Container shipping could be headed into a prolonged rate war as cash rich carriers battle falling demand and a sharp increase in supply. Speaking at TOC Asia Alan Murphy, CEO and Founder of Sea-Intelligence, said the container market was returning to normality but asked if this was pre-pandemic level of normality in 2019, a relatively good year for container shipping if 2020 – 2022 is excluded, or a much worse scenario of five – six years ago.

Murphy noted that container spot rates had been driven to stratospheric levels by a combination of a sharp rise in consumer demand and some 15% of global capacity being lost due to congestion at ports and in the supply chain. What is happening now is that consumer spending on durable goods has come down to a more reasonable level and this is being translated into container volumes which saw a quite serious contraction in September.

Capacity loss, which normally stands at around 2%, is now down to around 8% and Sea-Intel expects it to reach normal levels in Q1 next year. Murphy noted an almost perfect correlation between lost capacity and spot rates, with a 95% correlation with Drewry’s World Container Index (WCI) which is down 77% from its height. For contract rates the decline is slower but looking data from Xeneta Murphy commented, “For contracts signed in last three months we are seeing contracts are being renegotiated at lower rates.”

Meanwhile lines are facing an influx of some 2.4m teu in new capacity in the next few years, the largest amount in nominal terms ever and well above previous highs of around 1.5m teu. One key difference to the past is carriers now have huge amounts of cash and it was noted lines had earned the same amount in the first six months of 2022 as they did in 10 years prior to the pandemic.

Murphy sees two scenarios playing out, a managed decline with lay-ups starting now or a rate war. “What I personally think is much more likely is headed into we’re in for a rate war,” he said, putting an 80% chance on a rate war. “The carriers have much large war chests than before,” he said. “The only thing scares me more than shipping lines with no money, is shipping lines with money.” The result could be a prolonged rate war which is dragged out by carriers with more money to fight. But shippers looking forward to prolonged low rates were warned of a possibility of a repeat of 2009 – 2010 down the line where once large amounts of tonnage is in lay-up only a relatively small spike in demand could tip the market in carriers’ favor.

Chinese officials briefed the market on its Covid-19 prevention and control measures earlier today, and disclosed the vaccination rates among its elderly population is increasing and will continue to be the focus going forward. They said 65.8% of people above 80 have received booster shots, up from 40% as of 11 November, and that the one-shot vaccination rate for people above 60 years has exceeded 90%. The country is still in the process of approving its home-grown mRNA vaccine alternative, where the AWcorna looks to be leading in ongoing trials among other alternatives in development. The AWcorna vaccine received emergency approval for use in Indonesia just two months ago, but has yet to publish necessary trial data for approval in China. In connection with mRNA vaccine roll-out, the country is also completing several facilities to produce the vaccines once approvals are in place.

As we have highlighted before, the dry bulk shipping sector represents attractive exposure to the China reopening case. However, we continue to believe any reopening will be conducted in a controlled manner once the country is certain the potential virus spread will not cause excessive damage to the elderly population. Until then it remains a waiting game for the dry bulk sector to kick into overdrive.

Highlights

• The Baltic Exchange Dry Index (BDI) remained low in the fourth quarter due to congestion easing and weak demand in China. 
• The IMF forecasts the global economy to grow by 2.7% in 2023 and by 3.2% in 2024, following a downward revision. In its worst-case scenario, the IMF forecasts GDP to grow by as little as 1.2% and 1.6% in 2023 and 2024, respectively. 
• China’s economy is forecast to grow by 4.4% in 2023 and by 4.5% in 2024. However, downward risks remain, such as future COVID measures, continued uncertainty surrounding the resolution of the country’s property crisis, and the impact of a global economic slowdown on its export-oriented economy. 
• In 2023, iron ore and coal demand should stagnate, while grain supply should remain subdued. Growth in minor bulks should weaken as global economic growth stalls. 2024 could be a more favorable year for dry bulk demand as economic conditions improve. 
• The bulk carrier fleet is forecast to grow by 2.1% in 2023 and by 1.8% in 2024. A pick-up in demolition of older tonnage is expected in 2023 and capacity supply may be further reduced by 2-3% by the introduction of EEXI and CII.  
• We expect sluggish growth in cargo demand of 0-1% in 2023 and higher growth in the 2-3% range in 2024. Capacity supply is forecast to reduce by 0-1% and grow by 1.8% in respectively 2023 and 2024. As such, we expect a slight tightening of the supply/demand balance in both years. 

