Shippers are shelving their contract duties and turning to spot markets for vessel spaces as container freight markets soften further. Customers are taking a wait-and-see approach amid a persistent decline in freight rates, according to China United Lines executive vice-president Ding Wei. “And they often take the cheaper [freight all kinds] spot rates via forwarders rather than carrying out the contracts,” he told a container shipping webinar as part of the World Maritime Merchants Forum.

Spot markets were elevated by a pandemic-led capacity shortage when the contracts were signed last year and earlier this year, also at high prices. But a sharp correction since has raised concerns that shippers could walk away from their commitments as they have done in the past. Consultancy Sea-Intelligence earlier said that shipping lines had already offered to lower contract prices in order to maintain the relationship with large cargo interests. Mr Ding’s company is among those emerging carriers in the past year that have taken advantage of the market boom to enter the east-west mainline trades. It applied to be listed on the Hong Kong Stock Exchange in April, with plans to use the proceeds from the initial public offering to support its expansion. The Shanghai-based company ordered a pair of 7,000 teu ships, which will be the largest vessels in its fleet, in February at Shanghai Waigaoqiao Shipbuilding.

Mr Ding said container demand was expected to remain sluggish in the foreseeable future. “Based on the feedback from companies in the US, inventory there is still high and cannot be digested in the short term,” he said. “The American consumption structure has also changed significantly, with severe inflation, especially the soaring gasoline prices, eating up their demand for buying other products.” Inflation in the US was having a “far-reaching impact” he added. Not only CU Lines’ liftings from China, but also those from other Asian export hubs, such as Vietnam, Thailand and even India, had seen a fast contraction in volumes, he added. Weak demand aside, Drewry China general manager Du Yu also warned of a raft of newbuilding deliveries that will soon add strain to the already unbalanced market fundamentals. About 2.6m teu of fresh tonnage, or about 11% of the existing fleet, are scheduled to hit the water in 2023, including those to be pushed back from 2022, according to Drewry’s estimates.

Shipping lines may have to take a series of measures, such as scrapping, idling, delaying deliveries, slow steaming and blank sailing, in order to absorb that amount of extra supply. “If carriers don’t take enough action in capacity control, freight rates are bound to suffer a hard landing in future,” said Ms Du. But even if they do, the less than 2% demand growth forecast by Drewry is unlikely to be sufficient to shore up rates. “Rates will inevitably go down,” she said. “But the pace and extent of it is difficult to predict due to many other variables, like port congestion, the Russia-Ukraine conflict and the impact of the new emission rules.” Mr Ding said that small-and medium-sized carriers were facing more pressure in cutting costs and increasing vessel utility when compared to their large rivals. He added that CU Lines was now targeting e-commerce clients in southern China, aiming to provide them with more tailor-made, end-to-end services to increase the contract performance ratio.

Greek dry bulk giant Star Bulk Carriers has managed to sail two of its vessels safely out of Ukrainian waters under grain-export agreements while a third remains in place under war-risk insurance coverage. Star provided the update on Wednesday in a quarterly earnings report that revealed a third quarter profit in a softer market that fell below expectations of Wall Street analysts. The Petros Pappas-led bulker owner said its 82,200-dwt Star Helena and 82,200-dwt Star Laura (both built 2006) had been able to safely navigate out of Ukraine and “are now normally trading”. Meanwhile, efforts continue to free 82,400-dwt Star Pavlina (built 2021), which is manned by Ukrainian crew and has additional war-risk insurance. “We continue to closely monitor the situation to ensure that the interests of all stakeholders are safeguarded,” Star said in the report.

Star Bulk is continuing to churn out profits, just not as large amid a weakening market and below what industry researchers had projected. The Greek company reported adjusted net income of $136m, or $1.33 per share, which was lower than the analyst consensus of $143m, or $1.41 per share, according to a client note from Stifel analyst Ben Nolan. Net voyage revenue of $272m also fell below projections of $286m, as did adjusted Ebitda at $164m versus an estimate of $196m.

