Here we go again

The past several weeks has seen a range of economic support measures announced by the Chinese government. With a particular focus on the property market, these measures could further support the country’s bulk commodity demand next year.

The ongoing slowdown in the Chinese economy has triggered the introduction of a further range of supportive economic policies. Throughout the year there have been minor efforts to contain any further downside, but having made little impact, these efforts have seemingly accelerated in Q4. Naturally, the industrial slowdown is reflected in China’s dry bulk commodity import demand, which has declined by 4.7% YoY to 1.6 BMT across the first 10 months of the year. China’s slowdown has made a larger impact on the smaller ships, with imports on Supramaxes and Handies lower by 23% and 21% respectively. On the Handies in particular, some of this downside, however, is the decline in container shipments it should be noted. In comparison, the Capesizes have proven the most robust in terms of volumes discharged, rising by 3.4% as these vessels are unsurprisingly more exposed to China’s steel sector as opposed to the country’s overall economy.

In recent weeks, the Chinese government has announced a range of stimulus policies for its ailing economy, including a 16-point plan targeting the property and construction sectors, which ultimately drive the country’s dry bulk demand. Measures taken so far this year have been rather underwhelming, such as trimming its 1-year loan prime rate by just 5 basis points in August to 3.65% thus economic data releases have continued to be discouraging.

Chinese credit demand showing little improvement

Chinese new loans amounted to just CNY 615bn in October, the lowest level for several years. Despite the range of policy measures announced in the past several months, this has driven little upside to the demand picture yet. Covid-19 lockdowns can partially be attributed to the root cause of continued weak credit demand, as their stop-start nature makes new projects less appealing. This can be reflected in the latest reading of initiated floor space, which declined by 38.5% YoY in October, a marginal improvement to that in September.

Included in the country’s recent 16-point plan released last week were special loans for project completion, easing caps on banks’ property lending and encouraging the acquisitions of property projects by strong developers from weaker ones. Further, the PBoC are supporting mortgage repayment extensions for homebuyers while reassuring credit scores will be unaffected. A major headwind for property developers next year, however, is a considerable amount of outstanding loans. This has been exacerbated by falling property sales. The total cumulative value of commercial and residential building sales have declined by 26.1% and 28.2% YoY across the first 10 months of the year. Chinese policymakers have since granted an extension of up to a year for any loans due for repayment in the next 6 months, which should ease some of the strain’s developers are facing. Growth in real estate investment in China has now been in negative territory all year, reflecting the poor liquidity position of several large developers and weak property demand. On the demand side, the lockdowns will continue to hinder any real recovery in property investment. While the Chinese government has shown the willingness to ease some Covid curbs, the lockdowns show the stringent Covid policy is still intact for now. Ultimately, however, we do expect to see the country re-open on a very gradual basis throughout next year as the economy takes priority once again.

Industrial production robust despite lockdowns

Despite the weak demand from the property sector, the two most dry bulk-intensive industrial sectors in China have proven relatively robust so far this year. Steel production, while showing several months of negative growth this year, is flat YoY across the January-October period at 700.4 MMT given the sharp drop in production in 2H 2021. Subsequently, iron ore imports have improved by 2% YoY over the same period to 931.2 MMT. Alumina production, in which bauxite is used heavily in the production process, has increased by 8% YoY to 56.4 MMT.

Production of both steel and alumina in China this year is encouraging given the constant disruptions due to lockdowns and poor hydropower performance which is a primary energy source for many aluminum smelters specifically. Although steel demand domestically has been poor, China has been able to export some of the excess volumes, largely into the SE Asian markets. Overall, in recent weeks the Chinese government has shown an even greater motivation to intervene and support its economy while putting a particular focus on its struggling property market. As is the nature of most fiscal and monetary policy, there is inherently a response lag to when these policies will show any true impact, which will not be until the first half of next year at the earliest. Given the worsening impact of the lockdowns and the strong rise in Covid cases this month, we expect to see more stimulus measures put in place before the new year as sentiment in the country’s real estate market continues a downward trajectory. Looking to next year, the effects these policies are expected to have provides some encouragement on the prospects for China’s property market and thus raw material demand.

