Danish Ship Finance has published its latest keenly awaited biannual shipping markets report, the reading of which may prove uncomfortable for smaller, traditional owners. As shipping moves down its decarbonization path, far more ships will be tied up in longer-term contracts to pay for all the new, more expensive green fuels with larger owners better placed to handle this transition, Danish Ship Finance is predicting.

Vessels that are committed to long-term contracts are less likely candidates to participate in a future asset game, the Copenhagen outfit suggests. “These vessels will create value from the cash flow yield from operations rather than from the asset game,” Danish Ship Finance predicted, admitting that this may sound extremely unattractive to many, as the cash flow yield from operating vessels has been a weak driver of value across vessel segments and business models over the past 15 years.

The average shipowner today has four to five vessels. This extreme fragmentation will change with the incoming alternative fuels, the report, helmed by Christopher Rex, forecasts. “Few owners will have the balance sheet to secure long-term fuel offtake agreements with producers of alternative fuels,” Danish Ship Finance warned, adding: “The introduction of long-term fuel offtake agreements is likely to go hand in hand with long employment contracts to balance costs and income.”

The influential report, which tends to be read by thousands within the industry, also claimed that the first barrier to entry in shipping is about to disappear. “The ability to offer a premium product at a low price with a market-leading low-emission footprint is likely to present the first real barrier to entry into an industry that has traditionally competed on cost,” the Danish report suggested.

Vessel ordering in the dry bulk market has maintained its subdued nature throughout the year as freight rates have weakened and uncertainty over future regulation persists. We go through our latest supply-side forecast.

2022 setting the tone

Ordering this year has naturally slowed down as the freight market softened throughout the year. The current orderbook-to-fleet ratio now lies at 7.4% at the time of writing. Year-to-date, the dry bulk fleet has grown by just 2.3%, or 20.9m dwt. Looking to the end of the year, we expect the fleet to grow by 2.8% based on expected deliveries, although Covid-19 disruptions at shipbuilding yards in China does present the likelihood of some slippage into early 2023. This year, bulk carrier contracting has been dominated by the Kamsarmax and Ultramax sectors, grabbing a 32.3% and 43.0% share of total bulk carrier contracting in 2022 so far by number of ships, and so we forecast greater growth in these segments. These ships have proven most attractive given their relative price to the other vessel sizes and trading flexibility. Meanwhile on the Capesizes, ordering has been considerably low, with just 18 vessels ordered so far this year. In the event no more Capes are ordered this year, this would be the lowest year for Capesize contracting since 2001 (15).

One of the primary reasons for the slower ordering so far this year, and one we expect to persist into next year, is uncertainty over future propulsion and the viability of ordering a diesel engine vessel for the long term. So far in 2022, just 11 alternative fueled bulkers have been ordered, compared to 36 in 2021. Firstly, there are concerns over the safety of burning these fuels, namely ammonia, which can be dangerous if leaked. With regards to LNG, the future has become more unclear given the possibility of methane slip being included in forthcoming regulation. Yet it appears the largest hindrance to dual-fuel ordering is limited bunkering capacity of these new fuels, as well as the fuel’s cost compared to traditional fuel oil. Ultimately until the bunkering infrastructure and supply of these fuels improves, we expect the market to continue to take a cautious approach to ordering these designs, particularly as the dual-fuel vessels command a considerable premium to build compared to their conventional counterparts. While newbuilding prices have started to soften, they still lie near 10-year highs. In the current market environment, the high newbuilding prices have naturally driven hesitancy towards contracting given the weaker overall sentiment. In the meantime, yard slots are being filled by vessels from other shipping sectors, namely containers and gas carriers, which prolongs delivery times from future bulk carrier orders, mainly on the larger ships.

The points above explain several of the key reasons as to why we have revised our supply-side growth forecast downward and expect to see slowing fleet growth out till 2026.

Future orders

We forecast the fleet to grow by 2.8% next year which is largely a reflection of the current delivery schedule, but also an upward revision in scrap expectations. On the Capesizes we have specifically lowered 2025 deliveries from future orders due to slot availability as discussed above. As a result, we have revised our expected deliveries in 2025 down from 10m dwt to 4.4m (including those already ordered). In the Panamax and Supramax sectors we have reduced our forecast by 1.4m dwt and 685k dwt although these segments have still seen solid interest for both the Kamsarmax and Ultramax designs, which bodes well for future ordering despite the current market landscape. On the Handies, though ordering has been as subdued as the Capes, given the age profile of this fleet, we anticipate more ordering, rising to 2.6m dwt in deliveries in 2025, the highest since 2019. This is due to 24% of the fleet being aged 20 or older and these vessels do not face the same slot constraints as the larger ships.

