Shipping sector outlook: Container prices spike while tanker rates plunge

Over 80% of world trade volume is seaborne.

Due to supply and demand factors, world trade was initially impacted heavily by the pandemic. Ultimately total world trade contraction remains limited to just over 5% in 2020, after recovery in the second half of the year. Oil products suffering from significantly lower consumption from road traffic showed the largest decline, followed by coal due to lower usage for energy generation and phase-out effects.

Despite China's strong demand, even iron ore showed just moderate growth, even though steel production was in double-digits in both Europe and the US.

Although uncertainty remains, conditions supporting trade have improved.

In our base-case scenario, we expect volumes to rebound at an annual 6%, however, we see downside risks as we explained here. The resilience of world trade volumes was backed by recoveries in retail sales as consumers shifted consumption from services to goods like electronic devices, home and garden furnishings and outdoor sports article - all of which are goods shipped in containers, and many are ordered online.

On the other hand, a significant recovery of industrial production drove the recovery, especially with swelling flows to and from Asia.

Rising fuel costs will attract attention in 2021 as the fuel bill is often the largest cost component for shipping companies. Shares in total cost run-up to 40-60% for the largest vessels.

After the implementation of IMO 2020-rules at the start of 2020, oil prices fell, concealing the higher price of very low sulphur fuel oil (VLSFO) for the majority of ships without an installed scrubber. But with oil prices now higher than their pre-pandemic levels and further tightening expected, fuel costs will rise significantly.

Bunker costs were already 50% above the 2020 average by the end of February. Given the supply of high sulphur fuel oil (HSFO) is expected to rise, spreads between fuel grades are widening again (currently 20-25%).

The majority of vessels are sailing on compliant fuel. It now depends on contractual agreements whether shipping companies pass the extra fuel costs directly to charterers.

Charterers paying the fuel bill might favour ships equipped with a scrubber and/or will increasingly focus on more fuel-efficient tonnage (younger vessels). Ship operators and charterers might also consider further reducing the speed to save fuel.

Worldwide shipping fleet capacity expanded in 2020 by 4% in terms of deadweight tonnage (DWT)/teu (3% for bulkers, 4% for tankers and 3% for containers). This affects the market balance negatively after a year of contraction. However, new deliveries are expected to slow in 2021 and 2022 as order books for new vessels reach their lowest levels since 2003.

Worldwide shipping fleet capacity expanded in 2020 by 4% in terms of deadweight tonnage

Given the background of energy transition and next-generation vessels, shipping companies tend to act conservatively, which is strikingly different from the time of the global financial crisis when shipyards had three times bigger backlog. Besides the fact that fleets are ageing and for example, average ages of very large crude carriers (VLCC) and Suezmax tankers reached 20-highs, which could push up scrapping in 2021 also given relatively high scrapping prices.

Strong recovery of world trade fueled the rebound of containerised good flows.

Strong uptake of Chinese net exports resulted in fairly stable annual container throughput in the world’s biggest ports Shanghai and Singapore, and even a small increase in Ningbo and Shenzhen. Figures indicate the positive trend continued at the start of 2021.

The largest European container ports seemed to suffer the most from the pandemic, and the port of Hamburg stands out in this regard. On average, traffic is expected to return to above-average growth in 2021. Consumers might shift some of their consumption back to services once travel restrictions ease and services reopen, but at the same time, savings are also at high levels.

In contrast to the downturn during the financial crisis, when tariffs dropped among excess capacity, container liners managed to reduce their capacity right from the start of the pandemic in 2020 by taking ships out of the loops (‘blank sailings’). With the three big alliances - 2M, Ocean Alliance and The Alliance covering 80%-85% of the market – supply is less fragmented than a decade ago.

Following the quick return of volumes in the second half of 2020, delays, congestion in the ports and lack of available containers at the right location, tariffs spiked. At the beginning of March, rates on the general East-West trade still quoted three times, which may be even more for specific ports and trades.

Although production of new containers will catch up and more capacity is about to come online, incorporating higher prices in term contracts with forward indicative price levels will be lifted longer. The average time charter rate for container vessels doubled compared to last year.

At the same time, capacity pressure is not over yet as sailing schedules are disrupted and the efficiency of the fleet lower. On top of that, airfreight is often not an affordable option for higher valued shipments due to unusual high tariffs applicable here as well.

A striking figure illustrating the exceptional circumstances in container shipping is the ongoing deteriorating reliability of container liners at the start of 2021. Hardly one out of three global calls of container vessels were on time in January (source: SEA Intelligence), where this is normally more than two out of three.

This causes inefficiencies and congestion in ports, as well as delays in deliveries further down the line.

Dry bulk shipping markets show a mixed picture.

One of the big trade fractions coal (20-25% of total dry bulk volume) fell over 8% in full-year 2020. Simultaneously, iron ore (30% of total freight) refrained from a setback following strong demand uptake from China. On the agribulk side, trades remained solid. In specific breakbulk markets – like car transportation – however, volumes dropped significantly, impacting roll-on-roll-off ship activity.

In the second half of 2020, dry bulk rates recovered and exceeded 10-year averages. As the main industrial regions worldwide return to growth, 2021 is expected to offer widespread recovery in dry bulk markets.

With the implementation of IMO 2020 rules pressing on capacity followed by the oil price collapse and massive speculative floating storage (reaching 11% of total fleet capacity in May 2020), tanker tariffs spiked in the first half of 2020, which resulted in a profitable year for many tanker shipping companies. However, after economic perspectives turned positive again and oil prices started to recover in mid-2020, tanker rates started to slump.

In February 2021, tanker spot earnings even dropped to the lowest levels in decades. Nevertheless, one to five-year time charter rates for tankers like Aframax, Panamax and Suezmax size have been more resilient, revealing some future confidence.

Due to less car driving and travel bans leading to the massive grounding of aircraft, global fuel consumption fell over 15% in the second quarter of 2020. At the same time, crude supply, as well as refining, were slashed.

Although industrial demand for oil products has picked up since fuel demand from transport is still low, consumption will gradually return. Given the forecast of relatively weak demand and gradual uptake in the second half of the year, tanker rates are expected to remain low for at least the first half of 2021.