The trend continued with Star Bulk‘s quarterly dividend, which at $1.20 per share was lower than the $1.30 per share consensus. A weaker market was the culprit, as Star Bulk’s fleet-average time charter equivalent (TCE) rates came in at $24.365, which was 20% lower than the $30.626 earned in the third quarter of 2021. Star Bulk‘s quarterly numbers a year ago were higher across the board, adjusted net income of $224.7m or $2.19 per share on adjusted Ebitda of $278m.

“With continued elevated high sulphur/low sulphur fuel price spreads, our investment in scrubbers has contributed meaningfully to profitability for the quarter, strengthening our earnings and providing downside protection during seasonal downturns,” Pappas said in the statement.

“With the dry bulk orderbook at an all-time low and with new environmental regulations coming into force and expectations of a gradual reopening of the Chinese economy, we remain optimistic about the long term prospects of the dry bulk market despite global macro uncertainties.” Pappas said TCE for the quarter had exceeded applicable Baltic indices by 50%. Star Bulk also disclosed it had booked 66% of days in the fourth quarter at a TCE average of $22,772 per day.

The Greek shipowner also has been busy on the financial front. Star said it had refinanced three facilities ranging from $24m to $47m with lenders NTT Finance, CTBC Bank and Standard Chartered Bank. These contribute to a total of nearly $403m in refinancings over the course of 2022 that are touted to save $4.9m annually in interest margin.

“While the results were not overwhelming, the dividend still represents a healthy yield,” Nolan told clients. “Given the softness in shares recently, we expected [Star Bulk] should trade in line with the group or perhaps a premium tomorrow.”

Zim Integrated Shipping Lines has sharply lowered its full-year earnings guidance as the container market continues to normalize. The New York Stock Exchange-listed company expects earnings this year to be $400m to $500m lower than earlier projected. Revised guidance adjusted Ebitda for 2022 is $7.4bn to $7.7bn, which is down from $7.8bn and $8.2bn. Adjusted Ebit is this year revised to $6bn to $6.4bn, down from an earlier forecast of $6.3bn and $6.7bn.

Chief executive Eli Glickman said that both results would still represent full-year records. He singled out the normalization of the markets as a result of macroeconomic and geopolitical uncertainties. While profits remain incredibly strong, the Haifa-based carrier has issued a sharp drop in year-on-year profits. Zim reported a profit of $1.16bn for the three months to the end of September. That is sharply down on both the $1.46bn logged in the same period last year as well as the $1.34bn on the second quarter this year. Revenues were just 3% higher than the same quarter last year at $3.23bn. Volumes dipped 5% to 842,000 teu. Average freight rates rose 4% to $3,535 per teu in the quarter. “The near-term outlook for container shipping has shifted and the normalization in freight rates has begun,” Glickman said. “The proactive steps we have taken over the past two years, combined with our balance sheet strength, have transformed Zim and significantly enhanced our resilience both commercially and operationally, to best position our company for the ‘new normal.’”

Adjusted Ebitda for the third quarter was $1.93bn, a year-over-year decrease of 7%. Operating income (ebit) rose to $1.54bn, down 17% on the previous year. Glickman flagged the move by the company into niche areas including car carriers and digital freight forwarding. The company has declared a dividend of approximately $354m, or $2.95 per share, representing approximately 30% of third-quarter net income. “As we remain committed to our global niche strategy focused on attractive trades, we have opened several new services during this time, improving our port coverage to better serve our customers and making our commercial presence more resilient and diversified,” Glickman said. “We have identified growth engines complementary to our container shipping activities, such as our car carrier activities and digital freight forwarding subsidiary. We have also secured competitive and cost-effective newbuild capacity to support our commercial strategy and advance our and our customers’ ESG agenda.”

RCL saw its bottom line hit in the third quarter by rising costs and falling rates. The intra-Asian liner operator and owner saw net profits slide in the second quarter to THB 6.4bn ($180m). That is 13% down on the THB 7.3bn ($212m) logged in the previous quarter. It continues the drop in record profits since the start of the year.

Twinchok Tanthuwanit, who took over as president the Bangkok-listed company in June, said the result was “robust”. Net profits for the nine months of the year were 123% higher than for the same period last year at THB 22bn ($616m). However rising bunker costs and falling freight rates had conspired to hit the bottom line. That required RCL to make strategic adjustments and cost control, including service rearrangements.

