Ocean Rate Report: Boxes Fall, LNG And Refined Products Rise

Ocean cargo freight rates and shipping charter rates have generally risen over the past week, albeit not dramatically. The problem for ship owners is that in most cases, rates have been improving off a very low base.

Market conditions for shipping remain relatively unappetizing, while transport costs for cargo shippers remain affordable. Of the rate segments that are still declining, trans-Pacific container shipping costs stand out as the one to watch. It could be a ‘canary in a coal mine.'

Containers

Another week has passed, and still no evidence in the pricing of containerized cargo that U.S. shippers have any new-found urgency to import more Chinese goods ahead of future tariffs.

In the second half of 2018, the threat of new U.S. tariffs led to a swell in U.S. import volumes and a concurrent rise in the cost to ship containers from China to the U.S. The Freightos Baltic Daily Index, which tracks changes in the cost to ship containerized cargo, is showing no such trend currently.

Comments by U.S. President Donald Trump in early May signaled the potential for the next round of tariffs. A comparison of various regional indices over the past month should theoretically show evidence of a price reaction – unless that reaction is delayed for logistical reasons, or unless it won't happen this time around.

The Freightos Baltic Daily Index for China to North America West Coast shows a decline of 20 percent over the past month. This is a notably different pattern than seen in indices covering box trade from China to North East Europe (FBXD.CNER), which rose 3 percent in the same period; China to the Mediterranean (FBXD.CMED), which increased 23 percent; and the global index (FBXD.GLBL), down 4 percent.

Meanwhile, all four of these daily indices – China to North America West Coast, to North East Europe, to the Mediterranean, and the global index – are relatively unchanged year-on-year. In the one-year chart, the outperformance of the North American index compared to others in reaction to the tariff threat is clearly evident in the second half of last year, but is absent in the past month following the disclosure of new potential tariffs.

Public shipping companies with exposure to spot box shipping rates: Maersk, Hapag-Lloyd, Matson (NYSE: MATX)

LNG carriers

After the sharp pullback in liquefied natural gas (LNG) shipping rates at the beginning of this year, this sector's charter market is beginning to heat up yet again.

As of May 30, investment bank Clarksons Platou Securities estimates that average rates for MEGI (M-type, electronically controlled, gas injection) LNG carriers are at $74,000 per day, up 10.5 percent week-on-week and 51.5 percent month-on-month.

According to Randy Giveans, the shipping analyst at investment bank Jefferies, "Last week, LNG shipping spot rates for TFDE [tri-fuel diesel engine] carriers in the Atlantic continued to strengthen to $65,000 per day, the highest level since January."

He continued, "Additionally, one-year time charter rates for TFDE carriers are approaching $80,000 per day, further supporting our expectation of increased fixture [chartering] activity and spot rates throughout 2019 and 2020 as several new liquefaction facilities come online, combined with a sharp slowdown in uncommitted newbuilding deliveries."

By ‘uncommitted newbuilding deliveries,' Giveans is referring to speculative orders that are not committed under long-term charters to export projects. The more such speculative orders, the lower the future prospects for spot rates.

"LNG spot markets continue to rally after a difficult first quarter, with rates moving higher in each of the last four weeks," said Amit Mehrotra, the shipping analyst at Deutsche Bank.

"While elevated Asian LNG inventories weighed on trading opportunities and spot shipping rates in the first quarter, normalizing inventory levels and low Asian LNG prices incentivize restocking. We also note that low Asian LNG pricing can drive coal-to-gas switching, while ‘contango' in LNG commodity markets should promote vessel demand and even storage opportunities," said Mehrotra.

Public companies with spot LNG shipping exposure: GasLog Ltd GLOG, Golar LNG Ltd GLNG, Flex LNG, Cheniere Energy LNG

Product tankers

Product tanker rates are also improving, particularly in the medium-range (MR) segment, a category comprised of MR1s (25,000-39,999 deadweight tons or DWT) and MR2s (40,000-54,999 DWT). Clarksons Platou Securities estimates that as of May 30, MRs were averaging $14,500 per day, up from a 52-week average of $13,900 per day.According to Mehrotra, product tanker rates have recently increased "as global refinery throughput begins to rise after elevated spring refinery maintenance schedules, a catalyst we have been waiting for. The MR segment led the group with spot rates [last week] up 15 percent week-on-week to $13,200 per day, led by strong activity levels in the Pacific. The MR segment also benefited from rising rates out of Northern Europe and improved demand out of the U.S. Gulf."

Mehrotra added, "Product tankers spot markets are up nearly 100 percent year-on-year. We are encouraged to see the market tighten even before IMO 2020 tailwinds take hold, which we expect will drive significant demand for the industry." The IMO 2020 rule will cap sulfur content in marine fuel and emissions starting January 1, 2020.

According to Jon Chappell, the shipping analyst at investment bank Evercore ISI, "Recent regional updates, when cobbled together, add even more optimism to the near-term outlook [for product tankers]. Specifically, China has just released its second batch of refined product export quotas, up 30 percent from the first round and already exceeding the total from 2018."

Chappell continued, "At the same time, as the U.S. driving season begins, gasoline inventories on both coasts are at five-year seasonal lows, while inventories at the major European hub are at nine-month lows. We believe that as excess Asia production is redistributed to Western markets, the long-haul nature of this trade will only add to the other favorable market drivers."

Public companies with spot product tanker exposure: Scorpio Tankers STNG, Ardmore Shipping ASC, Diamond S Shipping DSSI

Dry bulk

Sentiment remains unsettled in dry bulk, and spot rates are driven by sentiment. Despite ongoing hopes that Brazilian iron-ore miner Vale could overcome its issues and normalize exports, those challenges still linger – and as long as they do, sentiment will favor charterers over owners, pressuring rates.

On a positive note, rates are off the extreme lows seen in the first quarter. According to Clarksons Platou Securities, rates for Capesize bulkers (bulk ships with a capacity of over 100,000 DWT) averaged $13,200 per day as of May 30, up 43 percent month-on-month.

Clarksons Platou Securities shipping analyst Frode Morkedal commented, "In dry bulk, uncertainties caused by weak Brazilian volumes after the Vale tailings dam incident continue to affect market sentiment, although Capesize earnings should be considered fairly strong, trending above the five-year average. Even without Brazilian volumes coming back, we argue that rates should improve with seasonality and be further helped by a tighter market balance as more vessels exit the market for scrubber retrofits [to comply with the IMO 2020 regulations]."

Chappell voiced caution, given the ongoing situation in Brazil. "After several starts and stops, it appears that the lost production impact from the fatal tailings dam collapse in January still stands at close to 90 million tons per annum, and the miner remains in the global headless amid fears that another dam is at risk of rupture.

"As part of the new fears, Vale has been ordered to suspend sections of its rail lines that pass through the concerning regions, which could restrict movement of present production to ports and mills. More risk assessments are required before the rail activity can resume."
Public companies with spot Capesize exposure: Star Bulk SBLK, Golden Ocean GOGL, Safe Bulkers SB, Seanergy SHIP

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