A snapshot on the economic and shipping environment

News was prepared under the information support of Online Daily Newspaper on Hellenic and international Shipping "Hellenic Shipping News".

30 Oct 2011

The week opened with a mixed up market sentiment worldwide for Eurozone’s rescue and debate on the discussions held from the Eurozone finance ministers’ summit in Brussels during the last weekend. The world focus has been on the three hot topic

issues that trouble today’s worldwide economic growth: the second bail out for Greece, the need for recapitalization of EU zone banks and ways of increasing the strength of the eurozone’s bailout fund, the European Financial Stability Facility. Japan's financial chiefs expressed optimism that Europe is heading towards a solution to the region's debt crisis, despite deep divisions between France and Germany over how to strengthen the euro zone bailout fund.
In Greece, there are findings by international creditors that the country’s financial situation has deteriorated since the last review in June, while a large private sector contribution is being needed as one more attempt for the country’s rescue from potential default. As a response on the upcoming news, Greek bank shares plunged on the Athens Stock Exchange with Germany pushing hard banks for a significant 60% writedown on their holdings of Greek government bonds.
On a final eurozone summit last Wednesday, European leaders reached a deal with Greek debt holders for a 50% cut in the face value of private bonds, which is believed that will reduce Greek debt levels to 120% of gross domestic product by the end of decade. The agreement also includes a new EUR 130bn bail out of Greece by the European Union and the International Monetary Fund. Furthermore, they agreed to increase the firepower of their EUR 440billion bail-out fund by providing “risk insurance” to new bonds issued by struggling eurozone countries without specifying the amount of losses that will be covered by the insurance.
In the meantime, while fears surrounded the world for eurozone finance ministers not reaching a final rescue deal, Germany and France turned to Italy to demand further action from Silvio Berlusconi’s government to boost growth and reduce its huge debt. There is belief that confidence in Italy’s economy is very critical at this point for preventing the spread of Greek debt across the eurozone and the worldwide economy.
In emerging countries, India raised benchmark lending rates for the 13th time since March 2010, in order to combat near double digit inflation at a time when other emerging economies, including Brazil, Turkey and Indonesia, are cutting rates on expectations for a global economic slowdown. India’s inflation rate was 9.72% in September bringing serious dilemma to policy makers for a further cut in interest rates as the country economic growth slowed to 7.7% during the second quarter, the weakest in six quarters.
SHIPPING MARKET
Under the tight European bank lending that seems to pose a serious threat on shipping bank lending, positive news came to light following the announcement from the head of Dutch lender ABN Amro’s Transportation confirming the group intentions for doubling its shipping book from the current levels of $6 billion by 2015, citing a nearing of the bottom of the cycle as a driver.
In the dry market, the BDI is still above the 2,000 points mark with capesize earnings pushing the index to float at the highest levels of the year. However, the uncertainty for the future solidness of the market remains due to sporadic fluctuations of Chinese iron ore import activity and steel prices. According to Commodore Research, the number of vessels hired to ship iron ore to China fell 61% last week due to decline of steel prices and expansion of port stockpiles. Chinese steel prices declined by 7% to 4,380 yuan ($686) a metric ton last week, the largest drop since October 2009, while domestic steel stockpiles rose by 2% to 15,1 million tons. The strong Chinese iron ore import demand that threefolded the capesize earnings from the end of July seems to be under doubt for the fourth and final quarter of the year due to signs of decrease in Chinese steel production and domestic steel prices, while iron port stockpiles are on increase. These imply potential sharp decreases in vessels’ iron ore fixtures that could lead to lower capesize earnings and the BDI below the 2,000 points mark during the fourth quarter of the year.
In the wet market, we have seen an upward momentum last week in the VLCC segment with rates going east fetching WS 50, while westbound routes are still hovering at bottom low levels with a small increase to WS 34 from WS 32 with rates still being in negative territory. Freight rates for the Arabian Gulf – US Gulf have averaged less than WS 37 year to date equating to negative time charter equivalent earnings, squeezed by oversupply issues, high cost of bunker prices and lower U.S. consumption. The Asian demand has created more opportunities for the VLCC owners on the eastbound routes. In the suezmax market, rates are still benefiting from the congestion in Turkish straits with the WS on Med-Med route reaching last week WS 50, with rates on the WAF-USAC declined to WS 85.
Positive factor for the tanker industry amid slower U.S. and European oil consumer demand growth will be the lower levels of crude oil prices in 2012, below $100/barrel, which could ease the pain of ownerships of the increased bunker costs at a time when the glut of vessels pushes the charter market downwards. The are estimations that oil prices will trade at around $100/barrel till the end of the year unless situations in the European region worsen, while they could fall up to 8% in 2012 from lower levels of oil demand in line with the global economic slump.
In the gas market, LNG vessel segment outlook looms very promising on the back of continued surge in imports of liquefied natural gas. According to data from Finance Ministry, Japan’s LNG imports increased 11% to 6,7 million metric tons in September from a year earlier, while crude oil imports dropped 4.4% to 16,97 million kiloliters and thermal coal imports by 3.9% to 8.25 million tons.
In the container market, the negative freight environment and the lower expectations for a prompt recovery have not urged owners to precede with strong investment plans either in the secondhand or newbuilding market. The appetite for secondhand tonnage has been very limited, while the ordering bonanza for mega containerships seems to have ended with the last placement for a post-panamax boxship order for 10 units of 10,000 TEU being reported at the end of July by Peter Dohle in Germany for construction at Chinese yard, Yangzijiang Shipbuilding. The Shanghai Container Freight index closed again last week in the red by falling to 939.points, 0.9% down week-on-week, due to mainly sharp declines in the largest main routes. The Shanghai – Northern Europe and Shanghai – Mediterranean freight rates are down by 2.9% and 2.4% to $677/TEU and $948/TEU respectively.
What is worrying, under the current spot freight market environment, is the big fall by 56.8% and 38.9% on the main Asia – Europe and Asia-USWC routes respectively from previous year’s levels, when the Shanghai Container Freight index was standing at 1,301 points. The low scrapping momentum and the increased post panamax ordering spree during 2011 leaves limited hopes for a firm rebound in 2012 on the fears of a double dip economic recession. A seasonal pick up during the fourth quarter of the year could be supported by sharp removals / laying up tonnage from the owners and strong consumer demand growth on the upcoming Christmas holidays.
In the shipbuilding industry, Japan is still struggling to compete with South Korea and China as data from Japanese Ship Exporters’ Association show a fifth consecutive fall in Japanese export ship orders during September, by 77.1% to 243,900 gross tons year-over-year basis. Japanese shipbuilders last month received orders for nine export ships, all of which are bulk carriers. Between April and September, Japanese shipbuilders received orders for 86 export ships — 80 bulk carriers, four general cargo vessels and two marine resource research vessels. Market sources suggest that Japanese shipbuilders, in an attempt to be more price-completive as the yen strengthens, will ask local steel mills to cut prices for plate used to construct vessels or be replaced by rivals from South Korea or China.
Sources close to Japanese Shipbuilders Association reveal that Japanese pay as much as 30% more for plates than South Korean yards, which adds further strains on the expansion of their ordering business under the economic uncertainties and currency appreciation.
In the shipping finance, Precious Shipping has secured a term loan facility of $84,96 mil with ING Bank and DNB NOR Bank for the financing of four newbuildings bulk carriers. The banks will provide up to 80% financing of the total acquisition cost for the four 57,000 dwt supramaxes to be built in China.
Source: Maria Bertzeletou – Golden Destiny S.A Research Department