EUR 285.00 For Business Accounts Only

Drewry Maritime Equity Research Monthly Insight - Feb 2016

• Global macroeconomics: The economists surveyed by Bloomberg expect the US Fed to postpone the next interest rate hike (anticipated to happen in March 2016) because of the global economic turmoil and massive sell-off in emerging markets. Bank of Japan also adopted an aggressive monetary policy as it lowered interest rates to negative 0.1% on excess funds that banks keep with the central bank in an attempt to fight deflation. Meanwhile, the Chinese government has set a lower GDP growth rate of 6.5-7% for 2016 compared with the targeted growth of 7% in 2015. Further, China’s exports in dollar terms dropped 25% y/y in February, the biggest monthly decline since 2009 beginning.

• Oil and bunkers: Oil prices are at multi-year lows and there is no strong reason for them to recover relentlessly, considering that oil-producing nations have restrained from cutting back oil production. Low oil prices have impacted US shale drillers as the rig count has dropped and energy companies have also begun to reduce their capex budgets. Bunker prices have also mirrored the drop in oil prices, but not enough to inject hope into the struggling ship operators.

• Dry bulk shipping: The Baltic index reached a nadir of 290 points in February – the lowest since it was first published in 1985. The crumbling commodity demand, especially in China, and excessive tonnage have been a double whammy for the dry bulk market. China’s iron ore imports continue to drop sequentially, with little hope of a trend reversal considering the low utilisation at Chinese steel plants. Further, countries such as India have taken anti-dumping measures to curb steel imports from China.

• Gas shipping: LNG vessel owners were finding it difficult to employ their vessels because of the weak Asian demand. For instance, Japan’s LNG import declined by 14.1% to 7.2 mmt in January 2016 due to the relatively warm winter and restart of nuclear reactors. In the LPG segment, VLGC rates dropped amid weak chartering activity from the Indian and Chinese charterers as well as increase in tonnage. In the coaster segment, utilisation of larger vessels was impacted because of the delay at discharge ports, while the performance of smaller vessels was better.

• Container shipping: Drewry expects the container shipping industry to remain subdued in 2016 as carriers’ earnings will be severely hampered by the slowing global trade and a bloated order book, leading freight rates to spiral downwards with industry losses expected to widen up to USD 5bn. Further, most container shipping companies, if not all, will return to the red as the fall in costs will not be enough to keep pace with the free fall in freight rates and cargo volumes. Recent findings suggest that operators are now unable to cut costs faster than the declines in the freight
rate market. In addition, oil prices have probably hit the bottom right now and costs for the positioning of empty containers and vessel lay ups will increase this year.

• Tankers shipping: Though freight rates softened across all vessel segments on major routes because of excess tonnage supply and low chartering demand, vessel earnings in the tanker market remained attractive owing to lower bunker prices. Chinese New Year holidays and oil spill at Forcados in Nigeria curbed the chartering activity in the Arabian Gulf and West Africa. We expect rates to weaken further as lower crude consumption and scheduled maintenance of refineries during summer will keep the chartering activity low.

• Port operators: Headline throughput volumes across different regions reveal laggard global demand, which set the stage for lacklustre quarterly earnings for companies. In the current economic climate, we look for resilient margins and strong debt management in our port coverage. An improvement in commodity prices will encourage moderate risk-on appetite towards emerging countries. Barring unforeseen shocks to earnings, we expect port operators to continue benefitting from the positive price momentum.