Looking forward, we expect several of the factors causing low ordering in 2022 to continue into next year, namely alternative propulsion uncertainty. Another factor to consider looking to next year is the rising cost of capital globally as central banks tighten to fight inflation, making debt financing for a newbuild more expensive. However, we do expect newbuilding prices to ultimately begin to more closely reflect market conditions which should entice more contracting, and why we still expect positive fleet growth.

Removals

Despite the downward pressure in the dry market this year, vessel demolitions continue to be few and far between. So far this year, 2.8m dwt in dry bulk tonnage has headed to a scrapyard, translating to 30 ships, considerably below the 69 vessel removals last year. Grabbing most of the share of scrapping this year has been in the Capesize sector at 2m dwt (10 vessels) removed, compared to 5m dwt in 2021.

Given the lack of ordering, we expect the older vessels to trade for longer than previously expected with several of these likely sold into Russian trades as has been a trend in the past few months. In the longer term, we see dry bulk tonnage being demolished increasing near the levels of 2020 in 2026, largely due to scrap pools growing but also tightening regulation making the older ships less sustainable.

New York-listed Genco Shipping & Trading remains eager to expand on its current fleet of 44 bulkers and thinks opportunities might emerge in the first part of 2023. Genco chief executive John Wobensmith confirmed the ambition in answer to a question from BTIG analyst Greg Lewis on an earnings call, saying that while asset prices have come off in recent months, they may have further to go. “The short answer is ‘yes,’” Wobensmith told the researcher. “We’ve set this company up to always play offence. We’ve put ourselves in that position pretty solidly. We have an overall goal of expanding the fleet beyond normal fleet renewal. It’s a matter of finding the right opportunity. Asset prices have come down a little. But I still don’t think they match where freight rates are today.”

Wobensmith suggested that because newbuilding prices remain high, values are the secondhand market “could be a little more sticky and less correlated” to freight markets for the next few years. “But we think there could be some opportunities in the first part of next year. We’re focused on buying at the right time,” he said.

While the conversation did not go there, TradeWinds has reported that Genco investigated the acquisition of an entire company, Singapore-based Grindrod Shipping Holdings, earlier this year while values were still much closer to the top of the market. Genco submitted a shares-based offer for the company but was unwilling to improve it on request with the dry rates market starting to deteriorate. Connecticut neighbor Eagle Bulk Shipping then backed off a cash offer and Grindrod went to UK-listed Taylor Maritime Investments, subject to a tender offer that remains pending.

When Wobensmith talks about setting up the company to play offence, much of it has to do with Genco’s low debt levels, which fell to $180m or 11% on a loan-to-value (LTV) basis at the end of the third quarter. Its aggressive debt repayment within 2022 is also tied to a high-payout dividend strategy which saw Genco dish out $0.78 per share, a 56% improvement over the second quarter. But with the yield at 22%, the numbers also show Genco has some way to go to fully execute the strategy. It would like its share price to run up to the point that the dividends reflect a single-digit yield, and that’s not happening yet.

Genco recorded spot rates for its supramaxes and ultramaxes that were some $7,000 above the Baltic Supramax Index, and this without the benefit of exhaust gas scrubbers. Wobensmith told analysts his team had looked ahead in the second quarter and worried Ukraine grain shipments would be severely impacted by Russia’s invasion, so booked forward cover as a hedge. “We purposely began taking forward cover for third and fourth quarter. We didn’t believe there was going to be a whole lot of grain coming out of Ukraine,” Wobensmith said.

Shipping shares went for the ride as stock markets moved sharply higher in New York on Thursday as signs emerged that inflation is easing faster than expected. Cruise ship and container shipping, the sectors most exposed to consumer spending, led maritime shares in the rally that saw the Dow Jones Industrial Average gain more than 1,000 points in afternoon trading.

The big jump in broader US stock markets was widely attributed to new data that showed the Consumer Price Index increased a slower-than-expected 0.3% in October compared to the prior month. As the US Federal Reserve has pushed interest rates higher to combat inflation, swings in stock and bond markets have been driven by any data that could make the central bank take more or less aggressive steps.

After the latest price index reading, data from CME Group shows bond traders believe there is an 80% likelihood of a 0.5% interest rate hike next month, rather than 0.75% increases of prior meetings, according to the Wall Street Journal.

