Oslo-based Xeneta is calling into question industry narratives of significantly declining ocean freight volumes and shipper dismay over rising Bunker Adjustment Factors (BAF). In its latest ‘Ocean Freight Pulse’ survey of its user base, made up of globally leading shippers, Xeneta found that over 50% of respondents expected volumes to stay the same or increase, while 38% expected a drop of just 5%. On the issue of BAF, 78% said they were staying with the original bunker formula, accepting the outlined Q3 increase in their long-term contracted agreements with carriers.

The findings go some way to “debunking current industry myths”, according to Peter Sand, Xeneta Chief Analyst.

Don’t assume, analyse
He comments: “The uncertain macroeconomic outlook, along with softening spot rates, slowing long-term rates growth and uneven demand has some people ‘jumping the gun’ to push narratives of an industry sailing towards stormy waters for the remainder of 2022. It’s not uncommon to read articles in the mainstream media at present forecasting declines of up to 15%.

“However, those stories are often based on assumptions, rather than genuine interaction with key stakeholders and analysis of the latest data. We’d say, from our dialogue with some of the world’s biggest shippers, that the outlook is actually significantly more stable. The BAF findings, in particular, were surprising – especially as shippers, who have been left reeling by spiralling rates, contrast their fortunes with the record-breaking profits carriers are racking up. We’d have expected more pushback than this.”

Real insight

Xeneta has unique access to industry intelligence, giving it the ability to report live on the very latest market developments. Its benchmarking and market analytics platform is comprised of over 300 million contracted container shipping and air freight rates, covering over 160,000 global trade routes.

The Ocean Freight Pulse survey, carried out in conjunction with a customer-exclusive webinar, first asked users about their confidence in ocean freight volume stability for the remainder of 2022. 32% said they expected volumes to remain stable, 18% expected an increase of approximately 5% , and 2% anticipated a 15% increase.

Contrary to current reporting wisdom, only 10% expected volumes to decrease by around 15 %, while 38% expected ocean freight volumes to slip by a more moderate 5%.

Questioning narratives
“We conducted the same survey in June,” Sand adds, “with 54% of customers anticipating a decrease in volume in the months following. So, if anything, we see a slight improvement in sentiment here. Which begs the question, are things more stable than we’re being led to believe? It’ll be interesting to keep an eye on the very latest data going forwards to get a true picture of the evolving supply, demand and rates dynamic.”

On the issue of BAF, the survey found the huge majority of shippers accepting the rise, with only 22% renegotiating – 17% successfully and 5% without success. Customers were also quizzed over whether they’d renegotiated their prices while their long-term contracts were still valid. 52% had, 41% hadn’t, and the remaining 7% tried to, but unsuccessfully.

Oslo-based Xeneta’s unique software platform compiles the latest ocean and air freight rate data aggregated worldwide to deliver powerful market insights. Participating companies include ABB, Electrolux, Continental, Unilever, Nestle, L’Oréal, Thyssenkrupp, Volvo Group and John Deere, amongst others.
Source: Xeneta

The dry bulk market has continued to remained depressed, although some signs of a tentative rebound were obvious during last week’s trading. In its latest weekly report, shipbroker Allied Shipbroking said that “a glimpse of hope was to emerge in the dry bulk market this past week as a surge of iron ore shipments from Australia and Brazil helped the Capesize market escape from the doldrum levels that it had been trapped in since mid-July. This surge in shipments was notable given that we witnessed a week-on-week increase of over 17% from Australia and just above 32% from Brazil. Yet given that this positive effect is still in its infancy and too early to be classed as a shift in trend, the market still holds at fragile levels and is still stuck at depressed freight levels on par with those witnessed at the onset of the first Covid-19 wave back in 2020 as well as back in the depressed spring market of 2016”.

According to Allied’s George Lazaridis, Head of Research & Valuations, “at such low-performance levels, it is natural for the overall market sentiment to have taken a considerable hit in recent months. At the same time looking at the overall demand-side fundamentals, there is still a fair amount of uncertainty as to what to expect from the market moving forward, while there is still a considerable level of market risk arising from the poor economic indicators coming out of the G20 economies, especially as to what to expect during the final quarter of this year and the first quarter of 2023. Despite the sharp correction that was noted during the second half of July and almost all of August, many in the market still grip on the fact that the fundamentals on the side of tonnage supply are healthy. Based on the current orderbook, the expected levels of fleet growth is assumed to be at a historically low level”.

