Shipowners looking to order LNG-fueled newbuildings could face the risk of the vessels becoming stranded assets if policymakers push shipping towards zero-emission fuels, a new study has found. The study by University College London’s UCL Energy Institute revealed that, depending on the course that shipping’s decarbonization takes, the value at risk of being stranded could range from $129bn to $848bn in 2030. An asset is considered stranded when its value is written down prematurely, that is, before the end of its planned lifespan. The higher end of that risk estimate is based on several “big ifs”, including the assumption that LNG-fueled vessels cannot be retrofitted to run on zero-carbon alternatives. “We show that if there is a large uptake of LNG-capable ships … which is a big if, and if the shipping industry is to remain within a 1.5-degree trajectory, and this is a second big if, then yes, indeed, there is a big value at risk of LNG fuel ships in 2030,” said lead author Marie Fricaudet, a PhD student at UCL.

But the researchers pointed to other scenarios. If the industry moves toward retrofitting LNG-fueled ships and those that run on low-sulphur fuel oil to ammonia power, this will lead to $129m in stranded assets. That is because the natural gas-powered ships would lose their value premium compared to conventionally fueled vessels, UCL found. That rises to $210bn if ammonia newbuildings hit the water and the competition pushes down the secondhand value of LNG-fueled vessels. The stranded value risk also creates another potential problem: it creates the risk to shipping’s low-carbon transition because it increases the cost of decarbonization and creates incentives to resist aligning the industry with the goal of keeping global warming below 1.5C, the authors found. “To minimize these risks, investors (shipowners and financiers) should consider not ordering LNG-capable ships and investing in conventionally fueled ships which are designed for retrofit to zero-emission fuels,” they wrote.

For owners of existing LNG-fueled vessels, preventing their ships from becoming stranded assets could involve retrofitting to new fuels down the road or depreciating their vessels at a faster rate to assume a shorter useful lifespan, UCL said. “The rule of thumb of having depreciation of a shape over 20 to 25 years might not hold true anymore. So maybe you must consider depreciation curves more like 15 years or 10 years,” Fricaudet told TradeWinds. LNG’s role as a transition fuel in shipping’s decarbonization has been coming under increasing scrutiny because its main ingredient, methane, is a more potent greenhouse gas than CO2. While current regulations can incentivize LNG-capable vessels now, UCL said achieving the aims of the Paris Agreement requires moving away from LNG as a fuel. Proponents of the fuel, however, contend it provides CO2-equivalent emissions reductions now while opening the door for use of renewable LNG, made of biofuel or synthetic e-methane, in the future. In addition, shipowners are waking up to regulatory threats of methane, with seven big-name players, Mediterranean Shipping Co, Carnival Corp, Seaspan Corp, Shell, Lloyd’s Register, Knutsen Group and Maran Gas Maritime, recently launching the Methane Abatement in Maritime Innovation Initiative.

The UCL study acknowledged that if shipowners can secure bio-LNG or e-LNG at prices competitive to ammonia, they are unlikely to face stranded value. “Both of those fuels are, however, unlikely to be competitive with other fuels such as ammonia, which is currently one of the most promising alternative fuels,” UCL said in the study. Proponents of LNG as a marine fuel are more optimistic about the ability to shift to renewable LNG. SEA-LNG, a multi-sector industry group that promotes the fuel, has argued that other alternative fuels have a long pathway to travel before they can be delivered in a scalable way that is truly green, with zero carbon emissions up and down the value chain. And the group believes renewable LNG will be more available than many detractors believe. Chairman Peter Keller recently told TradeWinds that while many point to ammonia as a leading zero-carbon option, they overlook the lack of availability of green volumes and the safety concerns over using the chemical as a fuel. “There is no such thing as green ammonia right now; there will not be for a decade or two. Just as there’s no green method methanol yet,” he told TradeWinds. “And no one has, and we’re now seeing it from the class societies, … effectively addressed the safety issues of ammonia.”

Scenario                                                                                                                                                               Stranded value for LNG-fueled fleet

Uptake of bio-LNG and e-LNG and availability at prices competitive to ammonia                  $0

Retrofitting to ammonia and competition with LSHFO                                                                      $129bn

Retrofitting to ammonia and competition with ammonia newbuildings                                    $210bn

Retrofit impossible                                                                                                                                          $848bn

China steel production ticks up in August

Chinese crude steel production increased by 0.8% YoY and 3.0% MoM in August, according to the National Bureau of Statistics. According to Reuters, Chinese steel inventories continue to decline. Rebar and HRC stocks have both declined by 9.4% and 11.1% MoM to 4.9 MMT and 2.6 MMT, respectively. Across all the major steel products, Chinese inventories have declined by 9% to 12 MMT. This is also 37.6% below the highs for this metric in 2022 back in March. With end-demand for steel continues to be weak amid a struggling property sector, steel prices remain depressed despite the falling inventories. Current SHFE rebar futures prices printed $552/tonne, declining by 5.5% MoM. Earlier today, the PBoC opted not to further ease monetary conditions by keeping all benchmark lending rates as they were, aiming at supporting its declining currency. The current 1-year and 5-year loan prime rates are therefore unchanged at 3.65% and 4.30% respectively.

