A snapshot on the economic and shipping environment
By totalco.com, from hellenicshippingnews.com
Published: 2011.05.31
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The week begun with a drop in the oil prices with the US crude falling below 100/barrel, while the volcanic eruption in Iceland disrupted Northern Europe. On May 19th, the International Energy Agency Governing Board called oil producers to increase their

supplies over the next few months, in an attempt to bring down oil prices. It is believed that the constant rise of oil prices, since September 2010, is affecting the economic recovery by widening global imbalances, reducing household business / business income and placing upward pressure on inflation and interest rate. The IEA in its statement said: “Although oil prices had fallen 10% over the last two weeks, they are still at “elevated levels”, following the geopolitical uncertainty and future supply expectations”.
In Greece, the battle continues with the Greek government announcing an additional set of austerity measures for 2011 that worth EUR6.4bn along with an accelerated asset-sale plan for the period 2011-13. Greece plans to sell assets and raise EUR3.5-5.0bn in 2011, EUR4.0-6.0bn in 2012 and EUR4.5-5.5bn in 2013. Meanwhile, the Greek opposition leader has rejected government’s request to support a four year austerity plan, as it is believed that the austerity demanded by Brussels would hurt the country’s economic recovery. According to final data by the Ministry of Finance for the first quarter of 2011, State Budget deficit reached EUR7.246m, above the target for the period (EUR 6.924m). The main reason for missing the target in the State Budget deficit was that ordinary budget net revenues were recorded lower at EUR 14.473m than the target of EUR 16.340m. Moody’s credit rating agency was the latest rating agency that announced that any kind of restructuring of Greek debt would constitute a default and also warned that any Greek debt default would likely hurt the credit rating of other peripheral eurozone countries.
In Japan, March earthquake and tsunami has influenced the country’s trade balance as exports were curtailed significantly and the country swung into a trade deficit of Y463.7bn ($5,7bn). Country’s exports slumped by 12.5% from a year earlier and imports rose to 8.9% buoyed due to higher demand for fuel. The deficit highlights the harsh impact of the natural catastrophe on a wide range of production sites, including Japan’s biggest exporters, Toyota, Sony and Hitachi. Mitsumaru Kumagai, chief economist at Daiwa, said that he expects exports to show signs of recovery on May as production will return to normal operation. However, the pace of recovery would be slow and the imports will remain firm due to the high demand for materials for the reconstruction of devastated areas and the need for extra fuel, after the damage to several nuclear power plants.
In the meantime, China faces the worst drought in 50 years. The monsoon rains that usually flood Southern China’s middle Yangtze River in spring did not come this year, and officials say rainfall in Hubei, Jiangxi, Anhui, Jiangsu and Zhejiang is at its lowest level in more than 50 years. In terms of economy, inflation signs are not at all reassuring, China’s consumer price index (CPI), an indicator that measures inflation on a consumer level, rose by 5.3% in April 2011 compared with prices in April 2010. Inflation is still the major threat of China’s economy growth and equity markets appear under pressure due to recent interest rate hikes and higher bank reserve requirements. The Shanghai Composite Index closed on Thursday at 2,736.53 points, a decrease of 174.98 points (-6%) from the end of April. The U.S. investment bank Goldman Sachs Group Inc. has cut its China 2011 and 2012 growth forecasts to 9.4% and 9.2% respectively from 10% and 9.5%, and predicted that inflation will persist, citing the impact of higher oil prices and supply-side constraints on the world’s second largest economy.
SHIPPING MARKET
With Nor Shipping taking place this week, anxiety surrounds what the end of Exhibition will bring in the freight markets. Vessels earnings are still in the doldrums with spiraling bunker prices distressing further the solidness of owner’s financial condition, while the oversupply adds more pessimism in the overall market sentiment.
In the dry market, there has been a comforting rebound the last week, but the sentiment is still negative with the chartering activity being in the doldrums and the massive port stockpiles recording high levels. According to Commodore Research, about 83,5 million tons of iron ore is currently stockpiled at Chinese ports, an increase of 500,000 tons (1%) from a week ago. Stockpiles have increased for six consecutive weeks and are now at a new record, the former record was 81,05 mt set on February 25. There are fears that iron ore demand is likely to come under pressure once major steel mills start receiving less electricity and capesize earnings may see even more severe falls.
In terms of coal, there has been also a reduction in Chinese imports due to significant price differential between domestic and international coal prices. According to statistics released by the China’s General Administration of Customs, China’s coal imports hit 11.1m tones in April 2011, down 2.42m tones or 17.9% from a year earlier. Coal buyers in Southern China were inclined to the domestic market, which eventually pushed domestic coal prices up. Thus, the market may experience an increase in Chinese thermal coal fixtures in the forthcoming days. If the price differential continues to grow and coal port stockpiles remain on decline, Chinese thermal coal fixtures may set new record till August, the highest level imported was in December 2010.