The Dow Jones US Marine Transportation Index, a basket of New York-listed shipping shares, added 3.4% in afternoon trading to reach nearly 224 points. Carnival Corp was the biggest beneficiary, with the Miami cruise giant’s New York-listed shares surging 12.8% to $9.65, the highest price for the struggling stock since late September. Its biggest rivals were close behind it, with Royal Caribbean Group’s stock price rising 8.7% to $57.08 and Norwegian Cruise Line Holdings shares soaring 8.6% to $17.05.

Excluding microcap shares, the next biggest shipping gainers were in the container sector. Hawaii liner operator Matson, whose shares leapt 7.8% in afternoon trading to reach $70.75, while New York-listed shares of Israel’s Zim jumped 6.4% to $24.66.

The leading stock in dry bulk was Genco Shipping & Trading, whose shares surged 6.3% to $13.10 even though the New York-headquartered shipowner reported lower-than-expected quarterly earnings. Despite the profit miss, the company’s results drew positive reactions from analysts as it hiked its dividend payment and strong spot market bookings in the ongoing fourth quarter.

The rout in freight markets did not hold back results for bulker owner Belships during the third quarter. The Oslo-listed company, which has 31 supramax and ultramax vessels, saw improved bottom-line growth compared to the previous three months and is paying out another dividend to shareholders. Belships recorded $49.8m in net profit for the third quarter, up from $35.2m in the same period last year. The Norwegian firm said the positive net result was “mainly driven by fleet expansion and the book gain from the sale of Belpareil of $10m”. Operating expenses have also fallen significantly compared to last year, which Belships said was due to lower Covid-19-related crewing expenses and vessel takeover costs.

Belships has declared a dividend of NOK 0.75 per share for the three-month period, the same as for the second quarter. The net result came despite a 25% year-on-year fall in net freight revenue for the whole fleet, which was $151.1m during the third quarter. Belships vessels earned a gross time-charter equivalent (TCE) rate of $24,155 per day on average, much the same as they did during the second quarter. The Baltic Supramax Index (BSI) averaged $19,728 gross per day in the third quarter. Belships’ in-house commercial platform Lighthouse Navigation continued to deliver solid results, but weaker freight markets could have an impact. The operator generated Ebitda of $10.1m for the third quarter, but this figure includes provisions for potential loss-making contracts of $4.6m based on the forward freight market at the end of the quarter. Belships’ overall Ebitda for the period was $56.4m, including the contribution from Lighthouse.

Looking ahead, Belships has fixed 90% of its available ship days during the fourth quarter at an average gross rate of $22,900 per day. Its daily cash breakeven for 2023 is approximately $10,900 per vessel. It said that 64% of its ship days in the next four quarters are fixed at $22,300 per day.

Belships has been active in fixing vessels on period contracts and chartered out a further three ultramaxes in October. The China-built Belpareil (built 2015), which was one of the oldest in the Belships fleet, was sold in May for around $29.5m to a Norwegian KS company. The buyer has since been named as Atle Bergshaven’s Bergshav Management. Meanwhile, Belships’ fleet has grown to 31 vessels with the delivery of the 64,000-dwt Belyamato this month from Imabari Shipyard in Japan.

Shortly after Belships announced its third-quarter results on Thursday, CEO Lars Christian Skarsgard acquired 25,000 shares in the firm at a price of NOK 14.38 per share through his company AS Torinitamar. Skarsgard subsequently owns 19,900 shares in his own name; 775,000 shares through AS Torinitamar and 5m options.

Belships shares were trading at NOK 14.70 as of 10:30am in Oslo on Thursday, down by 2.65% since the market opened.

As we discussed back in October, the September US consumer inflation number coming in higher than expectations at the time was obscuring the fact that inflation was nevertheless continuing to decline.  September’s consumer inflation reading came in higher than expected at 8.2%, but it marked yet another decline.  Inflation peaked in June at 9.1%.  In July, it fell to 8.5%.  In August, it fell to 8.3%.  And in September it fell to 8.2%.  New today is that data for October has been released and shows that inflation has fallen even further to 7.7%.  It has now fallen for four straight months, but also importantly came in lower than expected.  This time around, the global financial markets are reacting very positively. 

Separately, of note in China is that 1,185 new daily coronavirus cases were reported today.  While down from the 1,346 new cases reported yesterday, this marks only the second time since April 30th that over 1,000 new daily cases have been reported.   We continue to urge caution if anticipating any near-term reopening in China.

Hapag-Lloyd chief executive Rolf Habben Jansen has warned of ‘difficult waters’ ahead due to falling spot rates and rising inflation. The German liner boss made the comments as the Hamburg-based carrier confirmed it had doubled profits in the first nine months of the year. Group profit for the first nine months rose to €13.7bn ($14.6bn) on the back of rising freight rates. That was up from €5.56bn in the same period in 2021. But there are already signs of weaker demand for container transport and consequently a slight easing in the shortage of available transport capacities.