Chinese grain demand falls in August

China imported 11 MMT of seaborne grain in August, decreasing by 28.2% YoY. The persistent covid-zero restrictions have reduced the country’s demand for food as restaurants across most regions are sporadically locked down. Grain shipments to China on the Panamax and Supramaxes each declined by 24.0% and 50.8% YoY, respectively. More specifically, China imported 6 MMT of Brazilian soybeans on bulk carriers in August, declining by 25.9% YoY. Of the major producers, Australia was the only country to show growth in grain shipments to China, although in minor volumes. China imported 600k tonnes of predominantly wheat from Australia, almost doubling YoY. Despite the Black Sea grain deal helping soften prices in certain grain markets, dry weather across the US and ECSA have capped these declines, keeping China’s demand on the seaborne market subdued.

Tolls for vessels using the Suez Canal are set to rise by 15% next year except for dry cargo and cruise ships which will increase by 10%. The transit toll increases from January 2023 were announced at the weekend by Adm. Ossama Rabiee, Chairman and Managing Director of the Suez Canal Authority. According to the SCA the increases are based on a few pillars, the most important of which is average freight rates for various times of vessels.

“In this regard, there were considerable and consecutive increases within the past period; especially in containerships’ freight rates, compared to those recorded before the Covid-19 pandemic which will be reflected in the high operational profits that will be achieved by navigational lines throughout 2023 in light of the continued impact of the disturbances in global supply chains and the congestion in ports world-wide, as well as the fact that shipping lines have secured long-term shipping contracts at very high rates,” said Adm Rabiee.

The much-improved performance of the tanker market was also noted by the SCA with daily crude tanker charter rates up 88% compared to average rates in 2021, average daily rates for LNG carriers increasing by 11% compared to the previous year.

Tolls for all vessel types including tankers and containerships will increase by 15%. The only exceptions are dry bulk ships, where charter rates are currently extremely low and cruise ships, a sector still recovering from an almost total shutdown during the pandemic. It comes at a time when ship operators already face rising fuel costs, however, the increased savings made on higher fuel costs by using the shorter route through the Suez Canal was used in part to justify the toll increases.

The Suez Canal offers a significantly shorter route between Asia and Europe with the alternative involving sailing round the Cape of Good Hope. When the Suez Canal was blocked by the grounded containership Ever Given in March 2021 analysts Sea Intelligence estimated based on vessels sailing at 17 knots transiting via the Cape of Good Hope would add seven days to a Singapore to Rotterdam voyage, 10 days to West Mediterranean, a little over two weeks to East Mediterranean and between 2.5 – 4.5 days to the US East Coast.

Adm Rabiee also noted that the increases are inevitable given current global inflation of over 8% and increasing operational and navigational costs for the Suez Canal. “It was emphasized as well that the SCA adopts a number of mechanisms with the sole aim of having its pricing policies cope with the changes in the maritime transport market and to ensure that the Canal remains the most efficient and least costly route compared to alternative routes,” the Authority said.

These take the form of rebates of up to 75% for specific sectors of shipping for defined periods if market conditions result in the canal becoming less competitive.

The panamax bulker sector’s slide late last week after a two-week rally may continue this week, lest the grain trades from the east coast of South America and US Gulf Coast come to the rescue, BRS Brokers said. The projection by the French shipbroker came after the Baltic Exchange’s Panamax 5TC of spot-rate averages across five key routes declined 4.8% to just over $17,900 per day on Friday, continuing a downward slump that started the day before.

The FFA market also indicated darker days ahead for panamaxes by staging a two-day decline at the end of last week that took the market into backwardation when futures fall below spot rates. October contracts have fallen 15.1% from last Wednesday to $16,929 per day on Friday.

The Baltic Exchange was closed on Monday for the UK public holiday honoring the death of Queen Elizabeth II.

