GENERAL Archives - Page 16 of 68 - SHIP IP LTD

While the talk of the town has been of the VLCC sector’s spike in rates in recent weeks, this article focuses on some of the key variables that have afflicted these vessels over the past few years and kept market sentiment so low for so long.

The VLCC-TCE is a weighted average of earnings for conventional, non scrubber fitted VLCCs, incorporating two key routes: the TD1-TCE (Middle East Gulf to US Gulf) and the TD3C-TCE (Middle East Gulf to China). This estimate had been valued below zero from the beginning of 2021 until August 2022. At its worst, the daily earnings figure stood at -34,845 USD/Day. This period remains the longest stint of negative earnings on record for these large crude carriers.

The poor earnings seen for VLCCs have linked directly to supply and demand and impacted how market participants responded in newbuilding and demolition activity prior to recent positive developments in the VLCC sector.

Supply and Demand
Supply growth over the past year had stayed relatively flat at c. 3.0% to 4.5%; the live fleet stood at 861 vessels in July 2022. However, demand had been volatile; down 8% in June 2021 compared to June 2020, yet up 10% year on year in December. June 2022 showed a decrease in demand of -3.2%, year on year. Figure 1 compares month on month supply growth with vessel demand (cargo miles) between 2021 and 2022.

COVID-19 had significant effects on supply and demand with June 2021 and 2022 showing an overall decrease in cargo mile growth. That seen in June 2021 was a result of the movement of 222 million barrels of oil into floating storage by July 9, 2020 (According to EIA figures), driven by a crash in the oil market. June 2020 saw high cargo mile figures, with countries filling storage tanks as a consequence of low prices.

Figure 2 displays month on month comparison of laden daily cargo miles between 2021 and 2022. Cargo miles in 2021 ranged from 18.5bn MT-NM to 21.6bn MT-NM compared with 2022 where it ranged from 18.7bn MT-NM to 22.2bn MT-NM.

2020 was the most volatile of the periods with a maximum cargo mile value of 719bn MT-NM in May to a low of 559bn MT-NM in November. As in Figure 3, the May 2020 peak in cargo miles resulted from the oil market price crash. In the first half of 2022, the trend of decreasing cargo miles on a daily and monthly scale was reflected in the poor VLCC earnings seen in this period.

Newbuild and Demolition
Newbuilding orders from 2018 through to 2021 remained relatively stable, peaking at 40 vessels ordered in 2018 and remaining in the mid to low 30s in the 3 subsequent years. In total, 135 vessels have been contracted in these 4 years, worth a combined c. USD 12.0 bn. 2022 was yet to register a single newbuilding order until August 2022, a stark contrast compared to recent years.

Whilst VLCCs continue to be launched following ordering activity in earlier years, the orderbook has been shrinking, currently standing at 41 vessels. A common theme in the past 18 months had been oversupply; too many vessels were available in key loading regions, particularly the Middle East.

The combination of oversupply and lacklustre oil demand from China had aided the extended periods of negative earnings seen and forced market participants to think twice about contracting VLCCs with builders. Likewise, the skyrocketing price of raw materials for shipbuilding has increased newbuild values significantly; which currently stand c. 16% higher than this time last year at around USD 115.51 mil.

Tightening yard space has catalysed this reversal in VLCC newbuilding orders; as Container and Gas vessels fill up slots, the overall attractiveness in newbuild VLCCs remains low, with little sign of interest at these prices.

With oversupply an issue in this particular vessel segment, you would expect demolition rates to be high, yet this is not the case. As seen in Figure 5, 2018 saw the largest scrapping numbers of the past 5 years with 29 vessels sent for breaking; the combined demolition value of these sales totalled USD 529.9 mil.

Only 19 VLCCs have been sold for scrap since 2019. 2021 having the largest figure since 2019 (10 vessels scrapped) is unsurprising due to the scrap steel prices increasing to over 600 USD/LDT, levels not seen since the financial crisis of 2008, by the end of last year. Yet, to not have these demolition numbers far higher, particularly with an ageing fleet and poor earnings at the time, suggests there are other variables at play.