London-listed Taylor Maritime Investments (TMI) has declared its offer to acquire all the issued ordinary shares in Grindrod Shipping “unconditional in all respects.”

The Ed Buttery-led TMI, through its subsidiary Good Falkirk, offered $26 per share in the Nasdaq and Johannesburg-listed rival. The offer, which expired last night, was structured as a voluntary general offer, consisting of a cash purchase price of $21 per share to be paid by TMI for each share tendered in conjunction with a special cash dividend from Grindrod of $5 per share to its existing shareholders.

Computershare Trust Company, the depositary for the offer, said that, as at the expiration time, a total of 8,966,040 shares had been validly tendered and not validly withdrawn pursuant to the offer, which represents, when added to the shares owned by the TMI and its affiliates, approximately 73.78% of the outstanding shares.

TMI has provided for a subsequent offering period, which, unless extended, will expire on December 19, 2022. During this subsequent offering period, shareholders who have not previously validly tendered their shares in the offer may do so and will promptly receive the same consideration of $21 per share in cash, without interest thereon, offered in the initial offering period.

The combination of TMI and Grindrod is expected to create a significant market player in the mid-sized dry bulk industry with a fleet of 57 ships.

Container freight rates might be falling with unprecedented speed, but AP Moller-Maersk chief executive Soren Skou remains optimistic about contract negotiations. Analysts have said lines face some tricky talks over new long-term deals with shippers. But Skou told the Finans daily that his Danish group is in an “absolutely excellent” negotiating position. “Just as we have kept our word and provided the capacity we have sold, we find that our customers want to keep their word to us,” he said. “I know there are many who are now speculating to the contrary. But I don’t see that at all,” the CEO added. Skou believes companies are still looking for long-term contracts, but admits they will not be at the same levels as previously.

Freight rates have been falling for six months. “It is completely unheard of. I’ve gone through all the archives going back decades. It has never happened before that the bottom falls out of rates…so quickly. It can best be compared to a wildfire,” said Bjorn Vang Jensen, vice president of Sea-Intelligence. He argues the falls are a “disaster” for owners, with contract negotiations ahead.

Sydbank analyst Mikkel Emil Jensen told Finans: “We knew full well that the freight rates had been pumped up artificially hard, so it is no surprise that they have come down. But the speeds have surprised most. It looks more like a collapse of freight rates than a normalization.”

Maersk’s annual report for 2021 revealed that a drop in freight rates of $100 per feu would cut $1.4bn from operating profit over a year.

Prospects for dry bulk shipping remain uncertain as questions loom over what China will do with its zero-Covid policy. Analysts including Goldman Sachs believe China may loosen the all-or-nothing approach to pandemic restrictions as its economy continues to falter and protests pop up across the country, Bloomberg reported. But they said there is also a chance it may stick to its guns as the virus continues to spread. China will probably relax the policy in the spring, causing the market to improve during the second quarter of next year, said John Kartsonas, founder of Breakwave Advisors, an asset management firm that runs a dry bulk ETF trading platform. “There seems to be some willingness to relax the current policy, and there have been steps towards that direction,” he told TradeWinds. “If that accelerates it can only be good for dry bulk as it will increase demand for construction and infrastructure spending, thus pushing more steel demand and iron ore imports into the country.”

As Beijing has continued to clamp down on outbreaks of Covid-19, residents in major cities have taken to the streets in public protests that are rare for the country. “The protests come after the Chinese government’s loosening of the zero-Covid policy seems to have backfired, as it has led to more outbreaks across China … that has triggered new restrictions,” Danske Bank chief analyst Allan von Mehren wrote in a note on Monday. “The situation now is highly uncertain and China is facing some tough choices.”