Shipbuilders face a raft of headwinds as they prepare for 2023 but sectors such as LNG carriers, container ships, large tankers and specialist vessels are expected to compete for increasingly scarce berth space. Clarksons Research managing director Stephen Gordon said the shipping market outlook is quite sector-specific and this will likely be reflected in the newbuilding demand next year. He said the macroeconomic challenges that have been building for some time in the world economy are creating a difficult outlook and that 2023 is going to be “a bit bumpier” for shipyards. Despite this, and somewhat flat growth in seaborne trade, Gordon said yards are in a strong position in terms of forward order cover and there are markets that could do well in 2023. Demand for LNG carriers is expected to remain strong, although not as high as this year, partly due to the lack of berths but also because the current $250m-plus price on a vessel could prove too rich for some buyers. Gordon said around 400 MMT per annum of LNG is traded today, which is forecast to grow to between 600 mtpa and 700 mtpa by 2030. “Yards are going to be building as many LNG carriers as they can for the rest of the decade,” he said.

Views are mixed on the type of container ships that will be ordered for 2023. One newbuilding broker said he is aware of five ongoing projects for container ships above the 8,000-teu size range. The Clarksons Research team expect the focus to be on small or midsize range boxships. Gordon is also anticipating big-ticket orders for 17 floating production, storage, and offloading vessels in 2023, there were 16 this year, as the focus remains on energy pricing and security. He said offshore wind is also likely to provide opportunities for niche newbuildings. But the question for many is where are the tanker orders? One tanker newbuilding specialist said period rates for the sector have risen, which would normally prompt a rush to the yards, particularly when orderbooks are running so low. Instead, contracting is flat lining. He, and others, believe the tanker revival will come but its timing is uncertain, and owners may find themselves competing for limited berth space with other sectors.

Capacity is set to remain tight at yards. Clarksons Research takes the orderbook as a multiple of last year’s production to give a measure of forward cover at yards. Gordon said that at the start of 2021 this stood at 2.7 years but is now up at 3.5 years, the highest it has been since 2010. He said yards have filled up their capacity for the next three years, or maybe four in the case of some of the larger ship sectors. One newbuilding broker estimates that on LNG carriers, yards may already be 50% full for their 2027 delivery positions. Shipyard senior executives appear united in what their customers are requesting for upcoming orders. “They ask me to reduce the price,” one said, adding that there are good reasons why yards will not do this. These included the need to consider the very tight demand and supply situation for newbuildings, the high material and equipment costs as well as the labour shortage for the skilled workers required. One senior newbuilding broker forecasts that tanker prices will trend upwards as they collide with a very tight supply side at yards. He believes bulker prices will continue downwards until the Chinese economy reawakens, while levels for boxships will remain weak for smaller vessels and relatively firm for the larger sizes.

Patrick Morrison, head of newbuilding at Arrow Shipbrokers, said: “We forecast newbuilding prices to soften in the coming months as deliveries outpace demand assisted by weaker currencies and lower steel prices.” But Morrison said he does not see a material fall in prices as there is a growing need for replacement in the tanker and bulk sectors coupled with consolidated shipbuilding. “The drop in prices will not be as deep or as long-lasting as we have seen in the last three cycles,” he said. Looking at the medium to longer-term perspective for shipbuilding, Gordon said there are still huge fleet-renewal requirements being driven by the demographics of the fleet and decarbonization policies from a range of stakeholders. He sees opportunities for retrofitting, particularly for the energy-saving technologies that will keep the ship-repair yards busy. Gordon said increasingly the industry will need to be thinking about the emissions ratings of ships not just their age. But he added that uncertainty on regulatory and technological aspects will likely result in a lumpy build-out of fleet renewal.

