Moody’s prediction – Does it concern shipping?
“Substantial over supply will constraint freight rates for at least the next 18 months, particularly, weighing on earnings on the dry bulk and crude oil tanker segment, while falling US crude oil imports and declining European demand are likely to depress seaborne deliveries” said Moody’s Investor services. The report also states that it expects the aggregate EBITDA in the global shipping industry to decline by 5 – 10% in 2013. This will result in shipping finances remaining tight with only few banks lending. Moody’s have said that they could change its outlook to stable if it believed that the supply / demand gap is likely to narrow over the next 18 months where supply exceeds demand by more than 2%/ or demand exceeds supply by up to 2% for the outlook to stabilize. The industry aggregate EBITDA growth would also need to be within a range of minus 5 to plus 10%. Whilst the market prospects are expected to improve in 2014, with the amount of oversupply expected to decline, the down side risk remains high as the global economic recovery seems to have lost momentum over the last few months.
Meanwhile, as reported in the Container Shipping Manager, China’s economy has signalled a slowdown in to the second quarter following a decreased pace of economic growth in May, which is likely to create a downward revision for its annual GDP target of 7.5%. China posted a 1% export growth in May attributed to a slowdown of exports to the US and Europe which is its third month of consecutive decline in growth. Imports also contracted by 0.3% against a forecast of 6% with major metal imports falling by double digit rates. Coal also fell sharply.
Against this backdrop, bank loans and investment were down against forecasts for the month of May, while factory output and retail sales kept pace with April. Since May’s slowdown of economic performance, the IMF has set GDP growth at 7.75% with the Organisation for Economic Cooperation (OECD) targeting 7.8%. According to economist Jian Chang of Barclays in Hong Kong, “we now think China’s growth will stabilise at 7.6% this year. The possibility for the Central bank to cut interest rates is now rising,” she said. The latest reports indicate that China’s pain continues with exports contracting by 3.2% during June as against last year.
As reported in Dynaliners weekly, the North Europe /Far East trade is still to be in doldrums. Although the number of loops have reduced from 31 in June 2011 to 26 in 2012 and now 22 in July 2013, due to an increase of average shipboard capacity from 9500 teu to 10700 teu, aggregate nominal shipboard capacity reduced only marginally by less than 2% to 2.5 million teu. However, the overall annualized trade capacity is now down by a substantially higher 6.2% to 8.9 million teu.
Forward Freight derivatives to manage risks
Fluctuation in freight rates has been a major risk in the shipping market. To sight an example, Baltic Trading index which exceeded 11000 points in 2008 has now fallen below 900 points. To help companies to manage forward freight risks, Shanghai Clearing House has launched a Renminbi Forward Freight Agreement (FFA) which is China’s first RMB denominated liquidation of globalisation derivatives.
With hedging and price discovery functions, this is a forward freight risk management tool and is traded between two counter parties through brokers registered with the Shanghai Clearing House and is settled in Renminbi.
With approval granted by the People’s Bank of China in late 2012, Shanghai Clearing House is the world’s largest trading house of over the counter final derivative on shipping with a market size of up to tens of billions of dollars.
Shipping lines to build logistics capabilities
With freight forwarders /logistics companies managing approx. 40% of all containers shipped around the world, Shipping lines have chosen to build their own logistics capabilities through acquisition. APL over the latter half of 2012 took outright ownership of APL – ZHIQIN Technology Logistics of China and also acquired US based logistics operator Carmichale for US$ 37 million. In a similar move, NYK took a simple majority in Rolf CSC to create NYK Rolf with its main activities being logistics and terminal services for the car industry in Russia. With declining volumes and surplus shipping capacity, a closer relationship with the shipper gives an edge. The significance of the freight forwarding has been exemplified in the forward volumes contracted as given below.
Major Forwarder 2012 Volumes (Teu)
Sinotrans 8,237,000
Kuehne + Nagel 3,473,000
DHL (Deutsche Post) 2,840,000
DB Mobility Logistics 1,905,000
Panalpina 1,388,000
Damco 797,700
DSV Air & Sea 725,800
Top 25 Containers Operators control 88%
The top 25 container operators control 88% of the existing container fleet deployed in liner services and their share of the order book is around 87%. Whilst Maersk Line, MSC, CMA-CGM remains in the first three position, Evergreen secured the fourth position overtaking COSCON.
As against 2002, the fleet of 03 carriers grew by more than 20%, Evergreen (+22%), Nile Dutch (+51%) and PIL (+25%). Hyundai Merchant Marine (-8%) and CSAV (-25%), are the only two operators to downsize their carrying capacity.
Layup /Idle ships down
As of 17 June, as reported in Alphaliner, the capacity of laid up box ship fleet has fallen to 159 ships /395,000 Teu from 177 vessels – 426,900 teu two weeks earlier. Of the mothballed ships, the Lloyds List Intelligence shows two post-panamax ships of 8974 teu and 8240 teu inactive for more than 25 days operated by K Line and Yang Ming. The 12400 teu 2012 built MSC Katie an Ultra Large Container ships also remain idle. There were around 600 container ships laid up at the height of the global financial crisis in 2009. Despite the parlous state of the container industry shipping lines seems reluctant to idle ships and have instead chosen to blank or void voyages, particularly on the trouble trade lanes of Asia to Europe.
During the first half of 2013 126 container ships was sold for demolition with a total capacity of 270,300 teu. One vessel demolished was just 14 years of age (1500 teu – MSC Provider).
Containerisation of grain to assist container shipping
Containerisation of grain has now become popular in countries such as Australia, Canada, with most of it going to Indo-China, Malaysia, Indonesia and China, where flour mills find bulk shipments too big to handle. Canada has followed Australia to de-regulate grain exports which will result in an increase of container traffic thus helping container vessels and also ports. An industry source said “customers in Asia are using containers because of the finanacing scenario. Sending in bits and pieces allows them to manage inventory via the steady flow. The down side is administration as it multiples the paper work which is a pain for traders”.
The writer a Maritime Economist is a Chartered Fellow (Logistics Transport), Chartered Shipbroker (UK), Chartered Marketer (UK) and a University of Oxford Business Alumni. He is also a NORAD /JICA Fellow.