Where are these vessels that would otherwise be headed for scrapyards? There have been plenty of reports of what tend to be older VLCCs, often with unknown owners, outside of the spot market picking up discounted cargos from sanctioned exporters such as Iran and Venezuela. These vessels are elusive, often operating invisibly; AIS is often disabled or strategically used to hide their illicit activities.

These colloquially named “dark” vessels have been playing a large role in capping the earnings potential of above board VLCCs and helping, in part, to explain the reduced number of VLCCs being scrapped at present. A portion of vessels that require removal from the fleet are commonly engaged in nefarious activity to the benefit of their operators but to the detriment of the VLCC market as a whole.

Summary
Previous years’ fleet supply had remained relatively stable and, with the orderbook standing at 41, is set to remain steady, particularly with the dearth of newbuilding orders seen in 2022. Demand, similarly, has remained relatively stable over the course of 2021 and 2022. The globe’s largest importer of oil, China, has seen its crude demand oscillate with the severity of their COVID-19 restrictions, particularly through Q2 2022, highlighted by the reduced cargo miles figures seen for VLCCs. With China crucial for VLCC utilisation, this is unsurprising.

Whilst supply and demand figures suggest relative stability, this is not reflected in the newbuilding and demolition statistics seen in recent years. In both markets, VLCC activity has declined rapidly; 2022 has only seen 2 newbuild orders for these large crude carriers, compared to the annual average through 2018 to 2021 of c. 34 vessels contracted per year. Whilst excess supply has been a detriment to market participants, demolition figures have not been up to scrap to aid the lacklustre earnings these vessels experienced until very recently.

Just 4 VLCCs have been sold for demolition in 2022, down from 10 in 2021 and down from 29 in 2018. This despite scrap steel prices remaining at high levels. A combination of caution from owners and illicitly trading vessels can help explain this. Smaller Tanker segments have seen upturns in earnings as a result of the conflict in Ukraine, and many hoped this would translate into an uptick for VLCCs; they were proved right.
Source: VesselsValue

In his keynote address at the opening of SMM 2022, ICS Secretary General Guy Platten said that shipping uses around 4% of global oil production and will need to look outside of itself during the transition to zero carbon.

“As we move forward, we are going to need to focus on the remaining 96%, as these will be the same type of fuels that we are looking to use… when we look at all these new systems on display, we must not miss the 96% by just focusing on the 4%,” said Platten.

Supplying shipping with renewable fuels would take around 100% of current global renewable energy capacity, and providing zero carbon fuels for the world will take an 18-fold increase in renewable energy, said Platten, a huge undertaking.

“As we consider the current issues with constraints to supply and rising prices. We can no longer remain on the sidelines as a world takes decisions that will have fundamental impact on our industry.”

Platten repeated warnings on the availability of seafarers, and on the need to train crews to use the types of new technology on display at SMM and handle future fuels both to power vessels and as cargo.

“Here we have a challenge on our hands. We are currently facing a shortage of seafarers, and given the growing demand for STCW officers, we will need an additional 90,000 officers by 2026 to operate the world’s merchant fleet. And this is calculated before we take into effect the fact that 14% of our workforce is made up of Ukrainian and Russian seafarers.”

The war in Ukraine has complicated crewing calculations, but Platten did note one recent improvement.

“We welcomed the announcement last week that Ukrainian seafarers can now apply to be made exempt from the travel ban. All men aged between 18 and 60 will now be able to apply to leave the country to work under contract on vessels speeding up the pace at which we can transport grain back to the Ukrainian ports to where it is needed most,” said Platten.

The secretary general’s three takeaways from his speech were:

“Firstly, we must not underestimate the importance of people in any new technological developments. Our seafarers will be the ones using new technology, we must make sure that they are trained appropriately.

“Second, shipping is not on its own. We must not work in silos. We must instead look beyond our industry for opportunities to achieve our decarbonisation goals.