2022 is rapidly ending without a single mainstream shipowner being able to complete a conventional IPO in the US. This makes 2022 like most recent years. Except for Israeli liner operator Zim in January 2021, no mainstream shipowner has been able to float in New York since Peter Georgiopoulos and the old Gener8 Maritime pulled the trick in June 2015. But while the front door to the IPO market has been virtually locked for shipping, the back door to a public listing has been wide open. Bankers at New York’s Maxim Group have been like traffic police windmilling a line of eager shipowners right on through it. The latest to give notice it will use the listings loophole is Cyprus-based Castor Maritime, which plans to spin off eight tankers from its fleet onto the Nasdaq under the name Toro Corp. As a footnote, Castor itself did not come public through a conventional IPO. It opted for what is called a direct listing of shares on Nasdaq in 2019 without raising any new funds. Castor was previously on the Norwegian over-the-counter exchange. With help from Maxim-led shares sales, Castor has been a remarkable success in some respects. Between its launch in 2019 and December 2021, Castor spent nearly $400m on secondhand tonnage in deals that vaulted it from one ship to 29 vessels, 20 bulkers and nine tankers. But like most of the Maxim-related shipping deals, Castor hasn’t been such a success for retail-oriented investors who decided to buy its shares.

With a current stock price near $1.45, it has lost nearly 98% of its share value from a split-adjusted price of $71 per share on 11 February 2019. Most of the dilution came from heavily discounted sales of common shares packaged with warrants, as has been the style for other Maxim-connected companies such as Performance Shipping, StealthGas spinoff Imperial Petroleum and Diana Shipping spinoff OceanPal. In the case of the new public companies created by spinoffs, they generally would have little chance of floating in a regular-way IPO for a variety of factors, ranging from size to governance to general investor attitudes about shipping.

Such is quite likely the case with Toro, which brings just eight tankers averaging 17.5 years of age into the transaction. On the other hand, Castor’s timing appears deft. It would already have seen the tanker values appreciate from their 2021 acquisition, and most observers feel the gathering tanker bull market has some ways to run, fueled partly by tonne-mile dislocations from Vladimir Putin’s war on Ukraine. But the offspring company inherits another feature from its parent: control through super-voting rights rather than insiders’ skin in the game through significant ownership of common shares. For example, Castor has more than 94m shares outstanding. Chief executive Petros Panagiotidis holds only 112,409 of them, or roughly 0.12%. No insider or director holds more than 1% of shares, nor does the officer-director group collectively, according to public filings. Yet Panagiotidis also owns 12,000 Series B preferred shares, representing all the shares of that class. Each preferred share has the voting power of 100,000 common shares, giving him voting control of the company. Why is that significant? When regular shareholders suffer dilution from equity raises, insiders suffer little or no economic handicap from their decision to issue stock.

Toro has not begun trading yet, but a public filing suggests a similar structure. Toro has 38.7m shares outstanding. Panagiotidis owns 44,963, or 0.12%. All officers and directors collectively hold no more than 1%. Panagiotidis owns all 40,000 of the preferred shares outstanding, and each carries 100,000 votes. With common and preferred shares combined, Panagiotidis controls 99.1% of the vote. One other thing held in common by the Maxim-linked companies is that they typically go to great lengths to disclose the risks involved for investors. In that respect, Toro says the following: “We are a new company, and our anti-fraud and corporate governance procedures might not be as advanced as those implemented by our listed peer competitors having a longer presence in the shipping industry. As a publicly traded company, the SEC [US Securities & Exchange Commission], Nasdaq Capital Market and other regulatory bodies subject us to increased scrutiny on the way we manage and operate our business by urging us or mandating us to a series of actions that have nowadays become an area of focus among policymakers and investors.” Listed companies are “occasionally encouraged” to follow best practices in areas such as director independence, board committees, corporate transparency, ethical behavior, corruption control and sustainability, the company goes on. “While we believe we follow all requirements that regulatory bodies may from time to time impose on us, our internal processes and procedures might not be as advanced or mature as those implemented by other listed shipping companies … which could be an area of concern to our investors and expose us to greater operational risks.”

