MSI: 2022 Shipping Market outlook

XINDE MARINE NEWS: For the container shipping market, what will be the trend of freight rates in 2022? When will freight rates back to pre-pandemic steady levels? For major lines, should they continue to invest in second-hand ships and newbuildings as they did in 2021?
 
Adam: So far in 2022 containership markets have started where they left 2021 off at elevated levels driven by robust underlying demand trends coupled with supply chain and port disruptions. Freight rates have, on some routes, begun to show some signs of softening but, nevertheless, they remain strong when compared to historical averages.
 
Looking ahead, easing consumer demand amid inflationary pressures in the US and Europe will see freight rates soften further into H1 22 although we do not expect a significant market correction given ongoing cargo backlogs and liners' learnt capacity management skills. It is now a race against time to unclog ports before the start of the next peak season in August failing which will give already-elevated freight rates additional upside.
 
Locked-in contract freight rates revenues and the unwinding of the inefficiencies in the supply chain, which have built up since H2 2020 will keep freight rates elevated into 2023. The shadow of the containership orderbook which now stands at over 6MnTEU or 24% of the current fleet will force a downward correction in the markets and freight rates mid 2023 onwards when the new tonnage begins to hit the water with force.
 
Investment in containerships over the course of 2021 was at an unprecedented level, both in terms of newbuildings and secondhand transactions. S&P volumes have already declined from the levels seen midway through last year, this is in part due to a lack of suitable and available sales candidates that aren't already on long term charter and the elevated prices sellers are demanding. Although there has been a continuation of large enbloc new orders into early 2022, we also expect to see this tail off over the course of the year as prices and berth availability along with the volume of orders already at the shipyards dissuades owners from placing yet more additional contracts.
 
XINDE MARINE NEWS:  After the resumption of work and production after the Spring Festival holiday in Asia, the BDI continued to rise. Which factors were the main driving? How long might it last?
 
Adam: The first quarter of the calendar year always starts slowly with a cargo demand hiatus, driven by the Spring Festival holiday break, disrupted cargo supply due to seasonal weather issues and an uptick in vessel deliveries combining to put pressure on earnings. This year the pressure was further magnified by an Indonesian coal export ban in January. Earnings did, however, not fall as far as the pure fundamentals would have suggested, as port congestion remained high and fleet efficiencies low.
 
The market bounced back shortly after the holidays as Chinese industrial activity and commodity purchases returned to normal levels faster than in previous years as the Chinese government encouraged people to celebrate the Lunar New Year locally to minimize the spread of COVID. China's introduction of several stimulus packages, supporting infrastructure spending, and a reduction in interest rates also gave the dry bulk market a further boost.
 
The events taking place in the Ukraine have disrupted the dry bulk sector with market uncertainty and the repositioning of vessels pushing up rates in the immediate short term. However, with commodity prices now on the rise this will soon start impacting dry bulk trade, as consumer demand suffers with lost cargoes from the Ukraine and Russia also difficult to replace, particularly grains.
 
We consequently expect to see a softening in the dry bulk market in the middle of the year before a seasonal improvement kicks in towards the back end of 2022.
 
XINDE MARINE NEWS: The tanker market has been in recession for a while, is there any hope of recovery this year?
 
Adam: During the start of 2022 the tanker markets witnessed further declines across both crude and product tanker markets. OPEC+ production growth slowed, oil product trade volumes began to decline, oil prices climbed, and net fleet additions spiked all factors having a detrimental impact on tanker earnings.
 
The situation in the Ukraine has momentarily given tanker earnings a huge boost although this will partially unwind over the coming weeks, as uncertainty and price hikes reduce cargo volumes.
 
However, we do expect to see a reshuffling of cargoes and trade routes as a result of these events, with Europe sourcing potentially more Middle Eastern longer-haul crude, whilst reducing short-haul Russian volumes, which could move eastwards, again driving long-haul trade. OPEC production is forecast to continue to rise implying higher overall annual trade volumes in 2022, helping push rates higher at the end of 2022 than where they started the year. This improvement in market balances will be further supported by stagnant tanker fleet growth with demolitions forecast to offset new deliveries.
 
XINDE MARINE NEWS: The cost of shipyards is rising globally, what are the main drivers? Some shipyards may still have early berth slots to offer, but the majority will not be able to build the ships due to the short supply of main engines and crankshafts. What factors do you think contributed to the shortage?
 