That will mean the container market will continue to ‘normalize’ in the coming months, Habben Jansen said. “Thanks to higher freight rates, we have achieved an exceptionally strong nine-month result,” he said. “However, we are also seeing that the market environment has deteriorated further in the third quarter. This is evident, for example, in falling spot rates and rising inflation-related unit costs,” he said.

The jump in profits and revenues is due to higher container freight rates. Average freight rates rose to $2,938 per teu in the nine months, up from $1,181 per teu in the same period 2021. Revenues to €26.7bn ($28.4bn) for the period, up from €14.9 in the same period last year. Transport volumes were on par with the prior-year level, at approximately 8.9m teu.

Markets have been disruptions in the global supply chains, which resulted in longer turnaround times for ships and containers. However, that situation was already beginning to change, Habben Jansen noted. “In the coming months, the strained situation in the global supply chains should continue to normalize,” he said. “At the same time, our strong balance sheet will help us to stay on course even in difficult waters.”

Hapag-Lloyd is sticking with its full-year profit forecast that it issued on 28 July. Ebitda full the full year is forecast the range of $19.5bn to $21.5bn this financial year. However, this forecast remains subject to considerable uncertainty given Russia’s war of aggression on Ukraine, supply chain disruptions that have not yet been fully resolved, and the effects of the COVID-19 pandemic. In the first nine months, the company reported Ebita of $16.6bn (€15.6bn) and Ebit $15.1bn (€14.2bn). Transport expenses climbed to €10.1bn ($10.8bn), due to significantly higher bunker prices and expenses for container handling.

The downturn in markets has hit share price which has halved in the past three months to €175 per share. “We will stick to our strategic agenda while investing more in quality and growth as well as in the further decarbonization of our fleet,” said Habben Jansen.

Oslo-listed 2020 Bulkers has revealed a steep drop in earnings as market factors moved against it. The Tor Olav Troim-backed newcastlemax company said net profit in the third quarter was $7.3m, down from $21.6m a year ago. The owner experienced an “unseasonal weak market”, it added.

2020 Bulkers blamed the unwinding of congestion and a reduction in fleet inefficiencies. This effectively added vessel supply to the global fleet, the owner said.

The company also cited “lagging” Brazilian export volumes, which were down 2.4% year-on-year. But total capesize tonne-miles are up 1.3% year-on-year so far in 2022.

Revenue dropped to $18.4m, compared to $31.2m in 2021. The average time charter equivalent (TCE) earnings were $25,800 per day. In October, this figure rose to $26,700. The company declared a cash distribution of $0.10 for last month.

2020 Bulkers moved another of its newcastlemaxes on to a fixed-rate charter in October. The 208,000-dwt Bulk Sandefjord (built 2019) has been switched from an index-linked deal to one that guarantees $14,392 per day until the end of next March. The vessel will also earn a premium related to the fuel cost savings of $4,500 per day from its scrubber. The rate was above the average of the Baltic Exchange’s 5TC Capesize Index during September of $11,781 per day.

In September, the 208,000-dwt Bulk Sao Paulo (built 2020) was also switched from an index-linked contract previously. This means half the fleet of eight vessels are now on fixed-rate charters.

South Korean liner giant HMM has waved goodbye to an era of record profits and warned that container freight markets will continue to cool. The Seoul-based carrier logged a net profit of KRW 2.6trn ($1.9bn) for the third quarter, 11% down on the record KRW 2.9trn in the previous three months.

The company expects a further unravelling in the coming months of factors that have underpinned container markets. It expects container demand to be under downward pressure due to considerable uncertainties related mainly to widespread inflation, economic slowdown, and geopolitical tensions. “Weakening purchasing power and increased inventory of major retailers would also negatively affect global container volumes,” it added.

Revenues remain relatively stable at KRW 5.1trn for the third quarter, despite the slump in container freight rates. But port congestion and inland logistics bottlenecks in main locations have been alleviated, which had the effect of increasing capacity in the entire supply chain.

Container rates on major east-west trades where HMM operates have gone into freefall in recent months. Spot rates on the trade from Asia to the US West Coast were $2,479 per 40-foot equivalent unit, down 87% compared with the same week last year, according to the Freightos Baltic Index. Nevertheless, the company has enjoyed the benefits of the historically high market.

Net profits for the first nine months tripled to KRW 8.6trn and revenues were substantially higher at KRW 15trn. Net profits for the third quarter were 13% higher than in the same period last year. Revenues were KRW 5.1trn, up 27% from KRW 4trn a year earlier.