According to several media outlets, local Chinese governments have implemented stringent lockdowns and mass testing of their population amid the country’s alarming Covid-19 cases, with the country reporting its first Covid-related deaths in six months last weekend.

Industry sources estimate ~20% of China’s GDP is impacted by the measures as of Monday, which compares to ~21.2% recorded in mid-April this year.

However, the number of cases has continued to climb with the National Health Commission reporting 31,444 new cases in the past 24 hours, which is the highest number of cases reported since the start of the pandemic.

The widespread lockdowns continue to indicate China’s commitment to its zero-Covid policy despite recent indication of easing policies and while being met with a deteriorating macroeconomic outlook for the country.

In our view, the recent development provides further uncertainty for the macroeconomic outlook and could continue to weigh on shipping demand and freight markets, especially for tankers and dry bulk, while postponing hopes for reopening further into 2023.

4,010 new daily coronavirus cases were reported in China today.  This marks the largest amount reported since April 29th and is only the second time all year that over 4,000 new cases were reported in a single day in China.  As we have continued to stress, the current surge has been showing no signs of abating and no significant reopening has been likely to occur in the very near term.

Florida-based Zergratran, a sustainability driven transportation infrastructure company, is seeking to raise $75m in funding as its initial step to build an alternative to the Panama Canal for shipping containers.

Puerto Internacional Las Americas (PILA) is planned to be an underground tunnel that would use Maglev (derived from magnetic levitation) technology to transfer containers in less than 30 minutes between fully automated ports on the Atlantic and Pacific coasts of northern Colombia. This 80-mile “green shipping corridor” would help place the shipping sector on a credible pathway to achieve zero emissions, said the company in a press release. The Maglev and linear induction propulsion-based technology would be entirely electric and non-polluting.

Zergratran’s plan addresses the need for additional marine trade routes and the choke point around the Panama Canal. The technology, already used for high-speed trains, is expected to enable faster, cheaper, and more efficient transport.

Zergratran would own both ports and license its crane technology and port designs out to the industry. After pre-feasibility, it would request proposals from potential construction and operations partners, then select the best options. However, after 25 years of operations, it is required to turn over ownership of the ports and tunnel to the government.

Byron Bennett, CEO of Zergratran, discussing the initiative on LinkedIn, maintained the Panama Canal was suffering from delays. “Container ships typically must wait about 10-12 days to cross. We are addressing the need for additional capacity and the 13,000+ teu ships that can’t cross the canal,” Bennett claimed.

Panama has had to contend with suitors to its transoceanic capabilities before. Canal pretenders have come and gone repeatedly, most notably a Chinese bid eight years ago to develop a 284 km waterway across Nicaragua, which never materialized.

Liners will idle as much as 1.5m teu of tonnage next year as the container market eases with analysts warning images of boxships in lay-up could become commonplace once again. British consultants Drewry are forecasting idling will reach approximately 1.5m teu next year, or roughly 6% of the end-2022 cellular fleet. “Carriers are going to have to engage every capacity lever they can to stop the rot,” Simon Heaney, senior manager of container research for Drewry, told Splash. Oslo-based freight rate platform Xeneta, meanwhile, is predicting idling of up to 1m teu. “Carriers will apply the tools in toolbox available to them to dent the potentially freight rate eroding impact of a massive oversupply,” said Peter Sand, Xeneta’s head of research. The latest count from Alphaliner shows that there are already 1.24m teu of inactive vessel capacity, referring to ships that are out of revenue service. This equates to around 5% of the fleet. Some 60% of this is due to drydocking, repairs and conversions. “The amount of commercially idle tonnage is increasing slowly but steadily.  Most of these ships are carrier controlled. They are in between services or dropping out of service for one round trip, as sailings were voided,” commented Jan Tiedemann, a shipping analyst at Alphaliner.

