Shipping confidence reached its equal highest rating in the past three years in the three months to end-May 2017, according to the latest Shipping Confidence Survey from Moore Stephens.
The average confidence level expressed by respondents to the survey was up to 6.1 out of 10.0 from the 5.6 recorded in the previous survey in February 2017. Increased confidence was recorded by all main categories of respondent to the survey, which launched in May 2008 with an overall confidence rating of 6.8.
In the case of brokers, the confidence rating rose from 4.6 to 6.4, while for owners the increase was from 5.6 to 6.1. Confidence on the part of charterers and managers, meanwhile, was up from 5.9 to 6.4, and from 6.0 to 6.2 respectively. Confidence levels were unchanged in Asia at 5.6, but up in Europe, from 5.5 to 6.2, and in North America, from 6.1 to 6.4.
A number of respondents expressed cautious optimism about the industry's fortunes over the next 12 months, based largely on perceived increased levels of ship demolition and a rationalisation of over-ambitious newbuilding plans. This helped increase expectations of major investments being made over the next 12 months. Concern persisted, however, over political uncertainty, overtonnaging in certain trades, depressed oil prices and a potential dearth of quality seafarers.
"Shipping people are eternally optimistic, with one week of good news seeming to help them forget eight terrible years of hardship and financial loss," said one respondent.
The likelihood of respondents making a major investment or significant development over the next 12 months was up from 4.9 out of 10.0 in the previous survey to 5.4, the highest level since August 2014. There was increased confidence on the part of all major respondents, in the case of charterers up to a level of 6.3 from 5.8 in February 2017. Owners and managers, meanwhile, each registered a confidence level of 5.9, up from 5.1 and 5.6 respectively last time. Confidence on the part of brokers was up from 3.4 to 4.4.
50 per cent of respondents expected finance costs to increase over the coming year, compared to 54 per cent in the previous survey. Owners' expectations fell from 57 per cent to 48 per cent, while managers were also down, from 61 per cent to 57 per cent. More brokers and charterers, however, anticipated costlier finance – 63 per cent of brokers (against 41 per cent last time) and 57 per cent of charterers (compared to 47 per cent in February 2017). "The financial support needed to boost the markets is not yet at expected levels," noted one respondent, "but we believe that the situation will improve in the coming months as demand increases."
Demand trends, cited by 26 per cent of respondents, continued to be the factor expected to influence performance most significantly over the next 12 months, followed by competition (22 per cent) and finance costs (14 per cent). According to one respondent, "Larger companies are targeting their smaller competitors in order to minimise competition and secure a stronger position in the market."
The number of respondents expecting higher freight rates over the next 12 months was up on the previous survey in all three main tonnage categories. In the tanker market, 32 per cent of respondents anticipated improved rates, as opposed to 25 per cent last time, while the number anticipating lower tanker rates fell from 28 per cent to 16 per cent. Meanwhile, there was a 14 percentage-point rise, to 58 per cent, in the numbers anticipating higher rates in the dry bulk sector, the highest figure for three years.
In the container ship sector, the numbers expecting higher rates rose from 31 per cent to 46 per cent, while there was a six percentage-point fall, to 12 per cent, in those anticipating lower container ship rates. Net sentiment was up in the tanker market from -3 in February 2017 to +16 this time, while the increases in the dry bulk and container ship trades respectively were from +33 to +50 and from +13 to +34.
In a stand-alone question, respondents were asked to estimate the level they expected the Baltic Dry Index (BDI) to be at in 12 months' time. More than half (52 per cent) felt the BDI would reach a level of between 1,000 and 1,499, while a quarter (25 per cent) put the likely figure at between 1,500 and 1,999. "Healthy volumes of cargo are being moved," said one respondent, "but there are too many ships around."
"The survey was launched in 2008, on the very cusp of one of the most protracted and severe global economic downturns, with a confidence rating of 6.8. In our latest survey, the figure stands at 6.1 which, given geopolitical, economic and industry developments, must be seen as a robust rating," commented Richard Greiner, Moore Stephens Partner, Shipping and Transport. "Moreover, confidence today of making a major new investment is the highest it has been for almost three years. The positive sentiment on freight rates is welcome, although this must be weighed against the lows to which they have fallen and from which they must continue to recover.
"Even for an industry which is familiar with the volatile nature of international commerce, shipping's ability to survive adversity is worthy of comment. Our latest survey found many of our respondents in watchful mode, mindful of the fact that there are still too many ships, but encouraged to believe that increased demolition and more pragmatism by industry stakeholders will help to redress this imbalance. Respondents also remain cognisant of the impact which geopolitical developments can have on shipping, and it will be instructive to see what effect all this will have on industry confidence in our next quarterly survey."
As freight rates are coming back from the abyss, their actual rise seems to be magnified beyond their actual performance. Some container spot freight rates are up more than 100 per cent from the very low levels of last year, but may still be at a loss-making level now and so spot rates are not the best indicator for market profitability.
The broad-scoped China Containerised Freight Index (CCFI) offers a solid and alternative indication. The CCFI composite hit an all-time low at 632.36 on 29 April 2016. By 11 August 2017, it was back at 856.5 and now comparing year-to-date growth, the CCFI is up by 20.7 per cent versus the same period last year.
By contrast, the spot rates from Shanghai into Northern Europe are up 64 per cent year-to-date, year-on-year. The spot rates for containers bound for the US have gone up by 45 to 50 per cent over the same period.