RCL is the latest of a line of Asian carriers to report a downward trend in profits. Taiwanese operators Wan Hai Lines and Yang Ming Marine Transport have also reported lower profits. Wan Hai has become the first major carrier to report significantly lower profits on a year-on-year basis, according to Alphaliner. The intra-Asia specialist logged net income of TWD 22.4bn ($721m) for the third quarter, a decline of 37% on the same quarter a year ago. Yang Ming reported a net profit of TWD 49.7bn ($1.6bn) for the quarter, a smaller decline from a year ago of 2%.

Nearly all major carriers excluding some niche operators like US operator Matson have so far reported higher earnings year-on-year, even where profits fell over the previous quarter, said Alphaliner. Evergreen Marine reported a drop in net income after two and a half years of consecutive quarterly increases. Net profit was TWD 100.7bn ($3.2bn) in the third quarter, slightly down on TWD 102.3bn in the second quarter.

China industrial indicators show continued weakness in October

Chinese industrial output increased by 5% YoY in October, slowing from the 6.3% print in September, according to the country’s latest economic data release. Fueling some of the weakness was a string of lockdowns in the country leading up to the National Party Congress which started on October 16th.

Meanwhile, Chinese steel production declined to its lowest total since February, declining by 8.3% MoM to 79.8 MMT. Many mills are said to be reducing output as margins remain capped amid a demand picture that has yet to show a turnaround. Further, this has incentivized some producers to begin maintenance work while the market is suppressed. Keeping with this year’s theme of Chinese steel exports, the country exported 3.3 MMT of steel (excl. scrap) in October, rising by 17.3% YoY. One bright spot in today’s release was the country’s aluminum output, which totaled 3.45 MMT in October, an increase of 5.5% YoY. This is the country’s third largest monthly production figure on record, reflecting the robustness of its aluminum industry this year, given its reduced exposure to the property sector compared to steel.

Russia plans 23.5% tax on fertilizer exports

Russia’s trade minister has announced plans for a 23.5% tax on fertilizer exports from 1st January 2023, coming into force only when the market price exceeds $450 per tonne. Russian fertilizer exports totaled 2.2 MMT in October, increasing by 19.6% YoY. This comes despite a 25% YoY decline in exports to its main fertilizer buyer, Brazil, which totaled just 480k tonnes. Russian producers have taken advantage of tight global fertilizer supplies to diversify their exports. From January-October 2022, Russian fertilizer exports to India more than tripled YoY to 2.8 MMT. While India generally produces enough urea domestically, it relies on imports of nitrogen and potassium fertilizers. Indian authorities have been working to secure supplies of affordable fertilizers following exports quotas imposed by China last year. Exports to EU countries also increased by 80% YoY in October to 550,000 tonnes as Europe’s natural gas shortage limits domestic production of mineral fertilizers. To note, this trade remains unsanctioned. Other new markets for Russian fertilizer in October include Indonesia (150k tonnes), Egypt (120k tonnes), and Bangladesh (100k tonnes).

Savings made on fuel costs and gains on vessel sales helped bulker owner Golden Ocean ride out weak markets during the third quarter and keep profit at an elevated level. The Oslo and Nasdaq-listed shipowner reported net income of $104.6m and earnings per share of 52 cents for the third quarter, better than in the previous three months. During the third quarter of 2021, when freight markets were much stronger, Golden Ocean booked net income of $195.3m and 97 cents in earnings per share. The latest quarterly result includes a $21.9m gain booked on the sale of two ultramaxes, which generated net cash proceeds of $43m. The 60,300-dwt Golden Cecilie and Golden Cathrine (both built 2015) were sold in June to a buyer since revealed as Vanhui Shipping of Hong Kong. Chief executive Ulrik Andersen said the “solid” third-quarter result was generated despite “challenging” geopolitical and macroeconomic conditions. “Our modern, fuel-efficient vessels command a significant premium to benchmark earnings, a factor that has helped us consistently outperform the market this year,” he said. “Based on our contracted charter coverage, we expect to generate strong results in the fourth quarter of 2022 ahead of an expected seasonal slowdown in the first quarter of next year.”