The dry bulk market could benefit if China loosens the strict policy and lets Covid-19 spread, but it could also decline if the country keeps enforcing its lockdown rules. But one shipbroker is not so sure that China will ease the zero-Covid policy. “They will crack down,” UK-based Alibra Shipping founder Giuseppe Rosano told TradeWinds. He said an executive in China has told him that the country is still on lockdown. “This will put further pressure on the delay of any rebound however when it does rebound, it will rebound in a greater sense,” he said.

In the capesize sector, spot rates have already been climbing upwards in recent weeks. The Baltic Exchange’s Capesize 5TC collection of spot-rate averages across five key routes rose 48% over the past week to more than $13,800 per day on Monday. That put it at the highest point in almost three weeks. The spike was due to tight supply in the Atlantic basin and higher iron ore freight rates from western Australia to China, Clarksons Securities analyst Frode Morkedal said.

Australian miner Rio Tinto fixed an unnamed capesize on Friday to ship 170,000 tonnes of iron ore at $8.85 per tonne from Dampier, Australia, to Qingdao, China, after loading it from 10 to 12 December. The company hired an unnamed capesize on 18 November to carry the same amount of ore at a lower rate of $7.70 per tonne on the same route, after taking on the commodity from 5 to 7 December. But continuance of this upward trend depends upon what China does with the zero-Covid policy, Morkedal said. “If China reverses its Covid policy and removes restrictions, this should be good news for economic activity, and when combined with additional economic stimulus, we expect dry bulk shipping to be the primary beneficiary when considering all shipping sectors,” he wrote in a note on Monday.

China’s consumer market continues to show significant weakness.  As we reported earlier, retail sales rose year-on-year by 2.5% in September but inflation rose year-on-year by 2.8%.  It was concerning that September’s data showed Chinese consumers were suddenly not buying more goods, and instead were just paying more.  October’s data has shown even greater weakness.  Inflation rose year-on-year by 2.1% last month, while retail sales contracted year-on-year by 0.5%.  Furniture sales in China have now contracted for fifteen straight months, clothing sales have returned to contraction, and appliance sales (which includes consumer electronics) contracted last month by the largest amount seen since April 2020.

The largest protests seen in China since the Tiananmen Square massacre of 1989 have spooked financial and commodity markets today. Both the Hong Kong and Shanghai stock markets closed on Monday while the prices of key commodities including oil came under pressure.

The immediate trigger for the demonstrations was a deadly fire in Urumqi, the capital of Xinjiang, in China’s far northwest on Thursday. Ten people, including three children, died after emergency fire services could not get close enough to an apartment building engulfed in flames. Residents blamed lockdown-related measures for hampering rescue efforts.

Anti-covid protests, including calls for the removal of president Xi Jinping, have since spread to major metropolises including Beijing, Shanghai, Chengdu, Chongqing, Nanjing, Wuhan, and Xi’an.

“International television broadcasting angry demonstrators in China, protesting against the country’s strict zero-Covid policy, has caused further unease in financial and commodity markets, mostly in Asia but now also reverberating across the world,” a daily markets update from Oslo shipbrokers Lorentzen & Co noted this morning.

Niels Rasmussen, BIMCO’s chief shipping analyst, told Splash it was still too early to make any conclusions on how seriously the protests might affect shipping. China is, by some distance, the most important nation for shipping’s fortunes – both for imports and exports.

Despite myriad doom and gloom headlines based on rapidly declining spot rates, an influential container expert is forecasting liner shipping will post a full-year net profit of $223.4bn, a 50.6% improvement over the record profits made last year. John McCown, who runs Blue Alpha Capital in the US, has issued his latest liner quarterly profits report, which show that while Q2 marked an earnings peak for container shipping, Q3 remained strong thanks to the large portion of boxes that move on contract, not on spot. McCown estimates the number of containers shipped via the spot market is no more than 20%, and while spot prices have been falling all year, long term rates remain strong.