It's not only freight rates which have risen this year. Charter rates left the doldrums and went up sharply in the first four months of 2017, only to slide back down, but during June/July most of the slide had been regained.
The extreme volatility of previous years has been reduced for spot rates on the Shanghai-Northern Europe trade lane. A sign of improving demand and better market conditions since Q4 2016.
The improved freight rates come on the back of strong demand growth during the first half of 2017. Combined with steady fleet growth of 1.8 per cent the fundamental balance has improved noticeably. Global container shipping demand grew by five per cent in H1 2017, over the same period last year (source: CTS).
On both the key long front haul trades out of the Far East into Europe and North America, demand grew rapidly by 5.2 per cent and 10.0 per cent respectively (source: CTS). BIMCO's own data on inbound loaded containers to the US West Coast went up by 5.4 per cent and to the East Coast by 10.6 per cent. The fastest growing import ports on the East Coast were Houston (+26 per cent) and Savannah (+13 per cent). While the main port – Port of New York and New Jersey (PANYNJ) – grew by only 5.5 per cent, due to very weak imports in February and March.
Growth on the head haul trades is vital, as it pushes utilisation higher where it's most needed, avoiding blank sailings and filling the ships to a larger extent than in recent years. Head haul trades deliver the higher freight rates, whereas back hauls merely reduce the costs of repositioning the ship.
Moving forward, PANYNJ, should benefit from the early completion of the Bayonne Bridge navigational clearance project. With the new air draft of65.5 metres, ships up to 18,000 TEU will now be able to reach the terminal "behind" the bridge (9,800 TEU was the maximum before the elevation). This will prompt carriers to optimise their networks once again, as most US East Coast ports have upgraded their terminals in recent years to accommodate the ultra large container ships.
2017 is following the trend seen in 2011-2012 and 2014-2015, of US importers increasingly directing cargo towards the US East Coast ports.
As of August 7, 182 ships (474,000 TEU) were idled (source: Alphaliner). As the idle fleet hasn't changed much over the previous three months, demand growth has lifted rates instead of reactivating the unemployed ships. This is one of the reasons for the improved conditions – the careful handling of supply.
The significant slowdown in demolition comes as no surprise. The magnitude, however is still striking. Remember that a lot of container shipping companies are still losing money daily. But the simple fact that rates have climbed and managed to stay up, means owners shy away from scrapping their ships.
June saw only seven small units sold for demolition (9,639 TEU in total), in comparison to the all-time high level in January where 99,899 TEU (29 units) left the fleet. This is a drop of 90 per cent.
BIMCO forecast a full year demolition of 450,000 TEU, out of which 306,824 TEU had already been demolished by mid-August. This is in line with our forecast that sees the second half of the year with continued fleet growth, low demolition activity and a slower demand growth than was seen in the first half.
The final four and a half months will see more ultra large container capacity being launched. The scheduled order book shows 31 units with a capacity higher than 10,000 TEU, out of which 11 are larger than 20,000TEU. BIMCO estimates that up to 25 of these ships will be delivered.
Fortunately, we still see almost no new orders being placed. Less than 400,000 TEU have been contracted since December 2015. This is extraordinary. In comparison, July 2015 alone, saw orders for 435,268 TEU placed (50 contracts). In the same period, the orderbook has come down from four million TEU to 2.6 million TEU. The lowest TEU level since 2003.
BIMCO expects that this low level will be difficult to maintain, as optimism in the market combined with hungry shipyards and shipping companies being eager to be top dog is a toxic cocktail.
One year ago, the container shipping fleet surpassed the 20 million TEU mark, only to increase demolition and bring it back below this figure. Now we are back above the 20 million TEU mark again, this time for good. The fleet now holds capacity of 20,356,656 TEU. Year-to-date, the fleet has grown by 1.8 per cent and BIMCO forecasts that the rate will hit 3.3 per cent for the full year.
665,850 TEU of the new capacity is now active and some 450,000 TEU will be delivered during the remainder of the year. 41 ships with an average size of 14,223 TEU constitute 88 per cent of additional tonnage, ranging from 9,400 TEU to 21,413 TEU. The latter is the OOCL Hong Kong, which will be joined by four sisters from Samsung HI later this year.
Deliveries scheduled for 2018 are equally biased toward the larger sizes, as the upscaling of network capacity and hunt for lower unit costs continues. Currently 77 ships with a capacity of 9,400 TEU and an average size of 15,578 TEU will amount to 82 per cent of the new influx. However, it is anticipated that postponements and delays are likely to impact this schedule.
Since BIMCO's last report in mid-April, the consolidation amongst carriers has continued. First, the three Japanese conglomerates merged their container lines into ONE (Ocean Network Express), then there was COSCO's takeover of OOCL and in August we saw the formation of the Korea Shipping Partnership (KSP).
Whereas ONE is a merger of business units, at least according to the US Federal Maritime Commission, that had to give a final decision – rejection or approval – to the US Department of Justice; KSP is not. At least not yet. It remains to be seen whether KSP can reap the benefits from the partnership which is needed to counter the pressure from harsh competition on its main intra-Asian trade lanes.
BIMCO sees 2015/2016 as the real low point of the present crisis and 2017 is a step in the right direction for the industry. Demand growth will most likely outstrip supply growth for the second year in a row. The last time we saw that, was in 2010-2011.