Golden Ocean has continued to pay out to shareholders and has declared a dividend of 35 cents per share for the third quarter, just over half of what it paid out during the previous three months. But though the quarterly distributions have shrunk in size, the company pointed out that it has paid out just under $800m to shareholders since 2021. Golden Ocean’s 56 capesize bulkers earned an average TCE rate of $22,658 per day during the third quarter. Its 28 panamax vessels earned $23,563 per day on average. This quarter to date, Golden Ocean capesizes are earning $9,000 per day more than average Baltic Capesize Index earnings, which the owner attributed to fixed contracts, scrubber savings and its fuel-efficient fleet. Its panamaxes are earning a daily premium of $6,400 over the average Baltic Panamax Index assessment. Golden Ocean has bookings for 75% of its available capesize days this quarter at $23,100 per day on average. Its panamax vessels are booked for 78% of available days at an average daily rate of $19,100. Golden Ocean hopes that China’s gradual re-opening in 2023 and economic stimuli will boost iron ore and steel demand next year, despite headwinds from inflation and slower growth. It also noted that the bulker orderbook remains at near historic loads, which it thinks should help support a rebound in freight rates in 2023.

The shipowner has a very low level of forward coverage for the first three months of next year. Just 4% of capesize days are booked during the first quarter at an average daily rate of $21,300. Panamax days have a higher level of cover, with 21% of days booked at $21,150 per day. “Our strong earnings generation potential, combined with an expectation for historically low fleet growth, gives us confidence in our positive long-term outlook. This is reflected in our continued commitment to returning dividends to our shareholders and in our recently announced share buy-back program,” Andersen said. Golden Ocean in October commenced a $100m share buyback programme to repurchase its securities on the Oslo Stock Exchange and on the Nasdaq bourse in New York.

At the time, Andersen said the buyback was in its shareholders’ interest, given the decline in Golden Ocean’s share price. Uncertainty in the global economy has hit capital markets and near-term dry bulk freight sentiment, which has had a knock-on effect on equities for bulker owners. In September, Golden Ocean shares received a boost after US investment giant BlackRock become the shipowner’s second-biggest shareholder.

Shippers should prepare for a collective $14bn in costs as container lines pass through the cost of decarbonization and new environmental regulations, according to analysts at Drewry. As well as the IMO’s target to reduce greenhouse gas emissions by 50% from the 2008 baseline by 2050, carriers faced pressure from regional and national regulations that would raise costs, as would the technological changes in the design and propulsion of ships.

“Overall, the transition towards low or even zero-carbon shipping will result in higher costs and we believe that we have put together the first independent cost model to help shippers forecast and quantify additional medium-term direct costs, where they apply,” said Drewry managing director Philip Damas. Drewry pointed to the European Union’s carbon taxes, which will be applied via the Emissions Trading System and which will penalize high-carbon fuels. This would push carriers towards using greener fuels that had their own cost implications and which would be passed down to customers in the form of surcharges.

Drewry’s analysis suggest the cost of both the European carbon taxes and for transitioning all European container shipments to a greener fuel types would range between $3.5bn and $14.5bn, depending on the level to which carriers moved to LNG and other lower carbon fuels. MSC, the world’s largest carrier, earlier this month said it would pass on all European carbon taxes to its customers. “Should the EU fully implement its plans, we anticipate higher operating costs to be compliant,” MSC said in a statement. “We therefore plan to pass on the cost of compliance, as we have done with other forms of environmental regulatory costs in the past.” Based on a futures price of €90 ($90) per tonne, MSC estimated that the additional costs equated to €167 per teu for containers shipped from northwest Europe to Greece or Türkiye in the Mediterranean and €69 per tonne on the Asia-to-Europe route, the company said.

Maersk has also announced plans to introduce surcharges of €170 per feu for its Asia to northern Europe services and €185 per feu for northern Europe to US services to pass on extra regulatory costs. Using a 2022 baseline cost of $187 per teu for very low sulphur fuel oil, Drewry calculates that by 2024 this would rise by $50 per teu for VLSFO and by $234 per teu for liquefied natural gas, or in sector-wide terms, between $3.5bn and $14.5bn. “LNG is the main intermediate fuel type on the journey to decarbonize container shipping,” Drewry said. “Technology and fuel supply infrastructure are currently not ready for either green methanol or green ammonia. Future LNG prices will be heavily dependent on the ultimate future energy market.”