“Much is now already baked in for 2022 financial results. I suspect the folks who focus on spot rates and have been predicting a near term earnings collapse will be surprised by the actual third quarter results. They will likely be even more surprised by fourth quarter results as they haven’t been focusing on the more relevant aggregate pricing metrics. As such, they are substituting narrative for analysis, as no earnings collapse is eminent,” argued McCown, a liner veteran whose career started out with Malcom McLean, the American who created the seaborne container trades in the 1950s.

McCown estimates liners made a combined net profit of $58.9bn in Q3, a 22.4% improvement over the same period a year ago. Compared sequentially to Q2, net income was $4.1bn or 6.6% lower. “The 2Q22 actual results can now be recognized as the peak in terms of earnings. There will be further declines from 3Q22 in quarters to come,” the new container report suggests.

Once again, McCown showed how the industry’s profits beat those at FANG, the acronym for Facebook, Amazon, Netflix and Google, favorites of the capital markets owing to their fast-growing profits. Container shipping industry profits were 14% higher than total FANG profits in Q4 last year, 103% higher than FANG profits in Q1 this year and 145% higher than FANG profits in Q2. For Q3, that gap has expanded even more as container shipping industry profits have swelled to being 158% above total FANG profits.

The container shipping industry net income to revenue margin of 43.9% in Q3 was 4.2 times the overall FANG margin. Compared to earnings behemoths Apple and Microsoft combined, total container shipping industry profits were 54% higher with a profit margin that was 1.6 times the combined Apple and Microsoft margin.

Data from Container Trades Statistics (CTS) shows that worldwide container volume was down 3.9% in the third quarter compared to the same quarter last year, extending a downtrend from the 1.6% decline in the second quarter, 0.9% decline in the first quarter and the 0.2% volume gain in the fourth quarter.

After registering over 11 MMT of imports in both March and April before hitting a record 12 MMT in May of this year, China’s seaborne bauxite intake began a halting decline. China imported 9 MMT of Bauxite in October, a month-on-month increase of about 0.8 MMT against September (8.2 MMT), the lowest monthly intake since December of last year. Unsurprising as China’s bauxite imports tend to peak in Q2 or Q3 before falling off for the rest of the year. After all, China has imported nearly 104 MMT in the first ten months of 2022 (+13 MMT/+14% y-o-y), with 57 MMT from Guinea (+9 MMT/+19%) and 16.7 MMT from Indonesia (+3 MMT/+21%), benefiting the Cape and Supramax sectors, respectively. Australia, which uncharacteristically declined for the time last year after 18 years of consecutive export growth remains flat on the year at 28.5 MMT, negative for the Post-Panamax sector which loads almost every Australian shipment.

More worrying than a seasonal decline in bauxite imports was the increase in China’s alumina exports (the material refined from raw bauxite), which not only began climbing in April for the first time in history but actually outpaced imports this year. With energy prices hitting stratospheric levels, the energy-intensive aluminum smelting industry clearly suffered from the rise in costs. China’s alumina export growth further suggests that, despite the import surge in bauxite, at least some of these shipments were being driven by contract commitments rather than underlying demand alone. Giving credence to this assumption is the fact that, despite all suppliers to China displaying an increase on the year to October, only Guinea, heavily financed by and tied to Chinese firms, has increased annual exports since May. Indo’s exports to China increased by 4.8 MMT in the first four months of the year, but declined by 1.8 MMT y-o-y from May to October.

However, it appears that Chinese demand has begun to normalize, with alumina exports falling back over the past two months and once again below its imports. China’s vehicle production, which serves the primary demand driver for domestic aluminum, has climbed by 9% y-o-y. Although aluminum production has climbed only 1%, it has been increasing y-o-y every month since July, and October’s 9% growth figure is the highest since March of last year. With the Chinese domestic automobile industry ticking along at its current pace, and China resuming aluminum production, the outlook for bauxite trade remains positive.