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Shipping Finance – Markets

(Review as at 31 March 2017)

Excess capacity remains a major challenge for shipping markets in 2017, with the exception of a few sectors. One example is that earnings for bulkers witnessed a strong uptick during the first quarter of the year. Some positive momentum could also be seen in the container market towards the end of the first quarter. By contrast, the tanker market continued to follow a declining – yet volatile – downward trend. These three sectors are the most important for the maritime industry, in terms of transport volumes and services.

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Dry bulk carriers

As a result of stagnating fleet growth and strong Chinese imports, the Baltic Exchange Dry Index has continued its upward trajectory in the first quarter of 2017. The average index level during that period was 161% higher than during the first quarter of 2016.

At the end of the first quarter 2017, the dry bulk fleet stood at 11,215 vessels amounting to a total of 788 million deadweight tonnes (dwt). The first three months saw deliveries of 15.9 million dwt, while 4.5 million dwt were scrapped. As a result, fleet growth was 1.5%. Only 853 vessels, equivalent to 21.0 million dwt, were over 25 years of age – this represents a mere 2.7% of the current fleet. At the end of the first quarter of 2017, the order book stood at 693 vessels, equivalent to 7.7% of the fleet.

Dry bulk sub-sector charter rates and Baltic Dry Index

Chart about dry bulk sub-sector charter rates and Baltic Dry Index as at 31 March 2017

Container ships

The Clarkson’s Time Charter Rate Index increased to 47 during the first quarter of 2017. While the index has increased by 23.6% during this period, the average index for the full first quarter was still 2.3% below the average for the first quarter of 2016, and 17.3% below the average for the first quarter of 2015.

At the end of the first quarter of 2017, the container vessel fleet stood at 5,111 vessels, aggregating 20.1 million Twenty-Foot Equivalent Units (TEU). On the one hand, new deliveries added 0.2 million TEU to the global fleet in the first three months. On the other hand, 0.2 million TEU were scrapped. This resulted in fleet growth of –0.3%. The current order book stands at 420 vessels or 3.2 million TEU, representing 13.7% of fleet capacity. It is concentrated in the Very Large Container Ship (VLCS) segment, which accounts for 81.1% of the total order book measured in TEU.

Charter rates in containership sub-sectors

Chart about container subsectors charter rates as at 31 March 2017

Crude oil tankers

Following the general slowdown in global GDP growth, world oil demand is now growing again at a slow but steady pace. Despite an environment still largely characterised by oversupply, we saw some seasonal improvement at the start of the year. OPEC’s production cuts are starting to bite, and there were accordingly fewer cargoes emanating from the Middle East, which carries negative implications for tanker and tonne-mile demand. However, this situation has been slightly offset by increasing exports from the Atlantic region towards Asia.

The overall crude oil tanker fleet increased by 2.2% year-on-year. The scrapping rate remained low, with only six tankers (1.1 million dwt) being scrapped during the first quarter of 2017. Contracting, on the other hand, has picked up after subdued ordering for the past couple of years: ordering activity reached 21 vessels during the first quarter of the year, primarily focused on Very Large Crude Carriers. The current excess supply combined with slower demand growth for crude tankers has placed downward pressure on tanker earnings. Benefiting from a low order book in the past couple of years, asset values for crude tankers have remained at similar levels across all sub-sectors.

Five-year-old crude oil tanker resale values

Chart about five-year old crude oil tanker resale values as at 31 March 2017

Product tankers

Despite a slowdown in demand growth, the product tanker market remained relatively stable during the first quarter of 2017, especially for the Medium Range product tanker sub-sector where we have witnessed an upward correction. The main contributor to this development was trade in Clean Petroleum Products from Western Europe/the United Kingdom to the US Atlantic Coast.

On the vessel supply side, product tanker fleet growth has finally toned down and year-on-year growth for the overall fleet stood at around 1.2%. The main focus remained on Medium Range (MR; 30,000–59,999 dwt) segments, with 24 vessels delivered during the first quarter of 2017. Contracting saw an uptick during the first three months, with 26 vessels (15 MRs; ten Long Range tankers and one smaller tanker) being added to the order book and scheduled for delivery before the end of 2019. On the other side of the equation, scrapping activity remained extremely low, with only four old MR product tankers sold for scrap.

Chemical tankers

Across segments of the chemical tanker fleet, time charter equivalent rates declined during 2016. For the larger vessels, the market downturn was more severe than for the smaller ones. The deteriorating product tanker market impacted chemical shipping especially, but also higher bunker prices had significant effects. During the first three months of 2017, the market has stabilised on the back of more solid vegetable oil trade and less swing capacity seeking employment in chemical trades.

The order book stood at 7.3% of the total fleet (measured in number of vessels), but within certain sub-segments this ratio is larger – such as for vessels sizing between 15,000 to 30,000 dwt, for which the order-book-to-fleet ratio is 15.1%. Furthermore, there is an upsizing trend from smaller to medium-sized tankers, as well as an increasing preference for stainless steel tanks. In 2016, contracting activities for newbuildings were at the lowest level in five years with only 20 contracts. In the first three months of 2017, only six orders were placed. In comparison: during the previous 20 years, 86 vessels were ordered on average per year.

Liquefied petroleum gas (LPG) tankers

During the first three quarters of 2016, time charter rates for all LPG segments fell, with exception of coastal vessels. Since then, earnings for Very Large Gas Carriers (VLGC) first increased, and then stabilised into the first quarter of 2017. The tighter market balance for spot-employed VLGCs should be seen in the context of the increasing oil price, which improved the competitiveness and demand for LPG compared to – for example – naphtha. We have seen the same trend in earnings for coastal vessels. By contrast, earnings for both Mid-size Gas Carriers and Small Gas Carriers continued to slide over the past six months.

In total, 92 vessels – equivalent to 4.8 million cubic metres (cbm) capacity – were delivered during 2016. From a historical perspective, this made 2016 the year with the highest delivered capacity to date. So far in 2017, 21 vessels have been delivered (852,000 cbm), and only two newbuilding orders have been placed.

During 2016, the main driver of trade and vessel demand was LPG trade. So far in 2017, US exports have continued to be strong with an increase of ca. 49% from the first quarter of 2016 to the first quarter of 2017. The main importer of US LPG exports was Asia, where the imports have served as feedstock for Propane Dehydrogenation Plants as well as in the residential and commercial sectors.

Liquefied natural gas (LNG) tankers

In the LNG shipping market, around 75% of the fleet has long-term employment; challenging spot market conditions therefore only affect a minor share of the fleet. Day rates increased during the second half of 2016 from a historical low in the first half of the year. Coming into the first quarter of 2017, day rates started to slide again, mainly due to the delivery of eight vessels.

Newbuilding prices for modern LNG carriers have meanwhile continued to slide, and are now down by ca. 5% year-on-year to levels not seen in ten years. So far in 2017, five vessels have been ordered while in 2016 we only saw seven newbuilding contracts. Hence, ordering activity has picked up.

We see this as a result of lower newbuilding prices and vessel owners’ expectations of a market improvement. LNG exports out of the US are steadily increasing from quarter to quarter; however, the total volume is still not significant. Also, Australian exports are expanding, with Japan and South Korea being the main destinations. Under the current market conditions, spot-employed vessels do not break even.