The agreement to export grain through a safe shipping lane in the Black Sea should be extended and scaled up when the current deal finishes this week, according to the UN and the scheme’s Western backers. The 120-day programme, brokered by Turkey and the UN, is due to end on Saturday amid efforts to persuade Russia to back the extension to ease global hunger and keep food prices down.

“We demonstrate our call on all countries to demonstrate their support for the Black Sea Grain Initiative,” the US, UK and European Union said in a joint statement. “We call on the parties to the initiative to extend its terms and scale up its operations to meet the evident demand.”

Any extension relies on Moscow, which briefly withdrew its support for the scheme last month after drone attacks on several Russian warships. It returned to the humanitarian scheme after assurances that the shipping corridor would not be used for military purposes.

The UN said all sides are still discussing the deal to extend Ukraine grain exports but nothing has been decided. Russia said it would give its decision at an “appropriate” time. Russia has expressed anger that it has been unable to export fertilizer owing to the indirect impact of sanctions.

UN secretary general Antonio Guterres told G20 leaders, minus Vladimir Putin, meeting in Bali, Indonesia that many of the obstacles to allowing the free flow of Russian food and fertilizers to global markets have been removed. “We are working non-stop to resolve all remaining issues, chiefly around payments, and to renew the Black Sea Grain Initiative,” he said. There is already a threat of a “raging food catastrophe” because of shortages, he added.

The UN-led Joint Coordination Center has reported a backlog of 60 bulk carriers waiting to load cargo as Ukrainian authorities continue to blame Russia for holding up inspections. Eight more vessels loaded with wheat, barley, corn and sunflower meal are awaiting inspection in Turkish waters. A further four were reported on Monday as being ready to depart Ukraine.

Data released today shows that China’s electricity production in October totaled 661 billion kilowatt hours.  This is down month-on-month by 22 billion kilowatt hours (-3%) but is up year-on-year by 21.6 billion kilowatt hours (3%).  The month-on-month decline is normal and occurs virtually every October.  Of more significance is the year-on-year growth.  Also of note is that industrial production grew year-on-year by 5%, and crude steel output grew year-on-year by 11%.

Hydropower output totaled 99.4 billion kilowatt hours.  This is up month-on-month by 400 million kilowatt hours but is down year-on-year by 20 billion kilowatt hours (-17%).  As we have been stressing in our research, hydropower output has been coming under considerable pressure due to low water inflow, and last month’s weakness has again come as no surprise.  The last three months have now seen China’s hydropower output contract on a year-on-year basis by 19%.

Coal-derived electricity generation totaled 445.3 billion kilowatt hours.  This is down month-on-month by 38.6 billion kilowatt hours (-8%) but is up year-on-year by 18.9 billion kilowatt hours (4%).  As with overall electricity production in China, coal-derived electricity generation normally declines on a month-on-month basis in October.  Year-on-year change is more noteworthy and the 4% growth is decent.

China’s coal production totaled 370.1 MMT.  This is down month-on-month by 16.6 MMT (-4%) but is up year-on-year by 13 MMT (4%).  As we have continued to stress, the government is no longer primarily focusing on improving safety and instead has shifted its focus to ensuring robust coal production. 

Chinese steel production for October came in broadly in line with the 5-year average of 80.0 MMT as the National Bureau of Statistic reported production of 79.8 MMT, down 8.3% MOM but up 11.4% YOY. This brings steel production in line YTD with last year.

The raw material intensive pig iron production was 70.8 MMT for October, down 4.2% MOM but up 12.4% YOY. Pig iron production came in 6.5% over the 5-year average for October, and now stands 2.6% above last year YTD. After strong steel production at the start of the year, we see volumes converging towards the historical averages into the seasonally weaker winter months.

Chinese coal production tallied 370.1 MMT in October, down 4.3% MOM but up 3.6% YOY, bringing the total YTD growth 13.3% higher than last year. Hence, coal production remains high as China continues to build strategic stockpiles as previously announced, while still keeping up imports. However, the elevated production numbers cast shadows on long term import demand from one of the major coal importers. Still, in the current markets, we believe coal exports should find an alternative importer.