“And thirdly, remember that the supply chain is interconnected. What happens in one part of the world can cause the length and another understanding this means we can be better equipped for when things don’t go to plan,” said Platten.

Source: https://www.seatrade-maritime.com/regulation/shipping-can-no-longer-remain-sidelines-says-ics

Freight rates on the primary ocean trade channels are sinking during a time typically identified as the peak season in the industry after cargo owners reportedly shipped their holiday goods early and inflation dented consumer demands.

The cost incurred to ship a 40-foot container to the West Coast in the US from China is now about $5,400 per box, a drop of 60% from January 2022, per Freightos Baltic Index.

Each container shipped to Europe from Asia now costs $9,000, which is about 42% lower than observed early in 2022. At the same time, above pre-pandemic levels, the rate for both routes peaked at over $20,000 in September 2021.

Market conditions have made a sharp reversal from earlier in the pandemic. Freight rates jumped almost 10-fold during the previous year owing to port backlogs, surges in cargo, and supply chain disruptions. As a result, importers were found scrambling for space on the box ships. Retailers like Walmart -1.10%▼ chartered personal vessels to overcome the bottlenecks in 2021.

In 2022, Walmart and other major retailers ended up with excess inventory after they almost raced to import their goods earlier than usual, anticipating delays in shipping and demand that did not eventually materialize.

Manufacturers, too, moved goods earlier than usual. Some popular apparel majors like Gap GPS 0.32%▲ and toy makers like Hasbro, HAS -0.67%▼ have reported spring surges in their inventory levels that typically are observed when the holidays are closer.

Regarding spot rates, the party is officially over, mentioned Jonathan Roach, a container shipping analyst associated with a London-based firm named Braemar. The backdrop of a possible global recession, enhanced by surging energy prices and rapid inflation, is driving down the market. The COVID-19 pandemic boom in demand for consumer products has calmed, and spending on travel, leisure, and services has reportedly made its revival since 2021.

Shipping rates are set to further ease for the remainder of the year and in 2023, per shipowners and analysts. A series of new vessels will hit the water over the next two years, with net fleet growth expected to be over 9% in 2023 and 2024. Comparatively, per Braemar, container volume growth will marginally be negative next year and could rise about 2% in 2024.

The Chief Executive of Best Buy Co. BBY, Corie Barry, mentioned during an earnings call held on last Tuesday that cost pressures related to freight transportation are easing.

She added that the electronics retailer, whose sales have been shrinking, is finding it relatively easier to find freight space on trucks and ships.

This is a non-peak season as, for the first time, volumes that moved in the second half are noticeably lower than what moved during the first, clarified Peter Sand, the chief analyst at Xeneta, a maritime-data provider. He added that there are a lot of uncertainties given the ongoing war in Ukraine coupled with the massive global economic downturn.

Spot-market container shipping rates have dropped so rapidly that Xeneta highlighted in one of its reports in August that the prices have now come closer to long-term contract prices. These typically would come at a discount and even be below contract rates in some markets. Even major importers like Walmart move cargo via long-term contracts instead of paying for spot prices.

The ten largest liners have been enjoying bumper profits for the last two years. Recent quarterly earnings at Maersk MAERSK.B -0.27%▼ A/S were seen to be $8.59 billion, surpassing what it usually makes in a year. But many firms have warned about the weakening market conditions in the current year’s second half.

We ought to pay attention to the impact of inflation on consumer behaviour and demands, said China Cosco Shipping Corp., a firm that operates the fourth largest box ship fleet in the world. The industry’s supply side will likely encounter a unique situation with the changes in new vessels’ delivery.

Shipping analysts and executives have said that they do not expect freight rates to return to what was prevalent in the pre-pandemic levels. Part of the reason would be higher fuel costs. In 2019, the average price to send a container across the Pacific to the West Coast in the US was about $1,500.

Some ocean carriers are also investing billions in new and advanced technologies and fuels to reduce carbon emissions substantially. The additional cost of cleaner shipping will not go away. Instead, Roach said it would be a crucial factor in elevating rates in the long term.

References: Live Mint, The Wall Street Journal