BRS Brokers said that this week, many will have their sights focused on markets in the US Gulf Coast and east coast of South America, which had previously been the market’s “saving grace”. “If these disappear or weaken for next week, we could expect the downward trajectory to continue,” the shipbroking arm of France’s BRS Group said on Monday. “With the UK public holiday on Monday for the funeral of Queen Elizabeth II, we may see a more somber mood to start the week, although many will likely take a slow start while watching to see which direction the market will take.”

The market on the east coast of South America continued softening on Monday with bids from charterers “harder to come by” as owners looking to fix ships on Monday had to lower their rates significantly, BRS said. “On the cargo side of things, with no remaining September loadings, it appears we can now focus fully on October,” the shipbroker said. “We did see a couple of fresh [transatlantic voyage fixtures] today giving the list a minor boost, however for now we wait to see what the start of next week brings to the table.”

The freight rate for the P7 grain route from the US Gulf Coast to Qingdao declined 2.9% to $57.826 per tonne on Friday, while that for the P8 grain trade from Santos, Brazil, to Qingdao slipped 2.4% to $49.483 per tonne on Friday.

The two-week strike at the port of Liverpool on the west coast of Britain will start this evening after unions and Peel Ports failed to reach a pay deal. The strike will coincide with another round of industrial action at Felixstowe, the country’s largest container port, where workers will down tools for eight days from next week.

Research from VesselsValue shows that average waiting times for containers at Felixstowe shot up in August during the last round of industrial action, rising from about five hours earlier in the summer to a peak of 30 hours during the strike.

Arshad Dadabhoy, trade and customs specialist team lead at the UK’s Institute of Export and International Trade’s academy, commented on the impending twin strikes: “The interruption to supply chains causes havoc across many sectors, but is particularly acute in manufacturing and retail, where companies need to source products, parts and components from across the world.”

“These disruptions will delay the peak season cargo coming from China to Europe. The cargo ships will be diverted to other ports in Europe and the UK, adding pressure to the congestion in the ports of Bremerhaven, Hamburg, Rotterdam, and major port hubs where our proprietary data shows container availability levels are already at a very high level,” said Christian Roeloffs, cofounder and CEO of Container xChange.

Container shipping has been warned to brace for a hard landing rates-wise as multiple indices around the world plunge further. Utilization rates are sliding despite an increase in blank sailings. Spot rates, as recorded by the Shanghai Containerized Freight Index (SCFI), are on a “fast-declining trend” according to a new report from Jefferies. The overall SCFI spot rate index for rates out of China on a variety of trade lanes declined another 9.7% last week. Seen over the past four weeks the index has dropped 33% making it the second largest four-week drop since the beginning of the SCFI index in 2009, according to analysis from Vespucci Maritime.

On average the implied freight rate for voyages originating from Shanghai to worldwide destinations has fallen to $2,500 per teu, half of the peak seen in January. The current figure remains comfortably above the long-run pre-2020 average of $1,000 per teu. Sea-Intelligence warned in its latest weekly report that there is no underlying structural support for the high rates on the transpacific and Asia-Europe trade lanes and that support is on the brink of disappearing on the Atlantic as well. “[T]he renormalization rate levels are currently undergoing will also see a hard landing, in the sense that we should expect freight rates to drop lower than the longer-term normal, followed by a distinct rebound,” Sea-Intelligence forecast.

The ongoing negative sentiment has taken a further toll on charter rates, with the index operated by Clarksons Research falling 26% week-on-week last week to 246 points. However, it remains more than four times the 2019 average. “Over recent weeks softening had primarily been visible in the feeder sector, but the effect of falling freight rates is now also further eroding hire rates in the larger size ranges,” Clarksons noted in its most recent weekly report. “The overall sentiment on the demand versus supply is turning negative,” analysts at Braemar said of the containership chartering scene, discussing the “astonishing” rapidity with which the market has turned.

With charter rates plummeting the market has been discussing the chances of renegotiations getting underway, something that happened in a big way in the wake of the global financial crisis 14 years ago. A recent issue of Splash Extra focused on this topic with most analysts polled suggesting the difference this time is the cash-rich position liners find themselves in. Jan Tiedemann, a shipping analyst at Alphaliner, told Splash Extra: “Most carriers are sitting on a big fat pile of cash. So even when the economy turns sour, they should be able to pay their bills for the next few years.”

According to Drewry analysis, which includes a forecast for 2023, in just three years, the container shipping industry will have made as much money as the entire previous six decades. The erosion of charter periods and rates recorded in recent months has also seen the sale and purchase market enter a period of hiatus as market players take stock. On the newbuild front, the first signs of a falling market are surfacing with Splash reporting last week of Seaspan’s decision to cancel four 7,700 teu newbuilds it had contracted K Shipbuilding in South Korea to construct.

