Shipping tends to be cyclical, though not all forms of transport are affected equally. After a disastrous 2015, bulk carriers remained in an unprecedented slump and containers were only slightly better off. Tankers faced an increasingly difficult-to-balance tradeoff between gasoline storage and active freight, but, at least, they were not sitting empty in huge numbers. With underwhelming economic conditions set against the industry, few analysts were bullish on shipping prospects in 2016.
Bulk Carriers
Bulk carriers hit a perfectly imperfect storm in 2015, and conditions were not expected to improve quickly. “This is the worst we have seen in recent times,” said Kaushik Neogy, manager of Hong Kong-based Wallem Commercial Services. “Huge order books, China slowdown, the end of quantitative easing, lurking European monetary crisis, glut in oil and commodity prices.”
“This is pretty much the worst I have seen in my career,” said Tim Huxley, CEO of Wah Kwong Maritime Transport Holdings. “For the bulk carrier industry, this is going to be a grim year and next year is not going to be any better.”
The Chinese slowdown punctured the bulk carrier market in 2015. For nearly a decade, heavily subsidized industrial activity from China fueled large-scale bulk purchases, especially in coal, steel and iron ore. Investments in Chinese infrastructure demanded enormous imports of these commodities to satiate the government’s building projects. After its building bubble burst in 2015, however, China was expected to reduce its consumption.
Entering January 2016, Chinese imports fell for 13 consecutive months and declined by steadily between 2014 and 2015. Bulk shipping was one of the many globally affected industries. Most experts were looking for continued weakness in the foreseeable future. The Baltic Exchange‘s main sea freight index, which charts the rates for dry bulk commodity shipments, hit an all-time low in December 2015. “We expect that 2016 could become an even worse year than the historically low 2015,” stated the JP Morgan’s annual report entitled “International Dry Bulk Shipping – Initiating Coverage of the Dry Bulk Shipping Industry.”
Containers
Containers were unprofitable every year between 2009 and 2014, per McKinsey & Company, a market research company, and 2015 was even worse. Bulk carriers received a lot of headline attention because they carry major commodities such as steel and iron, but container purchases and delivery rates were arguably more indicative of broader economic conditions.
The China Containerized Freight Index, a leading indicator of container demand, hit 744.44 in October 2015. This represented a new all-time low for the index and a clear sign of softness in the demand for shippable goods. While it’s possible that a drag on the index could have been fueled by a glut of extra ships, thereby driving down the price charged per container, this was an extremely unrealistic conclusion in this case, since reports out of major ports suggested as many as one-third of all containers were empty.
The Wall Street Journal lamented the impact of China’s slowdown on U.S. exporters, suggesting that “shipments of empty containers out of the U.S. are surging this year.” It turned out major import partners, especially China, were demanding far fewer American agricultural products, high-end consumer goods, scrap metals and industrial papers.
Tankers
No shipping segment was particularly strong in 2015, though large tankers, especially oil tankers from North America, were the best of a bad bunch. Low crude oil prices meant more oil orders, and tankers can serve as both transport and storage for surplus oil. While dry bulk goods, steel, iron, etc., took the Chinese slowdown very poorly, bulk oil tankers did not suffer the same fallout.
Tankers that transported oil saw high earnings in 2015. Demand for cheap oil was strong, and consumers bought more oil than they could use; this meant many tankers acted as de facto offshore storage containers. According to 2015 industry reports, the oil tanker market has surged to their highest levels since 2009.
Dr. Edward Morse, managing director and global head of commodities research for Citigroup, Inc. (C), believes long-term charter rates and vessel values should stay “subdued” for non-oil tankers in 2016. He points to a lack of investor interest, which creates liquidity problems for tanker transactions, and slumping margins from a global market beset with excess supply.
Another subsector of the tanker market performed admirably in 2015: chemical tankers.According to Drewry Shipping Consultants Ltd, a global shipping consultancy group, the clean petroleum products (CPP) and specialized trade orders shipped to a growing Asian market are buoying chemical tanker demand.
In August 2015, Drewry published a report indicating if “order book(s) remain high” enough it is possible Asian shipyards will have to “bring ships back into the chemical trades.” According to the Drewry Chemical Tanker Freight Index, demand in the second half of 2015 reached a four-year peak.
The Economics of Shipping
A lot of variables factor into the performance of global shipping markets, the most obvious of which is the supply of international trade. Imports and exports are often transported across huge bodies of water in tankers, bulk carriers and containers; these are massive and sometimes complex ships that need to be financed, built, staffed, repaired and maintained, contracted, regulated, protected, insured, inspected and partnered with port authorities.
Shipping companies and the governments to which they are so often closely tied need a lot of investment to construct and liquid cash to upkeep. Ships are financed like any other large-scale construct, which means capital markets are a critical component as well. Investors shied away from shipping in 2015, which put pressure on shipbuilders and transport companies.
Rising nationalist and anti-free trade sentiment in the United State shouldered some of the blame. With an election year in 2016, there was concern that the prospect of rising tariffs on imports could potentially trigger a shock to shipping traffic. World trade stalled in a significant way during 2015, which meant international shipping markets stalled with it. Vessel rates started to slow significantly in late 2014. The downward movement refused to abate throughout the year, punctuated by China’s meltdown in July and August 2015.
Adding pressure to the cost front, the International Chamber of Shipping (ICS) pledged its support to lower CO2 emissions in late 2015 during the United Nations Climate Change Conference. The ICS indicated it would pressure the International Maritime Organization (IMO) to develop new technologies and reduce “CO2 per tonne-km 50% by 2050.” The ICS admitted “as soon our member national shipowners’ associations have digested the full implications of the final UNFCCC agreement, ICS will be proactive with ideas for debate at IMO next year.”