2017 was a year of change. Much of it for the better, but a cautious approach is still needed for 2018 to maintain the progress already achieved.
Economic growth has accelerated in Europe, Asia and the Americas since mid-2016, and the IMF now expects the global GDP growth rate to raise slightly in 2018 to reach 3.7%, up from 3.6% in 2017.
In 2018, the dry bulk sector is likely to improve the fundamental market balance further, if operational speeds do not increase. For the container shipping sector, the improvement in 2017 will carry on into 2018, where fleet growth rate seems to match demand growth, and as a result no big freight rate changes are expected to lift earnings. For oil tankers, there is a potential upside in low fleet growth for both crude oil and oil product tankers. The growth in demand - coming from increased oil consumption and a return of more price arbitrage-driven trading activity - depends on a better-balanced oil market. BIMCO expects that the world’s oil demand will only marginally outstrip the world’s oil supply, and this will be a negative factor for the oil tanker market.
China is at the centre of shipping activity. Being the one driver of dry bulk shipping demand growth, China has also taken a giant leap in hiking crude oil import levels during 2017. By introducing robotics into its enormous manufacturing sector, China aims to remain the world’s top exporter of containerised goods too. There is a lot of competition in that field, and maritime supply chains will change a lot over the coming years.
The Global economy: getting closer to its full potential
Increasing slightly on gains made in 2017 – global GDP growth rates are forecast to stay around 2018 levels, all the way into 2022 (source: IMF).
Nevertheless, the world trade volume growth rate (goods and services) is expected to drop from 4.2% in 2017 to 4.0% in 2018.
The shipping industry has adapted quite well to a lower level of demand growth over the past couple of years. The next challenge is to understand that this is as good as it gets, and to avoid wishful thinking that demand levels will increase significantly – as that will not happen. The biggest risks to the forecast remain on the downside, meaning that fleet could grow too much or demand too little.
Dry bulk: keep slow steaming around to safeguard recovery
We did expect markets to improve in 2017, but the extent of it was a positive surprise. We didn’t expect that 2017 would see a demand growth rate of 5%, nor a fleet growth 3.2%. A much weaker growth rate was forecasted for both. However, Chinese demand has exceeded expectations on the upside and as that happened, fleet growth exceeded expectations on the downside, denting some of the upside potential.
As the rest of the world either imports a steady amount of dry bulk commodities or slows down its imports – China’s importance to the market becomes even more evident. Once again it was the steel industry dominating the development. Iron ore imports were up by 7% on 2016, as steel production grew by 6.3% (2017-9M).
At the end of 2017, BIMCO continued its “Road to Recovery” market analysis, with the third update outlining the projected path towards a profitable industry. It highlighted that 2018 could become the first year since 2011, with the industry returning a profit, but we shouldn’t be too hasty. It is mostly in the hands of the shipowners, as fleet growth may increase as little as 1% if handled with care. As BIMCO’s expectations for demand growth in 2018 is slightly higher than that, fundamental improvements will follow if slow steaming is kept up.
For 2018, the challenge is for owners and operators to maintain slow steaming. BIMCO expects the supply-side to grow by around 1% in 2018 (3.2% in 2017E)
Tanker: Product tankers may breakeven in 2018
The prolonged draw down of global crude oil and oil product stocks proved to be a drag on tanker demand throughout 2017. While this came as no surprise, many PR departments from oil producers were busy telling us that the oil market fundamentals would balance “any day now”.
In Q4, the oil producers gave in, playing the blame-game for a while before extending the OPEC supply deal into 2018. However, believing in the return of stronger tanker demand sooner rather than later, may have prompted tanker owners to postpone demolition.
Not until we see global oil stocks at a much lower level, can we expect a renewed interest in seaborne oil trading activities that will lift oil tanker demand from its current subdued level. However, the first half of 2018 may pass by before that happens.
The rise of United States (US) crude oil exports to long-haul destinations was markedly the positive story in 2017. That development increased tanker demand on top of the expected increase of oil imports into India. Chinese imports of crude oil also went beyond expectations, increasing tonne mile demand by as much as 13% in the first nine months of 2017. Such a high growth rate is not expected for 2018.
As forecast, increased demolition activity amongst crude oil tankers and oil product tankers wasn’t enough to prevent freight rates from falling; still reaching a four-year high, but falling slightly short of BIMCO’s scrapping forecast. Shipowners postponed the lion’s share of demolition until the second half of the year, never really biting the bullet to reduce fleet growth significantly.
Tanker demand growth in 2018 is expected to prolong the trend seen in 2017; growing imports in the Far East and growing exports from the US. This is set to benefit VLCC and to some extent suezmax. The fate of aframax is closely linked to regional Asian and European demand where the growth rate is expected to be lower.
BIMCO expects the crude oil tanker segment to see a net fleet growth of around 2% in 2018 (5.1% in 2017E). We estimate that the supply side growth rate of the oil product tanker fleet to be around 1.8% (4.2% in 2017E). We expect demolition of oil tanker capacity to be on a par with 2017. Overall, we see oil product tankers operating in an improved market, whereas crude oil tankers will continue to struggle.
Container: industry needs to hold on to profitability
BIMCO expected 2017 to be a better year for container shipping compared to 2016. We got just that: freight rates went up and their volatility reduced. Demolitions went down, and the idle fleet was generally reactivated.
The 2017 demand growth rate is heading for +5%, which is the highest in six years. After a terrible 2015, port throughput has gone up and up, growing as much as 7.7% (quarter-on-quarter) in Q3-2017 (source: Alphaliner). As demand rebounded, combined with a multi-year low fleet growth rate in 2016, the fundamental market balance improved. In 2017 we have not seen such an improvement. The fundamental balance seems almost unchanged, as reactivation of idled ships lifted actual fleet growth beyond the nominal TEU growth rate of 3.3%.
In September, the ordering drought came to an end. Twenty new orders for 22,000 TEU ships broke a 21-month lull in newbuild activity. They will be delivered in 2019-2020.
This means that the nominal fleet growth level for the container shipping industry over the next few years is set for around 4%, which leaves little room for fundamental market balance improvements. As a result, increased earnings must come from: continued cost-cutting exercises and permanent slow-steaming to keep fuel costs on a tight leash. On top of that: operational efficiency gains and positive demand growth gain more boxes on the individual ships. The latter means harvesting some of the economies of scale the industry relies heavily upon – with the large volumes coming from front-haul trades.
Profitability is up for grabs across the container shipping industry, if demand growth remains in the region of 4-5% and actual fleet growth is handled with care.
BIMCO expects the container shipping segment to see a net fleet growth of around 4.1% in 2018 (3.3% in 2017E).