Given the huge influx of newbuildings, 2.5m teu in 2023 and 2.9m teu in 2024, Alphaliner expects commercial vessel idling to grow next year. Experts at Danish consultancy Sea-Intelligence have mapped out two possible scenarios for how liner shipping grapples with overcapacity in the year ahead. The more optimistic scenario from a carrier viewpoint would see the volume slowdown levelling out over the coming months, and carriers managing to catch up with capacity removal, to the point where spot rates level out at approximately 2019 levels. To get there, blank sailings would not be enough, wholesale service closures would be required, which the industry is starting to see. In this more optimistic scenario, Sea-Intelligence would expect hot lay-ups and an idle ratio of 3% to 5%, which is high compared to the past few years.

The second scenario envisages volumes continuing to contract over the coming year, and/or carriers refraining from taking the necessary hard cuts to capacity, which are needed to stem the spot rate drops, and, as it has happened several times in the past, the market overshoots the drop. In this scenario, transpacific west coast spot rates would duck below $1,000 per feu, and Asia-Europe rates tumble below $500 per teu, and soon the malaise would spread to all other deep-sea trades, effectively a repeat of 2016, but this time round carriers have full war chests to fight out a protracted rate war with Alan Murphy, Sea-Intelligence’s CEO, telling Splash that shippers will watch “gleefully” as carriers set their money piles on fire. In this scenario, after about six months of spot rates being below cost, carriers will have wasted all their free cash, and will start to panic lay-up vessels, both hot and cold with around 10% of the fleet laid up, and as in 2010.

Niels Rasmussen, BIMCO’s chief shipping analyst, said that with supply set to significantly outpace demand in 2023 and a worsening global economic outlook, cold lay-ups will likely reemerge, a phenomenon last widely seen in the wake of the global financial crisis where many boxships went into hibernation. Sea-Intelligence advises that older and smaller vessels will be the most likely candidates for cold lay-up. Carrier claims that the upcoming Carbon Intensity Indicator (CII) will take 10-15% of effective capacity out of the fleet have been dismissed by Alphaliner’s Tiedemann. “The CII effect will be negligible in 2023,” Tiedemann said of the upcoming International Maritime Organization legislation. “Since the index is becoming stricter over time, it will be felt at some point down the road, but probably not in 2023,” he added. Xeneta is forecasting ocean freight volumes to drop by around 2.5% next year. “We could see spot rates on some key corridors drop below pre-pandemic levels during the first half of 2023, while long-term rates will fall rapidly as older, expensive contracts expire and new, far lower contracts are signed,” commented Xeneta CEO Patrik Berglund.

Much has been written about the fleet expansion at Gianluigi Aponte’s Mediterranean Shipping Co (MSC) during container shipping’s boom era. Since August 2020 the Geneva-headquartered liner has bought more than 250 secondhand ships, as well as building a 1.7m teu orderbook, a period of expansion on a scale never seen before in any commercial shipping sector. This period of expansion also saw MSC surpass alliance partner Maersk at the top of the liner rankings at the start of the year.

Putting some perspective on MSC’s expansion, its orderbook today is roughly the same as the entire extant fleet of Hapag-Lloyd, the world’s fifth largest liner. Putting its extreme sale and purchase activity in context, Alphaliner data shows that the number of MSC purchases since August 2020 are greater than the next seven largest buyers combined.

While historically MSC, whose roots date back to 1970, has had a strong focus on chartering in ships, this has changed during liner shipping’s record earnings period of the last couple of years. Since the start of 2020, MSC’s share of owned ships increased to 69% from 51%, according to Linerlytica.

Last month MSC agreed to acquire 100% of the share capital of towage operator Rimorchiatori Mediterranei. In September the carrier debuted MSC Air Cargo, something that will take to the skies from early next year. The cash-rich line has also bought many other assets including Bolloré  Africa Logistics and Log-In Logistica.

Originally hailing from Naples, the secretive Gianluigi Aponte has amassed a personal fortune of as much as $100bn, Swiss media reported last month, firmly putting the family as the richest in Switzerland, three times as wealthy as the second-placed family.