Mr. Lazaridis added that “the initial loss in momentum in the market was seen in early summer as China, the world’s largest steel producer, face a series of steel production disruptions as it tried to tackle a surge in Covid-19 cases through renewed lockdown measures in major cities and provinces. This issue was compounded considerably as the country looked to tackle issues brought about by severe drought and electricity power outages, bringing in turn a further drop in steel production figures. When taking however a more macroeconomic perspective, we see that there are considerably more deep-rooted issues that need to be tackled before the market can return back to health. The real estate market is still in a troubled state in China, while expectations of a rollout of stimulus measures that would help prop up the market have yet to show face. Given all these headwinds being faced, there is still strong confidence that Beijing will roll out further policies and stimulus measures to boost the economy and support the struggling property industry”.

“Despite all this, the rest of the dry bulk market seems to be fairing much better. As the disruptions in supply chains continue to boost the grain, coal and other minor bulk trades, the smaller size segments have been holding out at much better levels, with their rates holding relatively more buoyant up to now, albeit having also faced a considerable drop since May. The truth is that positive tailwinds are still working relatively to their advantage, despite the overall negative pressure being faced by the deteriorating global economic conditions. As such all focus is now firmly on what sort of relief plans central governments will roll out to tackle soaring inflation, shield consumers and avoid the global recession we are seemingly currently heading towards”, Allied’s analyst concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide

Orders for dry bulk newbuildings have appeared on the market yet again this past week, despite the lackluster state of the freight market. In its latest weekly report, shipbroker Allied Shipbroking said that “the newbuilding market resumed on a relatively modest mode for yet another week, according to the flow of fresh projects being reported as per the below table. More specifically, in the dry bulk sector, new orders appeared in the market yet again (skewed, however, towards medium to smaller size segments), despite somehow the considerable pressure being present in freight numbers for a prolonged period now. Given though that buying interest is sustained robust, we can anticipate many strong projects being pushed forward, especially as we progress towards the final part of the year. In the tanker sector, things did not prevail so vivid. That can be seen seemingly as disconnected at this point, given the incremental recovery in terms of freight earnings that has taken place for many months now. On the other hand, this does not necessarily reflect the general appetite and positive sentiment surrounding this particular market for the time being. All-in-all, given also the market’s state of the other main sectors, we can expect a rather fervent new order market for the upcoming period.

In a separate report, shipbroker Banchero Costa said that “on bulkers Polish Steamship added 4 x 37,000 dwt Lakers at Dalian who ordered the construction to sister yard Shanhaiguan. Deliveries expected at the end of 2025. Dalian Shipbuliding got an order from CITIC Leasing for the construction of 5 x 65,000 dwt Ultramax, deliveries will be during 2025. Doun Kisen Japan went to Jiangmen for the construction of 2 + 2 x 40,000 dwt Bulkers, deliveries at the end of 2025.

Hyundai Mipo received an order from undisclosed Owner to build 2 x 45,000 cbm LPG for delivery at end 2024 and beginning 2025, price around $69mln per unit”.

Meanwhile, in the S&P market, Allied Shipbroking said that “on the dry bulk side, things continued on a relatively sluggish tone for yet another week, given the limited number of units changing hands. Thinking about the recent trend from the side of earnings, this came hardly as disconnected. At the same time, asset prices levels are under pressure as well, widening the bid-ask spread in the SnP market. At this point, we can anticipate a more volatile market prevailing, skewing significantly transaction volumes periodically. On the tanker side, it is rather apparent that things have moved on a stronger trajectory for some time now, given the good activity levels being noted in the market. Notwithstanding this, as of the past week, a small step back took place, according to the considerable lower number of vessels being reported as sold. All-in-all, given the recent momentum in terms of earnings, coupled with the general positive attitude surrounding this market for some time now, we can vision for a relatively fervent SnP market for the upcoming period”.

Banchero Costa added on the S&P Market that “during the week the dry secondhand market was quiet with most of the active players waiting for further developments in the charter market. C. of Panagea were reported to be behind the purchase of Clarke Quay 55,000 dwt built 2010 by Hyndai Vinashin at $17.1mln. A Japanese controlled Handysize, the Malto Hope 28,000 dwt built 2013 by Imabari (BWTS fittedand log fitted) was rumored sold at $13.6mln. In the tanker market some strong appetite for product carriers was clearly spotted. C. of Tufton purchased 2 x ECO MRs Alkaios and Archon around 50,000 dwt built 2016 by Samsung for $36.5mln each. Two 16 years old MRs fitted with ice class 1A Super, the Gotland Carolina 53,000 dwt built 2006 by GSI and the FSL Singapore 47,000 dwt built 2006 by HMD were sold respectively at $18.5mln and $18mln. A modern VLCC, the G Dream 300,000 dwt built 2022 by Hyundai (Scrubber fitted) was sold to Korean buyers at $108mln”.
Nikos Roussanoglou, Hellenic Shipping News Worldwide

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