BIMCO Shipping Market Reports JUNE 2019

Peter Sand, Chief Shipping Analyst, BIMCO
Macroeconomics: slower growth from unresolved trade tensions harms global trade volumes  
The slowing growth in advanced economies will especially harm global trade. According to the IMF, growth in advanced economies is projected to slow from 2.2% in 2018 to 1.8% in 2019 and 1.7% in 2020. Advanced economies have the highest trade-to-GDP multiplier, and this softening will therefore reduce global trade volumes faster than the forecast 4.4% 2019 growth in emerging economies will generate them. The combined result is a reduction in trade growth.

The Global Manufacturing PMI (Purchasing Managers’ Index), reported by IHS Markit, registered at 50.3 in April – its lowest level since June 2016. New export orders came in at 49.0 – signifying a contraction for the eighth month in a row. This contraction has dragged global trade growth down.

The escalation of the trade war hurts not only the US and Chinese economies, but also the global economy. Global trade is so interconnected that the effects are – and will continue to be – felt by many more countries around the world.

Trade talks between the US and China have been ongoing throughout 2019. The original deadline in March was indefinitely postponed because of the progress being made in the talks. However, at the start of May, President Trump announced an escalation of the trade war, and increased the tariffs on imported goods from China from 10% to 25% on USD 200bn worth of imports. The Chinese response to this was higher tariffs (25%) on imported goods worth USD 60bn currently subject to tariffs of 5% to 10%.

The shipping industry is reliant on global trade and will benefit from new free trade agreements. The slowing global economy and escalation of the trade war pose major threats to global seaborne trade.

Dry Bulk shipping: A struggling market gets all hyped up by Capesize volatility
Demand drivers and freight rates:
It’s been a rollercoaster ride for the dry bulk market in 2019. The market fell from slightly profitable levels in the first week of January, to hit loss-making lows during February, March and April that almost touched the all-time lows seen in early 2016. The Handysize, Supramax and Panamax segments all started to climb again after Chinese New Year in mid-February, but the Capesize sector lost all buoyancy.

During April, it was evident that the Baltic Dry Index (BDI) is dominated by Capesize shipping. The index rose 50% on the back of a 239% increase in rates for Capesize ships – from a very low level – whereas the three other segments only rose slightly or decreased. Knowing profits from losses requires insight into real USD per day earnings, which no index values can provide.

Ultimately, the combined development of the escalating trade war and African swine fever means that American exports of soya beans are unlikely to return to previous highs.

Fleet news:
In the first four months of 2019, yards delivered 10m DWT of newbuilt dry bulk shipping capacity. The demolition of 3.9m DWT limited the immediate negative impact, but even a fleet growth of 0.7% harms the market, as cargo demand is seasonally low. Capesize accounted for 87% of the demolished capacity pushed out of the market, as freight rates fell and the outlook turned bleaker.

Because of this unexpectedly dramatic start to the year, BIMCO revised its demolition forecast for 2019 up to 8m DWT from 4m DWT. It’s worth noting that Panamax, Supramax and Handysize ships also operated at lossmaking freight rates levels for the first four months of 2019 without causing a rush to demolish. Therefore, the forecast is kept at 8m DWT. BIMCO’s estimated fleet growth remains around 3% for 2019 and 2020, under the given assumptions.

In conclusion, BIMCO sees fleet growth outstripping demand growth in 2019 and 2020, making the near future look unappealing.

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