Despite the declines seen across multiple container indices in recent months, most analysts are forecasting liner shipping will rake in record profits for the full year thanks to earlier secured long-term rates. Liner veteran John McCown, who heads up Blue Alpha Capital, predicted earlier this month that liner shipping will make a cumulative net profit of $244.9bn for the full year of 2022, a remarkable 65.2% improvement over 2021’s record results.

The momentum from the record monthly corn exports from Brazil in August (7.5 MMT) and positive export figures to date for September has certainly helped the Panamax market in particular recover off its yearly lows $11,000 towards the end of August to $19,000 earlier this week.

As sharply increased exports to the EU, North Africa and the Middle East attest Brazil is clearly picking up the sales for corn which would otherwise have been sourced from Ukraine on smaller sizes albeit that shipments from Ukraine are usually at their busiest in Q4 and Q1. Thus, in the eight months to August, Brazil has more than doubled corn exports to Iran (3.8 MMT up 2.3 MMT YOY), doubled to Egypt (2.4 MMT) and all but doubled to Spain (2 MMT), Japan (1.3 MMT), South Korea (0.9 MMT) and Portugal (0.5 MMT). Israel at 0.4 MMT is well ahead of last year’s 0.1 MMT. Given the longer sea miles most of these shipments to the above-mentioned destinations have been transported in Panamax tonnage. On the smaller sizes Colombia has also been a strong importer of late, the 1.1 MMT imports to August nearly triple that of the same period in 2021.

Last year Brazilian corn exports peaked in August at 4.3 MMT before rapidly falling back for the balance of the year; this year by contrast corn exports for September and October are forecast to be double that of the combined 4.5 MMT of those two months in 2021 which should continue to provide the Sub Cape market with much needed support until the US grain market starts to provide additional cargo from Q4 onwards. Strong Brazilian corn exports contrast with a more subdued Brazilian soybean export season which at 66 MMT in the eight months to August is running more than 6 MMT lower than last year.

Goodbulk has shed eight vessels from its fleet so far this year to capitalize on strong bulker prices. The disposals, including seven capesizes as well as the capesize owner’s solitary panamax, will have generated profits of $60m and $143.8m in free cash, the company said in a second-quarter earnings statement. A $15.6m gain was recognized in the second quarter, contributing to a $25.9m profit for the period, according to a statement.

GoodBulk, which trades on the Norwegian over-the-counter market, has announced a $45m payout to shareholders of $1.50 per share. The dividend matches that declared after the first quarter of the year and brings the amount of capital repatriated to shareholders in the last 12 months to $165m. At end-August, the company’s fleet had been reduced to 19 vessels, all of which were deployed on the spot market. Three of the vessels that have been sold have not yet been delivered to the buyers.

GoodBulk said that it had benefited “tremendously” from its participation in Capesize Chartering and the CTH Capesize Revenue Sharing Agreement. Its spot vessels had outperformed the Baltic Capesize Index by 24% in the second quarter and by 28% during the first half, it claimed. The company’s capesizes earned an average time charter rate of $23,304 per day during the second quarter.

Since the end of June, the market had remained “very sluggish,” it said. “Sluggish demand from China, combined with a large number of vessels in ballast to Brazil, and a drop in congestion can partly explain the current weakness.” However, negative market sentiment driven by fears of a global recession, rising inflation and the real estate crisis in China were also to blame for dragging freight rates down.

In selling the vessels, the John Michael Radziwill-led owner “took advantage of the strongest sale-and-purchase environment in eight years for the capesize segment.”

Overall, it is becoming easier to be more bullish for the Chinese steel/iron ore complex and for the Chinese economy in general. China’s steel output has now risen to the highest level since late June and is also now finally experiencing year-on-year growth. Much of the global economy outside of China continues to contend with significant weakness, but several pockets of the Chinese economy are continuing to fare well, which has been helpful for the dry bulk market recently. Also helpful were typhoon Muifa and Nanmadol last week, which again caused temporary vessel supply disruptions in Asia.

Decrease in Chinese Steel Prices

The average price of hot rolled coil in China ended last week at 4,140 yuan/ton ($591), which is 15 yuan less than a week ago. Previously, steel prices had increased during six of the prior eight weeks.   On a year-on-year basis, prices are down by 1,755 yuan (-30%).

Decrease in Chinese Steel Stockpiles

Stockpiles of flat and construction steel products at warehouses in major cities in China ended last week at approximately 12 MMT. This is 100,000 tons (-1%) less than a week ago and is down year-on-year by 3.4 MMT (-22%). Stockpiles have now declined for twelve straight weeks after previously rising for eight straight weeks.

