FEATURE | “It’s the steel production, stupid!”

Chinese imports of iron ore keep falling, while its crude steel production keeps growing, according to data compiled by BIMCO. China’s increased use of scrap metal for its production of crude steel is fundamentally critical to the dry bulk shipping industry. Mostly Capesize ships are impacted by this, way beyond the temporary iron ore export disruptions in Brazil and Australia.

OPINION | Trade tensions and rising risks lead to slowing growth

The International Monetary Fund (IMF) has revised down its predictions for global growth in 2019 and 2020. It forecasts growth to be 3.5 per cent in 2019 and 3.6 per cent in 2020. This means a dampening of global growth over the next two years, as growth in 2018 is estimated to be 3.7 per cent The slowdown will affect both advanced and emerging economies.

OPINION | Trade war cease-fire is good news for the dry bulk sector

Following an almost total halt in exports of soya beans to China in the last quarter of 2018, the new year has brought new hopes for American farmers and the dry bulk shipping sector. The USDA reported that in the first four weeks of 2019 754,609 tonnes of soya beans were ready to be shipped in China, up from only 25,347 tonnes in December.

FEATURE | US container imports break records but uncertainty lies ahead

Container imports on both the US East Coast (USEC) and West Coast (USWC) had a strong year in 2018, growing 3.7 per cent and 8 per cent respectively in the first 11 months of the year compared to the same period in 2017. Record high levels of inbound laden containers were experienced on both coasts in October with the USWC at 1.09 million TEU and the USEC at 0.91 million TEU according to data from BIMCO.

OPINION: Macroeconomics: Labour market tightens but inflation remains subdued around the globe

BIMCO reported in our previous macroeconomics report in April 2017 that monthly indicators were showing a strengthening in the global economy. The firm growth dynamics in advanced economies have now, four months later, had a cascade effect on some emerging markets and developing economies (EMDE). This solid growth has sparked an appetite for EMDE assets and indicates that the market expects a pickup.

OPINION: Tanker shipping: All eyes on oil market rebalancing – is it happening or not?

The one key factor to watch is the one thing that’s impossible to measure accurately on a global scale - oil stocks.

Global stocks for both crude oil and oil products rose significantly following the sharp fall in crude oil prices in the second half of 2014. But while this may seem to be in the past, it is still haunting the oil market and the oil tanker market. Demand in the tanker market is below normal levels and will only increase once the global oil stocks have been reduced.

Tanker shipping enjoyed above-normal demand as the stocks were building, but will continue to suffer as long as they remain high. The strong fleet growth in 2016 and 2017 only makes the downturn tougher on owners and operators struggling with stretched balance sheets, as earnings drop.

So, what is the right level of future oil stocks? It’s anyone's guess now, but BIMCO believes that it is much lower than the estimates of the "money managers and bull traders", but not as low as the level seen before the rise in 2014.

Global oil demand has grown markedly since then, and it seems fair to strive towards a level equal to a given number of days of supply, rather than a multi-annual absolute average.

BIMCO believes that some rebalancing has taken place over recent months, but much more is needed. Data regarding OECD-stocks only provides an indication of how the market is developing in one part of the world. Likewise, any draw down on stocks in the US should not be used as a global proxy, as the US only holds 1/6 of OECD stocks.

Bearing in mind that if global stocks have a surplus of 180 million barrels, it will take one whole year to reduce that at the rate of 0.5 million barrels per day (bpd). As can be seen from the chart, the EIA (Energy Information Administration) has estimated that global liquid fuel stocks have risen by more than one million bpd on average for six quarters in a row, that’s at least 540 million barrels of stock stored.

Seaborne trade

The global tanker industry is directly linked to the global oil industry. Right now, demand for seaborne transport of oil is below normal and fleet growth is high, which means that the fundamental balance is uneven. The result is declining tanker earnings with the main culprit being the fast-growing fleet.