Adam: Prices at shipyards are driven by two principal factors shipyard costs and shipyard forward cover. Shipyard costs have come under a lot of upward pressure during the last couple of years due to the mini super-cycle in commodity prices which has had a significant impact on steel plate prices, energy prices, equipment prices and material prices more generally. The Yuan and the Won also saw appreciation in 2021 pushing costs up further in USD$ terms. Yard forward cover assesses the interplay between yard capacity and the orderbook. The greater the yard forward cover, measured in years, the higher the newbuilding price.
 
The successful rationalization in shipyard capacity over the last decade coupled with an ordering boom in H2 2020 which lasted throughout 2021 has pushed global shipyard forward cover back up towards 2.5 years for the first time since 2015. This has firmly put pricing power back into the hands of the shipyards with newbuilding prices posting significant gains through 2021.
 
The scale of the contracting hike in 2021 has caught many off guard, including the yards and equipment manufacturers with delivery slots this side of 2024 almost nonexistent in both China and Korea. The broader supply chain disruptions and bottlenecks, driven by COVID-19, have also hit equipment providers and suppliers of machinery to shipbuilding.
 
XINDE MARINE NEWS: The crisis in Ukraine is intensifying, many Western countries have imposed sanctions on Russia, which will inevitably have an impact on the shipping industry. What directions will Russia-Ukraine tensions push the dry bulk sector and the oil tanker sector?
 
Adam: Events in Ukraine have unfolded at extreme pace and are impacting a wide range of shipping sectors and the markets more generally, given the inherent uncertainty.
 
Russian oil production is equivalent to over 11 Mn b/d, more than 10% of global supply with Russia accounting for between 25-35% of total European oil imports via pipelines and seaborne routes. Geopolitical shocks are typically positive for the oil tanker market and we have already seen a spike in vessel earnings. The near-term outlook has improved for the sector as energy security becomes a critical concern for many European governments and the re-rerouting of Russian exports and new sources of European imports puts further pressure on tonne miles. The duration of the upside will be limited, however, if any lost Russian production and exports aren’t replaced by higher OPEC production as this scenario will result in yet higher crude prices impacting oil trade ultimately restricting tanker cargoes.
 
Russia and Ukraine are significant exporters of dry bulk cargoes, especially grains. Combined they produced 14% of global wheat and supply 29% of all wheat exports, as well as supplying 17% of worldwide exports of corn with exports out of the Black Sea in smaller geared vessels. Consequently, with exports from this region unlikely more grains will be sourced from the Americas to meet demand requirements in Europe and the Far East, this will benefit Panamax bulkers over smaller geared tonnage.
 
Russia exports 210 MnT of coal per annum with the Ukraine exporting 20 MnT. More Russian exports will head east, given western sanctions and this will push up coal prices more generally. Europe imports around 50% of its coal from Russia so these cargoes will need to be sourced more from further afield destinations such as South Africa, Australia and the US benefiting the larger bulker size segments.
 
However, it is unlikely that commodity supply from elsewhere will make up for all lost cargoes in the Black Sea/Russia, with commodity markets and supply chains already extremely tight.

 
About Maritime Strategies International Ltd. (MSI): 
 
Over the last 37 years MSI has gone from providing a limited number of European client's independent market forecasts for oil tankers and bulkers to a Company today covering all sectors of merchant shipping, offshore, offshore renewables, ports and maritime logistics. Not only does MSI provide the industry and its stakeholders with transparent forecasting models, sector reports and asset valuations but also strategic advisory and consultancy support. In 2016 we launched MSI HORIZON an online platform which provides data and forecasts not only for the individual markets but also individual ships and portfolios. In 2019 we opened our Singapore office in order to better service our Asian client base.
 
MSI's customer base is very broad and deep and includes banks, leasing companies, ship owners, shipyards, brokers, investors, shippers, insurers, equipment providers and classification societies to name but a few.
 
Not only are we supporting our clients with independent forecasts of the markets (demand, supply etc) and vessel future cash flows (earnings, values and operating costs) but also assessing market risks and opportunities. These are key considerations for any industry stakeholder. The sector knowledge and expertise that MSI is also able to impart both in our products and directly in discussions with our clients is an additional key component of our business model and one that our clients value.

Source: Xinde Marine News

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