The Karnataka iron ore export ban continues and there are speculations that will remain in place during the duration of India’s monsoon season, from early June till October. This means that China will continue to source more of its ore from Australia and Brazil providing some support in the capesize segment during the traditionally weak summer period. (The vast majority of Australian and Brazilian iron ore is hauled on capesizes, whereas the vast majority of Indian ore is hauled on panamax and supramax vessels).
The week closed again in black with capesize average time charter earnings posting significant rise the last days, with BDI standing one breath behind breaking the psychological barrier of 1,500 points mark. The BDI closed on Friday at 1,474 points, up by 125 points from previous week’s closing and down by 60% from similar week’s closing in 2010, when the BDI was standing at 4,078 points. Capesize and panamax vessels have driven the market to a positive note again this week, with capesize earnings to be $10,275/day, up by 30% from last week’s closing and panamax earnings at $14,965/day, up by 10%. Supramaxes continue to outperform with earnings at $15,169/day, and handysizes earning $1,282/day more than capesizes.
In the wet market, the VLCC remains flat and subdued with rates in the MEG region being severely depressed and WAF region showing some improvement. Overall, tanker earnings are currently at or below breakeven levels across all major crude tanker vessel categories, VLCC, Suezmax and Aframax with the oversupply of ships adding more and more pressure in the freight market. According to the director “Tor Olav Troeim” of Frontline, the biggest tanker operator, oil tankers may be unprofitable for five more years. The glut that caused 95% slump in returns since 2008 will take time to erode as only 10% of the fleet is estimated to be above 15 years old and the volume of demolition transactions is at a low speed. In comparison with the bulk carrier segment, a quarter of the dry bulk fleet is above 20 years old and the slump in the dry bulk shipping may be over in three years. In addition, it is estimated that 27 VLCCs have been delivered year to date, with 55 more scheduled deliveries through December. There has been a spike in VLCCs deliveries during the first quarter of the year, as a result of some owners pushing back their 4q deliveries. In spite of ongoing vessel deliveries till 2012, this year will the one with peak fleet growth. The comforting news in the already oversupplied VLCC segment is the significant ease off of ordering activity within 2011 due to weak tanker environment.
In the container market, market fundamentals do not seem promising in terms of supply side since the daunting orderbook has disrupted the balance of the industry. According to Alphaliner, scheduled deliveries for 2013 could hit a record high of over 2 mil TEU if existing options and intended orders materialize. Scheduled deliveries for 2012 have surged from 380,000 TEU a year ago to 1,590,000 TEU today and there is still some available shipyard capacity for 2013 deliveries. The new orders bring the capacity growth forecast for 2013 to 8.9%. This figure could rise further to 11.3%, if options and Letters of Intent are added. Maersk’s ten 18,000 TEU ships are the largest units planned for delivery in 2013 and option for 20 additional vessels of the same size has yet to be exercised for 2014-2015 delivery. Furthermore, Evergreen has committed to 35 ships of 8,800 TEU, of which 22 are scheduled for delivery in 2013. Will the demand side be strong enough to absorb the overwhelmed newbuilding business? The sector seems still fragile and its future is always dependable on the consumer demand growth of developed economies and especially USA. According to data from the Journal of Commerce, U.S. containerized exports increased 11.6% in the first quarter of 2011 representing the highest volume since the second quarter of 2008 with 3,006,592 TEUS being exported. Shipments to China, the largest overseas market for U.S. exports, were up 77,030 TEUS, an increase of 14%. Exports to Japan, the second largest market, increased 13%. The largest percentage gain was exports to Brazil, which were up 29% from last year’s first quarter.
In the shipbuilding market, South Korean small-medium sized yards are in distress as they face great difficulty in filling their slots. The majority of the yards being under pressure are yards that came in the market during the shipbuilding boom of 2004-2008. But, the shipbuilding demand nowadays seems to be far below the ample capacity from the shipyards. According to one manager of a so called “second-tier” medium size yard based in Tongyeong it is difficult for such yards to secure orders in today’s buyer’s markets since the ample capacity allows shipowners to choose where they will have their ships built. Under the current circumstances, most of them choose established first-tier Korean yards such as Hyundai Heavy Industries or Chinese yards that offer up to 10%-20% lower newbuilding prices.
In terms of ship finance, GERMANY’s KG shipping equity market is nearing its largest single box ship placing since the recession, from Hamburg’s Nordcapital. It has unveiled plans to raise $72M from German private investors over coming months for the 13,100teu ship ER Benedetta. Covered by a charter with the world’s second-largest container line, Mediterranean Shipping, at a rate of $60,275 per day for 15 years, the ship would yield a 7.5% return to investors per year. The vessel would be sold to the fund for $155M, against a reported newbuilding price of $175M at the time of contracting in 2007. Its delivery from Hyundai HI is scheduled for November 2011. According to managing director of Nordcapital Florian Maack, the shipping KG market has remained anaemic so far this year, but the recovery in box ship charter rates could spark more activity in the coming months, with other KG houses such as HCI Capital lining up new deals.
Source: Maria Bertzeletou – Golden Destiny S.A Research Department

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