"2012 is going to be a big delivery year particularly in dry bulk", BIMCO Chief Shipping Analyst Peter Sand tells The Shipping Herald in an exclusive interview. He also analyzes the impact of rising fuel cost on the shipping market and explains why BIMCO expect annual freight rates to stay at the levels of 2011.
Q: Global freight rates dropped on average 25 percent in 2011. What is your forecast for 2012 and how do you expect tonnage oversupply to impact on rates?
2011 was for sure a challenging year across the board for the shipping industry. BIMCO expect 2012 to just as challenging. As regards to the three main shipping segments that we follow closely, being bulker, tankers and containerships, we expect average annual freight rates to be more or less at the levels of 2011. Some may see this as a bearish statement but we see it as a rather optimistic and realistic one. All of the three segments are carrying along a quite substantial overhang of tonnage supply, which has been delivered at a time when demand for it just wasn’t there. But you have to remember that many of the current deliveries were booked at a time when the world did look much different than today in term of the economy.
We do expect the overhang of absolute overcapacity to grow, but as owner and operators are doing many different things in order to control the actual supply of tonnage going into the active fleet. BIMCO expect that the tools applied will have a significant effect in order to counterbalance the overcapacity menace. All in all freight rates in the main three segments are expected to on par with 2011.
Q: What is your view of the current balance between demand and supply considering new shipping capacity and the overall world economic prospects?
The fundamental balance between supply and demand is currently out of order across the three main shipping segments. The three segments are however differently located on the “overcapacity-cycle”, meaning that dry bulk might only be in the midst of a massive delivery cycle whereas the product tanker segment may be further down the road closer to a bettering of the current unbalance.
The recent freight rate downturn in dry bulk is a fairly clear example of what severe overcapacity can do to freight rates in the timespan of just a few months. In particular Capesize vessels that were in high demand during the large part of Q4-2011 have felt the pressure from demand not being massively strong.
Shipping demand will definitely benefit from a more calm and positive macroeconomic environment. So the challenges for politicians across the Globe, and especially in the EU, are still very tangible and they must focus on establishing the right economic framework. This is necessary to make growth stay around and to stimulate consumer confidence and pull private consumption to a higher level.
Q: Do you expect owners to continue renewing fleets at the same pace as in 2011?
2011 was the all-time record year when it comes to the amount of newly built tonnage entering into the fleet. The order book is still considerably large and 2012 is going to be a big delivery year too particularly in dry bulk. But the container ship fleet and crude tanker fleet is also about to assume a sizeable amount of tonnage. When talking of renewing fleets it’s important to notice that owners can also renew their fleets in the secondhand market. But it has now become clear that the slowdown in new building orders is matched by a slowdown in secondhand sales also. Without doubt the tough times in ship finance and a lower appetite for more tonnage in your own portfolio has dampened activity. Having said that, some owners may also find the current market full of opportunities if they are in solid financial territory and have been holding back the investments during the boom years. Sales and purchase of ships at the right time have always been central to any successful shipping business.
Q: How do you expect rising fuel costs to impact on the market? Is there scope for further slow steaming to help market balance?
The rising fuel costs are extremely expensive to the shipping industry, especially in a time like this when general freight rates are so low. Owners have been applying slow steaming across the board and across most trades. Slow steaming on your ballast legs might make the difference between running a surplus and a deficit on your business. A trend that will gain more powerful is exactly due to the rising bunker cost. This trend is more and more fuel efficient ships. Be it new orders for so-called ECO-ships or be it retrofitting of an existing vessel – the main point is that in high competitive shipping markets you will be the winner if you have the lowest cost base as all market participants are price takers. Regular overhauls of the underwater hull and polishing of the propeller are not an investment-heavy as other solutions but they have proven to be quite effective when it comes to improving your fuel-efficiency.
Newer ships in general and Eco-designs in particular are bound to be more fuel efficient than the average existing vessel in the market. A potential two-tier market might reveal itself to the market in a few years’ time when the difference between a fuel-efficient modern vessels and an over-aged outdated design becomes crystal clear to all market participant (ship owners, charterers, cargo owners, traders etc.)
Is there a scope for further slow steaming? – Surely there is. But the low-hanging fruit have been applied now by most operators and owners so you have to be more innovative when you want to cut your fuel bill and/or find new ways to slow steam even further. Executing this task will in most cases make you explore the members of your sphere of interest, to make them buy-in to this idea of applying further slow steaming, working with virtual arrival or inventing new ways of utilising the unexplored potential benefits that seaborne transportation still holds.
Q: What is your forecast for recycling in 2012? How will current earnings impact on demolitions in the remainder of 2012?
There is a rather high and quite intuitive correlations factor between low earnings and high scrapping volumes. But there is a limit to how much tonnage is actually. Using dry bulk as an example: the commercial realities in the dry bulk freight markets spur ship owners to recycle ships that are no longer economically viable. When doing so the ship owner considers his total fleet-mix, seeking to find the optimal balance between older, but still viable, fully depreciated tonnage and recent deliveries entering into the fleet as part of a renewal process. Then, the poorest performing vessels get recycled."
BIMCO has recently done a special analysis into the recycling potential of the dry bulk fleet. In this we estimate the total potential for recycling of overage dry bulk tonnage across the fleet to 5.0%. This is equal to 29.3 million DWT. During 2012, BIMCO forecasts 20 million DWT of dry bulk to be recycled, as rates are expected to rise from the current very low levels. However, should the earnings of January and February become the norm for the year, recycling will be higher than the current forecast.
In the larger crude tanker segment the potential is likewise relatively slim, while the prospects for the product tankers are better. Finally the potential for recycling on any sizeable amount of containership tonnage is insignificant, as vast amount of the tonnage in the containership fleet is young and modern. I a couple of years’ time the current Panamax containership might find themselves amongst the recycling candidates as much larger vessels will outmatch them and squeeze them into and uncertain future of suboptimal trades.
Peter Sand is BIMCO Chief Shipping Analyst