We tend to forget however, that demand is not that bad. Looking beyond the regular draw on stocks, other demand factors remain strong. US gross input to petroleum refineries hit an all-time high in the week ending May 26, when 17.7 million bpd were refined. Global oil demand as forecasted by IEA (International Energy Agency) may pass the 100 million bpd mark for the first time, hitting 100.1 million bpd in Q4-2018, and for 2017, growth has been revised up to 1.5 million bpd. In addition, China is still believed to be increasing its strategic petroleum reserves (SPR) and crude oil imports were up by 13.8 per cent year-on-year in the first half of 2017 hitting 8.55 million bdp on average.

Earnings for VLCCs in the spot market are as low as US$8,775 per day, a level last seen during the difficult years of 2011-2013. The year-to-date average stands at US$20,489 per day. Based on a set of assumptions, BIMCO estimates that spot trading VLCCs built in 2005 and later are loss making at that level, because of heavy financing costs. For the whole industry, any profits made from older ships do not outweigh the losses of the younger vessels.

As earnings very often follow from one segment to the next, suezmax and aframax ships are suffering too.

Earnings for the oil product tanker sector on average appears to have stopped falling, as they dropped steadily throughout 2016, reaching the present level at the end of the year. BIMCO is forecasting that average earnings in this segment will also be loss-making.

MRs have made no more than $10,040 per day, while Handysize have dropped to $7,658 in 2017 down from $8,962 in 2016. LR1s have a year-to-date average of $7,873 and LR2 $9,235 per day.

Supply

The tanker fleet is growing strongly. By mid-August, the crude oil tanker fleet had grown 4.3 per cent year-to-date, and the oil product tanker fleet had grown by 3.6 per cent.

Deliveries into the crude oil tanker fleet, include 36 VLCC, 41 suezmax and 23 aframax plus some panamax and smaller units. The crude oil tanker fleet expansion remains on course for a six-year-high, measured in DWT, however, the fleet growth percentage is down from last years’ 5.9 per cent, to 4.7 per cent for the full year of 2017.

Meanwhile, 23 LR2, equal to 45 per cent of the total added oil product tanker capacity, overshadowed the recent years' favourite: MR, as "only" 38 new ships were delivered during the first seven and a half months.

The fast-growing fleets come as no surprise. But the continued low levels of demolition in both tanker segments are a roadblock to changes to the current poor earnings environment in the freight market and a possible recovery.

The fact that one VLCC was reportedly sold for demolition in April, but was then subsequently sold to a new owner, one month later at a higher price, seems irrational as overcapacity is increasing amongst crude oil tankers in general and VLCCs in particular.

Amongst oil product tankers, just two LR2 left the fleet in 2017, a year that has seen MR, almost exclusively being demolished.

BIMCO continues to believe that demolition will pick up during the final five months of 2017, but the actual demolition rate only amounted to one third of forecasted full year levels by mid-August. The ongoing poor freight market conditions will drive demolition.

Over the last four months, shipyards have been busy signing new orders for tankers. Amongst them were 14 LR2 and 14 suezmax ordered in June, supplementing the nine VLCCs ordered in May. In total 32 VLCCs have now been ordered in 2017, up from 12 in the first quarter.

Assuming 2.5m DWT of oil product tanker capacity will be demolished; fleet growth will hit 4.1 per cent in 2017. Should demolition fall short of that by 1m DWT, the fleet will expand by 4.8 per cent.

Outlook

Not a day goes by without a story about global oil stock levels. Many of them trying to be the messenger of positive news for the oil market and the tanker shipping market. However, sometimes business interests and wishful thinking are not supported by facts. Money managers and financial traders run businesses which are very different from the shipping industry.

As OECD compliance with the extended output cut falls to hit 78 per cent in July (IEA), US shale oil production is rising, and Nigeria and Libya have some export potential left. So, oil supply seems to rise alongside oil demand.

On the geopolitical scene, Venezuelan exports to the US amounting to 0.8 million bpd for the past four years face a low risk. As Venezuela's crude oil is very heavy and sour, it has no obvious substitutes, and is compatible with sophisticated refineries in the US Gulf (including some Venezuelan owned). There may be US sanctions aimed at political targets, but we do not expect oil exports to be hit hard.

Following its annual peak in August, the global refinery runs will decline seasonally due to maintenance, by 1.5 million bpd during September and October, before throughput picks up again in November for the winter season.

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