The deteriorating market has led some observers to speculate that HMM could be in the red as early as 2024. Japanese investment bank Nomura last month predicted that the owner will probably start posting operating losses from the second half of next year. It cited the drop in freight rates, which affects HMM and its alliance partners Hapag-Lloyd, Ocean Network Express and Yang Ming Marine Transport.

HMM, founded in 1976 as a subsidiary of Hyundai Heavy Industries, was taken over by Korea Development Bank in 2016 as part of the government’s shipping industry restructuring. Ranked the eighth-largest liner operator in the world, HMM deploys 76 ships totaling 816,000 teu, of which 44 ships of 608,000 teu are owned.

Shipyards and shipowners face serious delays to deliveries in 2023, due to a skills gap in South Korea and Beijing’s zero-Covid policy in China, that could put newbuilding contracts in jeopardy. South Korean shipbuilding sources this week told TradeWinds that yards are facing their most serious labour shortfall since reopening in the wake of the pandemic in mid-2021 and that they are now struggling to produce the number of hull blocks required to meet their delivery schedules. In China, sources said some yards are declaring force majeure on newbuilding contracts as a precaution against further lockdown delays that continue due to Beijing’s strict zero-Covid policy.

The number of vessels involved is not known but 2023 is being billed as a big year in boxship deliveries. Clarksons’ monthly container ship report stated that fleet growth is expected to accelerate to over 7% in 2023 to 27.5m teu from 2022’s 25.6m teu as deliveries are set to reach new highs. But brokers said the market conditions for the container ship sector are expected to soften further in 2023 and 2024 due to the global recession and the easing of port congestion. And with the pressure of excess boxship tonnage supply, brokers and shipyards fear charterers and shipowners may try to walk out of expensive newbuilding contracts that they inked under the pretext that shipbuilders fail to deliver the vessels on schedule.

South Korea’s labour woes worsened this week when 1,100 Vietnamese welders were denied entry due to forged work permits and visa issues. A prolonged strike at Daewoo Shipbuilding & Marine Engineering has added to the logjam, while there is also talk of possible industrial action at Korea Shipbuilding & Offshore Engineering (KSOE), which controls the Hyundai group of shipyards. The manpower shortfall comes as most yards have built up orderbooks stretching to the end of 2025 and into 2026 and are overloaded with work.

South Korean yards had reduced the number of shipyard workers by more than half, from about 203,000 in 2014 to 92,000 today, in response to the post-2008 market collapse. The Korea Offshore & Shipbuilding Association estimates that the labor-intensive industry is currently facing a shortage of 9,500 workers, representing about 10% of the current workforce. The shortage has caused friction between yards competing in a tight labour market. In August, four South Korean shipbuilders — Samsung Heavy Industries, DSME, K Shipbuilding and Daehan Shipbuilding — accused KSOE of poaching their workers. The yards filed a complaint with competition regulator the Korea Fair Trade Commission, claiming the Hyundai shipbuilding group had offered attractive salaries to lure their employees.

The shortage of ship hull bock sections is so severe that Hyundai Heavy Industries has brought forward the reopening of its Hyundai Gunsan yard by two months to try to catch up with shipbuilding production. Hyundai Gunsan was shut five years ago during the shipbuilding market downturn but is set to reopen to fabricate hull blocks. Hyundai Gunsan will employ 750 workers and produce 100,000 tonnes of blocks annually for HHI, Hyundai Mipo Dockyard and Hyundai Samho Heavy Industries. Meanwhile, in China, Beijing has given no sign that it will be lifting the pandemic restrictions despite mounting concerns that its zero-Covid policy is hurting the economy. Shipyards continue to be subjected to unplanned lockdowns as Covid-19 infections break out and some have taken to declaring force majeure newbuilding deals early to protect themselves. Lockdowns effectively mean lock-ins for the yards, making access for foreign nationals to oversee for sea trials, for example, impossible. Force majeure releases both parties in a contract from liability if there is an unforeseen event such as war or interference from governments. Sources said Chinese shipyards have “learned” from the previous Covid lockdowns and are declaring force majeure as a precautionary measure, with it only coming into effect if deliveries are delayed. One broker said: “Some shipbuilding companies in China that we know of are writing to shipowners and declaring force majeure as shipyards’ gates are closed and it is impossible to arrange for outside engineers to participate in the sea trails of the newbuildings. “There is a rising fear that should shipyards fail to meet the delivery schedule under the contract terms, and if the shipping market deteriorates further, shipowners may try to get out of the deals. This is especially so for the container ship sector.”