Bulk Carrier Vs. Container Vs. Tanker: Exploring the 2016 Shipping Market
By Sean Ross
Shipping tends to be cyclical, though not all forms of transport are affected equally. After a disastrous 2015, bulk carriers remain in an unprecedented slump and containers are only slightly better off. Tankers face an increasingly difficult-to-balance tradeoff between gasoline storage and active freight, but, at least, they are not sitting empty in huge numbers. With underwhelming economic conditions set against it, few analysts are bullish on shipping prospects in 2016.
Bulk Carriers
Bulk carriers hit a perfectly imperfect storm in 2015, and conditions are not expected to improve quickly. «This is the worst we have seen in recent times,» says Kaushik Neogy, manager of Hong Kong-based Wallem Commercial Services. «Huge order books, China slowdown, the end of quantitative easing, lurking European monetary crisis, glut in oil and commodity prices.»
«This is pretty much the worst I have seen in my career,» said Tim Huxley, CEO of Wah Kwong Maritime Transport Holdings. «For the bulk carrier industry, this is going to be a grim year and next year is not going to be any better.»
The Chinese slowdown punctured the bulk carrier market in 2015. For nearly a decade, heavily subsidized industrial activity from China fueled large-scale bulk purchases, especially in coal, steel and iron ore. Investments in Chinese infrastructure demanded enormous imports of these commodities to satiate the government’s building projects. After its building bubble burst in 2015, however, China is expected to reduce its consumption.
Entering January 2016, Chinese imports fell for 13 consecutive months and declined by more than 20% between 2014 and 2015. Bulk shipping will be one of the many globally affected industries. Most experts look for continued weakness in the foreseeable future. The Baltic Exchange’s main sea freight index, which charts the rates for dry bulk commodity shipments, hit an all-time low in December 2015.
«We expect that 2016 could become an even worse year than the historically low 2015,» states the JP Morgan’s annual report entitled «International Dry Bulk Shipping — Initiating Coverage of the Dry Bulk Shipping Industry.»
Containers
Containers were unprofitable every year between 2009 and 2014, per McKinsey & Company, a market research company, and 2015 was even worse. Bulk carriers receive a lot of headline attention because they carry major commodities such as steel and iron, but container purchases and delivery rates are arguably more indicative of broader economic conditions.
The China Containerized Freight Index, a leading indicator of container demand, hit 744.44 in October 2015. This represented a new all-time low for the index and a clear sign of softness in the demand for shippable goods. It is possible that a drag on the index could have been fueled by a glut of extra ships, thereby driving down the price charged per container; however, this is an extremely unrealistic conclusion in this case, since reports out of major ports suggest as many as one-third of all containers were empty.
The Wall Street Journal lamented the impact of China’s slowdown on U.S. exporters, suggesting that «shipments of empty containers out of the U.S. are surging this year.» It turns out major import partners, especially China, were demanding far fewer American agricultural products, high-end consumer goods, scrap metals and industrial papers.
Tankers
No shipping segment was particularly strong in 2015, though large tankers, especially oil tankers from North America, were the best of a bad bunch. Low crude oil prices meant more oil orders, and tankers can serve as both transport and storage for surplus oil. While dry bulk goods, steel, iron, etc., took the Chinese slowdown very poorly, bulk oil tankers did not suffer the same fallout.
Tankers that transported oil saw high earnings in 2015. Demand for cheap oil is strong, and consumers bought more oil than they could use; this means many tankers act as de facto offshore storage containers. According to 2015 CNBC data, demand for oil tanks «and the rates they command have surged to their highest levels since 2008.»
Dr. Edward Morse, managing director and global head of commodities research for Citigroup, Inc., believes long-term charter rates and vessel values should stay «subdued» for non-oil tankers in 2016. He points to a lack of investor interest, which creates liquidity problems for tanker transactions, and slumping margins from a global market beset with excess supply.
Another subsector of the tanker market performed admirably in 2015: chemical tankers. According to Drewry Shipping Consultants Ltd, a global shipping consultancy group, the clean petroleum products (CPP) and specialized trade orders shipped to a growing African market are buoying chemical tanker demand.
In August 2015, Drewry published a report indicating if «order book(s) remain high» enough it is possible Asian shipyards will have to «bring ships back into the chemical trades.» According to the Drewry Chemical Tanker Freight Index, demand in the second half of 2015 reached a four-year peak.