Shipping Finance – Markets
(Review as at 30 September 2016)
Excess capacity remained a major challenge for shipping markets in the first nine months of 2016. The dry bulk and container shipping markets both continued to suffer from overcapacity, keeping vessel earnings and values under pressure. Crude oil tankers saw the positive short-term factors recently contributing to good earnings progressively fade away, leading to a decrease in earnings and values. These sectors are the three most important for the maritime industry, in terms of transport volumes and services.
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Dry bulk carriers
The Baltic Dry Index (BDI) hit an unprecedented low in February 2016 at 290. In the following months, it gradually increased before peaking in September at 941. By September, this year’s average index was still 19% below the 2015 average.
At the end of the third quarter of 2016, the dry bulk fleet stood at 10,841 vessels amounting to a total of 763 million dead weight tonnes (dwt). Only 822 vessels, equivalent to 19.3 million dwt, were over 25 years of age – this represents a mere 3% of the current fleet. The depressed freight market discouraged contracting of new vessels, and only 12 million dwt were ordered in the first nine months of 2016. At the same time, 451 vessels or 37.3 million dwt entered the fleet. The order book stood at 962 vessels, equivalent to 12 % of the fleet. The first three quarters also saw a surge in dry bulk demolition, with 329 vessels or 25.0 million dwt scrapped. In addition, younger vessels were sold for scrap. The average scrapping age was at 23.2 years during the first nine months of 2016 compared to 25.3 years in 2015.
Dry bulk subsector charter rates and Baltic Dry Index
The container market remained under pressure in the first nine months of 2016 as a result of significant excess capacity and weak demand growth. The Clarksons Time Charter Rate Index for container carriers fell to 40 points at the end of September 2016, which is a year-on-year decline of 22%.
At the end of the third quarter 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 0.7 million TEU to the global fleet in the first nine months of 2016. On the other hand, 0.4 million TEU were demolished, which is more than double compared to the full year of 2015. The current order book stands at 440 vessels of 3.4 million TEU, representing 17% of fleet capacity. It is concentrated in the Very Large Container Ship (VLCS) and Sub-Panamax subsectors. The VLCS subsector order book accounts for 55% of the VLCS fleet, while the Sub-Panamax subsector order book amounts to 14% of the Sub-Panamax fleet.
Charter rates in containership subsectors
Crude oil tankers
Despite the decline in world gross domestic product growth, world oil demand remained strong and has been growing at a stable pace over the first three quarters of 2016. This was supported by low oil prices but also partially by a stabilisation of market expectations of future oil prices.
Over the first three quarters of 2016, the crude tanker fleet grew by 4.5% year-on-year in dead-weight terms. Scrapping remained low, with only 0.8 million dwt (one Suezmax tanker, six Aframax tankers and one Panamax tanker) being scrapped. Contracting, on the contrary, has increased, with four Aframax tankers, seven Suezmax tankers and 14 VLCC tankers being added to the order book. The excess supply combined with slower demand growth for crude tankers contributed to a decline in earnings across all sub-sectors compared to the previous year. 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 the year. In the third quarter, however, it showed a declining trend. Supported by the increasing refinery throughputs from new refineries out of the Middle East and Asia, the decline has been maintained at a fair level. 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.
The product tanker fleet currently consists of 5,021 vessels (171 million dwt). 55% of the total tonnage belongs to the Medium Range (MR) segment. The order book stands at 511 vessels (25 million dwt) with a focus on the MR segment. The MR order book accounts for 251 vessels (12.1 million dwt) which represent 48% of the total product tanker order book in number terms. Contracting activity is close to a stop though, with only 14 product tankers ordered during the first three quarters of 2016. The orders are divided between Small tankers (eight vessels) and Long Range tankers (six vessels). In 2014/2015, we witnessed a huge increase in the order book for Long Range product tankers, of which 63% (in number terms) will be delivered before the end of this year.
Scrapping activity stayed at a moderate level: only 21 product tankers (0.5 million dwt) were sold for scrap during the first three quarters of the year, most of which are concentrated within the MR, Short Range and Small size tankers.
Across segments of the chemical tanker fleet, time charter rates continued to decline slightly during the third quarter of 2016. The order book now stands at 13% of the total fleet, but within certain sub-segments this ratio is larger. This accounts for vessels sizing between 20,000 to 30,000 dwt, for which the order book to fleet ratio is 37%. Further, there is an upsizing trend from smaller to medium-sized tankers, as well as an increasing preference for stainless steel tanks.
On the demand side, trade levels were affected by weaker Chinese imports, partly explained by plant shutdowns ahead of the G20 summit early September, as well as lower palm oil exports out of Southeast Asia, as production was affected by the El Nino drought. A continuation of sliding rates in the clean petroleum products market also had a negative impact on earnings, especially for larger chemical tankers.
Liquefied petroleum gas (LPG) tankers
During the third quarter of 2016, time charter rates for the Small Gas Carrier segment remained rather stable. Oppositely, dayrates for Medium Gas Carriers (MGC) and Very Large Gas Carriers (VLGC) continued to decrease, although at a slower pace than during the first half of 2016. From the peak levels reached mid-2015, dayrates for VLGCs and MGCs have declined by 75% and 50%, respectively, so far.
The LPG fleet expanded by 3% during the third quarter of 2016, bringing the total fleet growth for 2016 close to 15%. This development was primarily driven by the delivery of new MGCs and VLGCs, combined with a very limited amount of scrapping. Currently, the order book represents 25.5% of the fleet.
Exports of LPG out of the United States continued to be strong and demand from Asian countries, especially India, was firm. Demand for VLGCs was, however, affected by weak arbitrage economics, worsening the vessel oversupply problem.
Liquefied natural gas (LNG) tankers
Spot rates for LNG carriers continued to remain below breakeven levels at around US$35,000 per day for a modern vessel during the third quarter of 2016. The low rate levels result from a timing mismatch between the delivery of vessels and new demand coming from the start-up of liquefaction capacity in Australia and the United States. The order book has a size of 32% of the current fleet, and only 7% of the fleet is above 25 years. However, the negative development in the short-term LNG market has limited impact on the overall fleet, as most vessels are employed on long-term contracts.
LNG tanker market