If the $100bn wealth was confirmed that would place the Apontes in sixth place on Forbes rich list, nestled between Bill Gates and Warren Buffett.

A bid by Ukrainian forces to reclaim the strategically critical Kinburn Spit from Russian control could hold the key to freeing ships caught in the war-torn port of Mykolaiv. Vitaliy Kim, head of the Mykolaiv Regional Military Administration, told Interfax-Ukraine that successful reclamation of the three-mile-long strip of land running into the Black Sea in the south of the country would open the door for the port of Mykolaiv to join the Black Sea Grain Initiative. The Kinburn Spit controls the entrance to the Dnipro and Pivdennyi rivers and access to the port cities of Mykolaiv and Kherson.

Russian forces have used the Kinburn Spit to launch rocket and artillery attacks on Ukrainian-controlled areas on the Black Sea coast. At present, Kim said ships must sail close to the Kinburn Spit when they leave the port. “Geographically, our ships should sail a kilometer from the Kinburn Spit, which is dangerous now,” he said.

There are more than a dozen ships currently trapped in the port of Mykolaiv, mostly handysize bulk carriers, including the 25,900-dwt Mallard S (built 2010), 53,100-dwt Filia Joy (built 2009) and 29,100-dwt Oceanic Island (built 2009). There are several tankers also in the region, including the 46,600-dwt MTM Rio Grande (built 2007) and 38,000-dwt Harald Maersk (built 2009).

The only way for ships to leave Ukraine’s Black Sea ports is via the grain initiative. The current agreement only includes the ports of Odesa, Chornomorsk and Yuzhny. There was hope that the port of Mykolaiv, a major Ukraine grain export terminal, might be included when the grain initiative was recently renewed. But it was left out of the deal, which simply automatically renewed as it was for a further 120 days.

The infrastructure in the region, which has been at the centre of a fierce battle between Russian and Ukraine forces, is close to collapse following the fighting and targeting of Ukraine’s power generation, and the port of Mykolaiv is likely to have been severely damaged. Ukraine has been forced to order the evacuation of the recently liberated Kherson and Mykolaiv region in response to heavy Russian artillery fire and the onset of winter.

Swiss liner giant Mediterranean Shipping Co (MSC) has reportedly told Italian authorities that it is no longer interested in investing in ITA Airways as part of a planned privatization. In a short statement, MSC said it did not now see the right conditions for a deal in the current process, reported Reuters.

The Soren Toft-led shipowner had partnered with German airline Lufthansa earlier this year to bid for a stake in the Italian airline, the successor to Alitalia.

The world’s largest container ship owner had initially seen an investment as a way of expanding beyond its cruise and container shipping business. MSC had said the deal would help it expand into air cargo, a sector that has thrived during the pandemic. It announced in September that it was leasing four Boeing wide-body freighters as part of a move into that sector.

A Lufthansa spokesman recently said that it was still interested in buying into ITA despite reports that MSC had pulled out, reported Reuters. In August, Italy picked a group led by US private equity fund Certares, backed by Air France-KLM and Delta Air Lines, for exclusive talks on buying a majority stake in ITA Airways. However, the exclusivity period expired in October with no deal reached, re-opening the door on a rival bid presented by Lufthansa and MSC.

MSC has been looking to new horizons to deploy its pile of cash earned in the container shipping boom. In August 2022, MSC was part of a consortium that launched a £3.7bn ($4.5bn) takeover bid for London-listed private hospital group Mediclinic. The bid is being led by Remgro, the investment vehicle of South Africa’s richest man Johann Rupert. MSC president Diego Ponte said at the time that MSC was “very well placed to provide long-term capital, as well as our insight and experience from operating a global business in order to support the strategic ambitions of the Mediclinic management team”.

In April this year, MSC agreed to buy the African transport and logistics business of Bollore for €5.7bn ($6bn) including debt after acquiring a stake in Italian ferry operator Moby in March.