Increase in Chinese Coal Port Stockpiles

The amount of coal stockpiled at major northern ports in China now stands at 21.3 MMT. This is up week-on-week by 700,000 tons (3%) and is up year-on-year by 5.1 MMT (31%).   Coal stockpiles at the major transshipment port of Qinhuangdao (which is included in major northern ports) ended last week at approximately 4.7 MMT. This is up by 300,000 tons (7%) from a week ago and up year-on-year by 800,000 tons (38%).

The most recently released data shows that daily crude steel production at large and medium-sized mills in China averaged 2.10 MMT during September 1- 10. This has marked a rise of 3% from late August, is up by 11% from the low seen in late July and is up year-on-year by 3%. The last time that daily crude steel production at large and medium-sized mills was up on a year-on-year basis was very briefly in late May.

Smaller Contraction in Chinese Home Sales

Sales of commercial buildings in China (the vast majority of which are residential homes) have remained in contraction, but so far this year the largest year-on-year contraction was in April. More recently, commercial building sales last month totaled 1.01 trillion yuan. This is up month-on-month by 4% and is down year-on-year by 20%. This year-on-year contraction has notably marked the smallest contraction seen since January/February (January/February data is published together each year instead of monthly as Lunar New Year can occur in either January or February). Still, though, sales have now contracted on a year-on-year basis for fourteen straight months. Also of note is that sales of residential buildings (which last year contributed to 89% of all commercial building sales) continue to experience a near identical trajectory. Sales totaled 896 billion yuan, which is up month-on-month by 4% and is down year-on-year by 21%. This has marked the smallest year-on-year contraction seen since December. As with commercial building sales, though, residential building sales have now contracted on a year-on-year basis for fourteen straight months.

Global Grain Trade Forecast Lowered

The USDA has released their latest global grain export forecast for the upcoming 2022/23 season and has reduced its expectations. The trade forecast is still very preliminary, but of note is that 488.9 MMT of exports are now expected.    This is 2.9 MMT (-1%) less than was forecast a month ago but would mark a year-on-year decline of 20.5 MMT (-4%). However, global soybean exports (soybeans are not technically classified as a grain) are now expected to rise year-on-year to 24.5 MMT. The USDA is now forecasting that global coarse grain exports in 2022/23 will total 226.4 MMT, which is 2.1 MMT (-1%) less than was forecast a month ago but would mark a year-on-year decline of 25 MMT (-10%).

Decrease in Indian Coal Stockpiles

India’s power plant coal stockpiles ended last week at approximately 26.8 million tons, which is 600,000 tons (-2%) less than was stockpiled at the end of the previous week but up year-on-year by 15.8 million tons (144%). Stockpiles have now fallen for four straight weeks after previously rising for thirteen straight weeks. They can still meet 10 days of demand, while the normal requirement for this time of year is to meet 19 days of demand.

Outlook

While dry bulk rates rose further last week as expected, it is difficult to say just how much last week’s typhoons temporarily aided the market. Though, the Chinese economy is continuing to improve and peak Northern Hemisphere winter electricity demand season is fast approaching, we remain very bearish for the global economy outside of China. China remains one of only three nations that has cut interest rates this year, and much of the rest of the world is continuing to raise interest rates into what are already weak economies. The hope remains that ongoing improvement in China will continue to help offset further weakening in the rest of the world. This certainly remains to be seen. For now, though, the market can take solace in the fact that China’s steel output has risen to the highest level since late June (along with year-on-year growth returning) and that China’s total electricity production and coal-derived electricity generation have both set records during each of the last two months.

Data released today shows that China’s coal-derived electricity generation not surprisingly set another new record in August, but this has not received much widespread attention.  China’s total electricity production also set a record, but this also has not received much widespread attention.  Overall, several pockets of China’s economy continue to show significant improvement and strength.

Coal-derived electricity generation totaled 598.9 billion kilowatt hours in August.  This is up month-on-month by 42.9 billion kilowatt hours (8%) and is up year-on-year by 82.2 billion kilowatt hours (16%).  The 16% year-on-year growth is impressive and marks the first time since October that China’s coal-derived electricity generation growth has fared better than domestic coal production growth.  China’s coal production last month totaled 370.4 MMT.  This is down month-on-month by 2.3 MMT (-1%) but is up year-on-year by 35.2 MMT (11%).  

Overall, we remain of our view that it is becoming easier to be more bullish for the Chinese economy.