Shipping Finance – Markets
(Review as at 31 December 2016)
Excess capacity remained a major challenge for shipping markets in 2016, with the exception of a few sectors that benefited from higher demand triggered by the low oil price environment. The dry bulk and container shipping markets both continued to suffer from overcapacity, keeping vessel earnings and values under pressure. In the crude tanker market, the positive short-term factors contributing to good earnings faded away, leading to a decrease in both earnings and asset values. 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
The Baltic Exchange Dry Index hit an unprecedented low in February 2016 at 290 before improving towards the end of the year. However, the average index level in 2016 was 6.3% lower than the average level for 2015.
At the end of 2016, the dry bulk fleet stood at 10,875 vessels amounting to a total of 766 million dead weight tonnes (dwt). 2016 saw deliveries of 44.0 million dwt, while 28.1 million dwt were demolished. As a result, fleet growth was 2.1%. Only 804 vessels, equivalent to 18.7 million dwt, were over 25 years of age – this represents a mere 2.4% of the current fleet. The depressed freight market discouraged contracting of new vessels, and only 13.4 million dwt were ordered in 2016. At the end of 2016, the order book stood at 819 vessels, equivalent to 10.1% of the fleet.
Dry bulk sub-sector charter rates and Baltic Dry Index
The container market remained under pressure in during 2016 as a result of significant excess capacity and weak demand growth. The Clarksons Time Charter Rate Index for container carriers fell to 38 points at year-end, and the average index level for 2016 is 22.6 % below the average one for 2015.
At the end of 2016, the container vessel fleet stood at 5,188 vessels, aggregating 20.2 million Twenty-Foot Equivalent Units (TEU). On the one hand, new deliveries added 0.9 million TEU to the global fleet in 2016. On the other hand, 0.5 million TEU were demolished, which is three times as much compared to the previous year. This resulted in fleet growth of 1.5% in 2016. The current order book stands at 432 vessels of 3.3 million TEU, representing 16.1% of fleet capacity. It is concentrated in the Very Large Container Ship (VLCS) and Sub-Panamax sub-sectors. The VLCS sub-sector order book accounts for 51% of the VLCS fleet, while the Sub-Panamax sub-sector order book amounts to 14% of the Sub-Panamax fleet.
Charter rates in containership sub-sectors
Crude oil tankers
Despite the decline in world gross domestic product growth, global oil demand grew at a stable pace in 2016. This was supported by low oil prices but also partially by a stabilisation of market expectations of future oil prices.
During 2016, the crude oil tanker fleet grew by 5.5% year-on-year in deadweight terms. Scrapping activity remained slow, with only 1.4 million dwt being scrapped. By the same token, contracting has remained at a moderate level with 33 crude oil tankers added to the order book during the year – the figures are almost evenly divided among the three main sub-sectors. The excess supply combined with slower demand growth for crude tankers contributed to a decline in earnings across all sub-sectors compared to 2015. In line with earnings, asset values of crude tankers have also decreased over the same period, especially of second-hand tankers older than five years.
Five-year-old crude oil tanker resale values
Despite a slowdown in demand growth, the product tanker market remained relatively stable during the first half of 2016. Starting from the third quarter, it showed a declining trend. Nevertheless, the decline has been maintained at a fair level supported by the increasing refinery throughputs from new refineries out of the Middle East and Asia. On the delivery side, product tanker fleet growth continued on the high side with most of the deliveries focused on the Small Tanker (<10,000 dwt), Short Range (10,000–29,999 dwt) and Medium Range (30,000–59,999 dwt) segments – these account for 252 vessels (10.3 million dwt) ordered during 2014/2015. Nonetheless, we have also witeness the highest delivery for Long Range (LR) product tankers in the past half-decade, with 47 LR tankers (17 LR1 and 30 LR2) added to the service.
The product tanker fleet (> 4,000 dwt) currently consists of 4,134 vessels (155 million dwt) while 51% of the total tonnage belongs to the Medium Range segment. Fortunately, contract activity has been curbed during the year that the current order book stands at 148 vessels (7 million dwt) divided among various sub-sectors.
Scrapping activity reached lowest level since last decade, only 26 product tankers (0.6 million dwt) were sold for scrap in the year, most of which are concentrated within the Medium Range, Short Range and Small size 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. Especially, the deterioration of the product tanker market impacted chemical shipping, but also higher bunker prices had significant effects.
The order book stood at ca. 12% of the total fleet, but within certain sub-segments this ratio is larger. This accounts for vessels sizing between 25,000 to 34,999 dwt, for which the order-book-to-fleet ratio is 26.5%. 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 was at the lowest level in five years with only 20 contracts. During the previous 20 years, 86 vessels have been ordered on average per year.
Liquefied petroleum gas (LPG) tankers
During 2016, time charter rates for all LPG segments fell with the exception of coastal vessels. The downturn was most significant for the Very Large Gas Carrier (VLGC) vessels, for which we saw a period in the third quarter where time charter equivalent rates were around the level of operational cost. The deterioration of dayrates for the Medium and Small gas carriers was less severe as these vessels segments are more diversified in terms of cargo carrying capabilities. The market balance for the coastal vessels tightened, which increased dayrates moderately.
In total, 91 vessels equivalent to 4.7 million cbm were delivered during 2016. This makes 2016 the year with highest delivery capacity from an historical perspective. However, owners reacted to the downturn in the market and placed an historical low number of only twelve new building contracts. Over the previous 20 years, on average 55 contracts had been initiated per year.
During 2016, the main driver of trade and vessel demand was LPG trade, where US exports continued to be strong with an increase of ca. 29% from 2015 to 2016. 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, hence, challenging spot market conditions only affect a minor share of the fleet. Compared to 2015, spot dayrates for LNG vessels fell in 2016, however, at a slower rate than witnessed between 2015 and 2014. Even though dayrates deteriorated in 2016, there was an improvement from the first to second half of 2016. This improvement resulted from a significant increase in LNG imports into China and India, as well as a temporary shutdown on a nuclear power production plant in South Korea. During 2016, Australian LNG exports continued to be strong, with Asia being the main destination. Moreover, US exports of LNG were initiated in 2016, which contributed to a slightly tighter market balance, although the spot employed vessels were still not reaching break-even levels during the year.
LNG tanker market