Outlook: Shipping Market Review

• SHIPBUILDING

Shipyards’ order cover continues to decline as more tonnage is being delivered than contracted. 28 million cgt was contracted during 2011 while 50 million cgt left the shipyards. 74 million cgt was scheduled for delivery in 2011 but, according to our estimates, global yard capacity was not able to build more than 63 million cgt in 2011. Global yard capacity was utilized 80% in 2011, down 3 %-points from 2010. For 2012 and beyond, we expect pressure on yard capacity and yard utilization. South Korean yards seem best positioned to adapt to the difficult outlook. After extensive postponement activity, the spare capacity at global yards amount to 44 million cgt in 2014 if current yard capacity is maintained. In 2011, newbuilding prices fell on average 10% and are 40% below the 2008 peak-level. Time will tell whether newbuilding prices will decline in tandem with lower yard utilization or not.

• CONTAINER

The container market is dominated by operators’ chase for market shares, which drove box rates down in 2011. Accordingly, the composite index declined 16% in 2011. The low box rates led to intensified vessel sharing agreements and removal of capacity. Consequently, time charter rates declined. The intensified focus on market shares has apparently led to an increased appetite for new, larger and more fuel-efficient vessels. To our surprise, 2011 became the year where second most Post-Panamax vessels were contracted. The supply-demand gap widened slightly in 2011 as distance-adjusted head-haul demand growth increased by 6% while nominal supply grew 8%. However, slow steaming managed to absorb much of the oversupply. The outlook for 2012 is dominated by the challenge of absorbing another large inflow of Post-Panamax vessels. The demand outlook seems weak, and remains most fragile in the main east-west trading routes where most of the orderbook is expected to be employed. Distance-adjusted demand is expected to increase by 5%. We doubt that this will be enough to absorb the Post-Panamax deliveries. Rates and values are expected to remain low during 2012.

• CRUDE TANKERS

The crude tanker market faced great challenges in 2011. The crude tanker market got worse in 2011 as the economic crisis intensified. Oil demand grew at a sluggish pace and the continuing inflow of new tonnage made matters even worse – pulling rates down. Timecharter rates and earnings were testing the historical lows. Newbuilding and secondhand prices declined accordingly. With freight markets in the doldrums, owners’ appetite for new tonnage seems to have almost evaporated. For 2012, distance-adjusted demand is expected to increase by 7%. By itself, this sounds promising. But, the crude tanker market has been flooded by new tonnage entering the market in 2011, and yet more is set to enter the fleet in 2012. Accordingly, freight rates and asset values are expected to remain depressed in 2012.

• PRODUCT TANKERS

The product tanker market remains under pressure. Rates declined slightly in 2011 as owners battled overcapacity and declining demand. The product tanker fleet grew by 4% in 2011 as postponements and cancellations helped to curb fleet growth. Trade in seaborne oil product commodities increased 6% in 2011 mainly driven by increased European imports. However, since long-haul imports were to some extent replaced by short-haul imports, distance-adjusted demand grew only 5%. Nevertheless, the gap between supply and demand narrowed throughout 2011. The current orderbook for product tankers stands at 10% of the fleet and in combination with a relatively high scrapping potential in 2012, the fleet is expected to increase by 2% in 2012. Trade in seaborne oil products is expected to increase 5% in 2012 driven largely by shorter-haul imports. As a result, distance-adjusted demand is expected up by 4%. Thus, in 2012, the supply-demand gap will narrow even further although oversupply is likely to endure – at least throughout 2012.

• CHEMICAL TANKERS

The chemical tanker market had a slow start in 2011 but the year ended with rising spot rates and bounced back to levels last seen in 2008. Supply and demand growth ended more or less in balance as postponements (61% of scheduled deliveries) suppressed supply growth. The chemical fleet grew by 7% whereas distance-adjusted demand increased 6% in 2011. The chemical tanker market is characterized by a relatively limited number of active players, which may explain the low contracting during the past 3 years. Consequently, the orderbook currently represents about 8% of the fleet. The outlook for chemical tankers is relatively bright. Demand growth is expected to exceed supply growth by 2 percentage points in 2012 as the chemical fleet is projected to grow by 3% and distance-adjusted demand by 5%.

• LPG TANKERS

Conditions in the LPG market are gradually improving. After a strong recovery in 2010 rates continued to improve in 2011. The fleet grew a modest 1% in 2011 even though both scrapping and postponements were kept low. Demand for seaborne LPG surged by 14% mainly driven by an increased demand from the Far East. As countries in the Middle East are by far the largest producers of LPG, the increased demand from the Far East has added significant ton-miles to distance-adjusted demand which grew 15% in 2011. By January 2012 the orderbook/fleet ratio stood at 9% and the fleet is expected grow by 1% in 2012. The scrapping potential in the LPG fleet is relatively large as 19% of the fleet is older than 20 years. Global demand for LPG is expected to continue its strong growth. LPG is seen as a healthier and more environmental friendly alternative to gasoline in many smog-plagued cities. Distance-adjusted demand for LPG is expected to increase 13% in 2012 as particularly Asian countries are set to increase demand. Rates in the LPG tanker market are set to remain firm in 2012.

• DRY BULK

A large and growing oversupply of tonnage continues to weigh down the Dry Bulk market. The Baltic Dry Index dropped in January 2012 to levels not seen since the financial crisis was at its worst. The fleet grew 14% in 2011 and had it not been for a record high level of scrapping, growth would have been even larger. Distance-adjusted demand grew 8% in 2011. Measured in volumes, seaborne Dry Bulk trade increased 7%. Thus, longer travel distances supported demand for Dry Bulk vessels in 2011. In 2012, the fleet is once again set for a large increase in capacity. The Dry Bulk fleet is scheduled to increase by 23% in 2012. However, cancellations and postponements of orders as well as a continuing high level of scrapping is expected to curb fleet growth significantly in 2012. We expect the Dry Bulk fleet to expand by 10% in 2012. Seaborne trade is expected to increase by 8% in 2012 and distances will continue to support demand for Dry Bulk capacity. Distance-adjusted trade volumes are expected to increase 9%. Thus, the outlook for the Dry Bulk market remains bleak.

Accordingly, several ship segments are facing low freight rates, declining asset values and a short- to medium-term outlook where the risk of escalating overcapacity issues cannot be neglected. However, previous shipping cycles has taught us that occasional spikes in freight rates does happen even in downward trending markets.

Source: Danish Ship Finance / maritimedanmark.dk