Four of the most ominous words in finance are: “This time it’s different.” It is different sometimes. It’s just that it’s different far less often than people with a vested fee-generating interest in it being different claim it is, and it can frequently (but not always) be financially catastrophic to heed their self-serving advice.
In ocean shipping, 2019 is shaping up to be a tantalizingly strong year in the wet and dry bulk trades. Rate surges are exceptionally broad-based. Very large crude carriers (VLCCs), larger and midsized dry bulk carriers, liquefied petroleum gas (LPG) carriers and liquefied natural gas (LNG) carriers are all simultaneously booking very strong rates. That doesn’t happen often.
There have been several instances in the past decade when the boom times seemed nigh, but it turned out to be a head fake. The argument why “this time it’s different” is that today’s orderbook in most vessel classes is extremely low and newbuilding investments continue to be curbed by a combination of a pullback in European commercial bank capacity, a lack of investment interest within U.S. capital markets and confusion over what type of ship to build due to environmental regulation.
There is an increasing clamor to place bets as fast as possible, before the wider investment community catches on, jumps in and pushes prices higher. Wet and dry bulk shipping’s performance is still very much under the radar when it comes to the mainstream financial community.
As Clarksons Platou Securities analyst Frode Mørkedal put it: “It’s go time.” Ironically, if this turns out to be true, many may not heed the call until it’s too late due to the “boy who cried wolf” effect, i.e., they’ve heard this too many times before.
Bulk shipping on a roll
Crude tankers are performing far better than expected courtesy of geopolitical unrest. Global tensions historically benefit ship owners, and recent weeks have been a classic case in point.
The aerial attacks on Saudi oil facilities on Sept. 14 pushed rates higher for VLCCs, vessels designed to carry two million barrels of crude oil each. Demand jumped as crude buyers sought to increase their stockpiles and VLCC owners required a risk premium to ply Middle East waters.
Adding more fuel to the rate fire, the U.S. sanctions against a subsidiary of Chinese shipping giant COSCO on Sept. 25 spawned widespread confusion among charterers and precipitated a scramble to replace COSCO ships. Rates rose further still – and they’re still rising.
“The timing [of the COSCO sanctions] couldn’t get much better,” said Michael Webber, founder of Webber Research & Advisory LLC, who added, “We believe the current set of structural tanker dynamics are among the strongest in a decade.”
According to Clarksons Platou Securities, VLCC rates hit $69,500 per day on Oct. 3, up 85% week-on-week and up 128% month-on-month. When VLCC replacement deals cannot be found for COSCO ships, charterers are splitting cargoes between two Suezmaxes, vessels that can carry one million barrels of crude each. Suezmax rates are now $41,900 per day, up 50% week-on-week and 164% month-on-month.
Upside is now extending to refined product tankers as well, because a number of these vessels are built to toggle between carrying products and crude. When the crude market becomes more attractive, as it is now, they switch from products and fill up their tanks with crude, and when the pendulum swings in the opposite direction, they scrub their tanks and go back to products. Because of this flexibility, strength in crude tanker rates ultimately pulls up product rates by temporarily removing product tankers from the mix and improving the supply-demand balance for remaining vessels.
According to Mørkedal, “For products, the LR2 market is strengthening significantly with a fairly tight vessel availability list in the Arabian Gulf and Europe. This is due in part to as many as 10 LR2s switching over to the Aframax crude tanker trade over the past two weeks. With a backdrop of a very strong VLCC market and for crude rates in general, there is now a spillover into the product trade overall.”
LR2 or Long Range 2 product tankers are vessels with a carrying capacity of 80,000-119,999 deadweight tons (DWT). Aframax crude tankers have the same carrying capacity as LR2s.
Rates also remain strong in other bulk shipping sectors. In dry bulk, rates are still well above breakeven despite coming off early September highs due to the increased availability of Capesizes (bulkers with capacity of 100,000 DWT or more) in the Atlantic Basin. According to Clarksons Platou Securities, Capesize rates as of Oct. 3 are $24,400 per day, down 16% week-on-week and 32% month-on-month.
Meanwhile, rates continue to rise in the gas-shipping sector. In LPG, very large gas carriers (with capacity of 84,000 cubic meters) are earning $58,000 per day, up 15% week-on-week, and rates for tri-fuel diesel-engine LNG carriers are $72,500 per day, up 7% week-on-week.
Public companies with spot VLCC exposure: Euronav (NYSE: EURN), DHT (NYSE: DHT), Frontline (NYSE: FRO), International Seaways (NYSE: INSW)
Red flags still waving in container shipping
In what has become a common pattern, strong rates on the bulk side of the equation are not being seen in the containerized market. Yet again, rates on the benchmark routes are weak.
The average price to transport a 40-foot-equivalent unit (FEU) container on various routes is estimated by Freightos. As of Oct. 1, it cost $1,318 per FEU to transport a container from China to the U.S. West Coast, down 19% from Sept. 2. In comparison to previous years, the latest trans-Pacific rate is down 45% versus the unusually high levels seen last year (when importers were pre-shipping cargoes to beat tariff deadlines) and down 9% versus 2017.
According to Eytan Buchman, chief marketing officer of Freightos, the full extent of how weak the current peak season is “will likely be evident about a month from now. In both 2017 and 2018, peak season prices only truly peaked in the second week of November.
“The fourth quarter always starts quietly because of Golden Week [the Chinese holiday], but despite a weak peak season so far, carriers can still expect price increases ahead,” he maintained.
“Here’s why: Notwithstanding a recent dent to U.S. consumer confidence, spending is still holding up. Demand for freight seasonally increases in October and up until the middle of November, as importers stock up before Thanksgiving and Christmas sales periods. December’s looming 15% trade tariff will likely push importers to stock up more than usual. Another reason to stock up is to beat bunker charge increases when the IMO low-sulfur regulations take effect [on Jan. 1]. The regs will also lift prices by restricting supply as some vessels are taken out of the running while they’re retrofitted with scrubbers.” More FreightWaves/American Shipper articles by Greg Miller
Public shipping companies with exposure to spot box shipping rates: Maersk Line (Copenhagen: MAERB.C.IX), Hapag-Lloyd (Frankfurt: HLAG.D.IX), Matson (NYSE: MATX), Evergreen Marine (TWSE: 2603), Hyundai Merchant Marine (KS: 011200
Editor’s note: Freightos has a business agreement with FreightWaves that includes editorial coverage.