marine diesel oil to meet the shipping industry’s needs for IMO 2020 compliant fuel. This will drive peak demand for crude oil transport (i.e. what goes into refineries) and even greater demand for the transport of petroleum products, since the new compliant fuel will have to be shipped mainly to the Gulf of Mexico, to be distributed to all major bunker stations in the world. Stock prices of publicly traded tanker companies have started to anticipate this.

With ship exhaust gases already regulated for nitrogen and sulphur, IMO (the international regulator for the shipping industry) will now turn to the carbon dioxide (CO2) issue. CO2 emissions must come down by 40% over the 2022-2030 period, and talks will begin next week at IMO as to how to make that happen.

The most simple and effective way to limit CO2 emission is to reduce speed, since fuel consumption decreases exponentially when a ship slows down. A tanker cutting its speed from 12 knots (miles/hour) to 10 knots, for instance, cuts its consumption by nearly a third.

The European Commission, led by France in this matter, and over 100 important shipowners are favourable to adopting such “slow steaming”; it should be made mandatory in the Commission’s view, voluntary in that of shipowners.

Beyond being “climate friendly”, slow steaming would also be “freight rate friendly”, as a lower average speed implies lesser available transport capacity.

Update : 05/2019

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