Summary
- 2017 saw some interesting developments, a few of them came as a surprise.
- Moreover, 2018 will likely see even more interesting themes to emerge.
Note: This article is an abridged version of a more in-depth report published on Value Investor’s Edge on January 5th.
Overview
Making predictions in shipping is often a sketchy endeavor. The year 2017 saw quite a few surprises that caught many off guard.
But if one looked closely enough the seeds were planted for these surprises long before they emerged. Here we will try to read the tea leaves in order to make five predictions for 2018. Some might be bold, others not so much. But if they come to fruition they should have an impact on their respective segments.
Overcapacity
One major theme of 2017 was a massive consolidation effort in the container shipping segment driven by low (non-profitable) rates brought on by a massive influx (overcapacity) of vessels.
Growing trend
The later half of 2017 saw the beginning of an anticipated growth trend for the year 2018 in the crude tanker segment.
On December 21st, Euronav and Gener8 Maritime officially confirmed their merger agreement creating the leading independent large crude tanker operator.
This merger may be the first of several to come according to Frontline’s Chief Executive, Robert Macleod. On the November 22nd Q3 conference call he noted that the industry would benefit from consolidation and is driven by several factors.
Environmental mandates/regulations including the Ballast Water Management Convention and the 2020 Sulfur Cap may take their toll on poorly capitalized companies and consolidation could provide some assistance.
Some companies are trading well below NAV, which was likely a main factor behind Euronav’s selection of the significantly undervalued Gener8. Also, these assets are traded at significantly depressed prices, and since shipping is a volatile business, these downturns lead to acquisition opportunities.
Gener8 was previously quoted as a top takeover target and covered this development extensively via Value Investor’s Edge.
LNG Bunkering
Several companies and nations are beginning to make significant investments in LNG bunkering facilities with the expectation that LNG fueling is the way forward.
The Maritime Executive spoke with Tom Strang, Senior Vice President Maritime Affairs for Carnival Corporation to get an in-depth view on Carnival’s LNG fuel of choice as its future oil source.
The striking part of the interview that might be of most interest is described below.
“What was the thinking behind the LNG project?
LNG is an economic, clean and safe marine fuel with increasing global availability that complies with existing and scheduled emission requirements. By building new ships that will be powered by LNG, both while in port and at sea, we believe we are stepping ahead to take advantage of these benefits and future-proofing our fleet.”
The idea of future-proofing a fleet is an important consideration going forward. Recently we have seen the IMO, introduce new mandates regarding sulfur emissions.
Now there is talks on addressing carbon dioxide, which maritime trade took away from the Paris Agreement, and concerns on particulate matter. A switch to LNG would basically address these issues which is set to dominate the environmental side of maritime trade over the coming years.
How is LNG bunker progress?
A couple reports out recently seem to have similar outlooks. One suggests CAGR of 64.7% through 2023. Others suggest CAGR of 52.4% over the forecast period (2017–2025) an some projects 63.6% CAGR through 2025.
Much of this early bunkering outside of NW Europe will actually come from ship-ship transfers. In fact, some believe that ship-ship LNG bunkering will be the fastest growing segment in the coming years.
For the year 2018, I expect we will see a rapid expansion of port developing LNG bunkering facilities, causing a rise in custom build bunkering vessels, a growing LNG powered orderbook, and an influx of LNG conversions for newer vessels already on the water.
A Surge In Newbuild Orders
For the last few years newbuild prices is quite low from historical standards. But in 2018, we may see a return to the shipyards in a big way, as owners perceive the window of opportunity for these low prices as closing. Let’s review why this may be the case.
Shipyard capacity has tightened. There was a total of 358 active yards, defined as having at least one unit under construction, as of July 2017, a 62% reduction in capacity when compared to 934 from 2009. In October of 2017, Clarksons predicted a further 20% decline by the end of the decade.
Charter rates for several segments is expected to go up. As rates rise, owners react in a collective manner by ordering newbuilds in an effort to place the most tonnage on the water to capitalize on an improving environment.
Steel prices are rising, which is the main costs for building a ship, and ofcourse labour labor. Most reports see this rise as sustainable in the long term move as seen from the supply/demand perspective .
Finally, as the global economy recovers and many areas of investment are seen as saturated, shipping is one such area that hasn’t been completely flooded with investment capital. The situation may change as those who seek to earn high returns chug along to areas, they once deemed too risky.
On December 31st, Yonhap News reported that ”South Korean shipyards have sharply raised their order targets for next year on expectations that the shipbuilding sector will improve.”
Dry Bulk Dividends
This one is a bit of a long shot here and won’t be realistically possible until the back half of 2018. But let’s see, why this might be on the radar.
If rates were up to a profitable level in recent quarters, why wait till late 2018 to consider dividend increases?
It because of dry bulk shipping has a seasonal cycle. Q1 typically might see the lowest rates of the year, with February representing the trough, while Q3 and Q4 will typically see the highest charter rates.
Therefore, Q1 of 2018 will likely see lower rates than those of Q4 of 2017 and may fall again into the unprofitable territory one last time. However, it is expected that Q3 of 2018 will be a starting point for a sustainable profitability and dividends.
During the Q3 2017 conference call, Citi’s Christian Wetherbee and Angeliki Frangou of Navios Maritime Partners L.P. discussed a return of distributions which was ended in late 2015.
Angeliki comments on the recovery in dry bulk sectors and says, “there is clearly a path towards dividend.”
This may be a bit of a long-shot, even for the back half of 2018, but it wouldn’t be out of the question.
India
India could be the place where we might see quite a few shifts in various trade flows over the course of the year 2018. Let’s discuss them by segments as they relate to shipping.
Crude
On a cumulative basis, India’s crude oil production in the first seven months of 2017-2018 remained almost flat at 21,063 metric tonnes, decreasing at 0.24% when compared to the corresponding period, a year ago.
But crude oil demand has been increasing significantly, and the country’s import dependence is significant at around 82%. Almost, all crude oil demand is brought in by crude tankers.
By 2040, India’s oil demand will rise more quickly than any other country, according to the International Energy Agency, which might soar from 6 million bpd, now, to 9.8 million bpd.
Getting the much-needed oil as cheaply as possible will be an important goal as to limit the impact of inflation on this red-hot economy. This could bring the price differential between WTI and Brent into play, leading to even more trade between the USA and the subcontinent in 2018.
Greater volumes along the USA/India route would also contribute heavily to ton mile demand growth.
LNG
India imported about 19 million tons of LNG in 2016, up 30% year over year, making it the world’s fourth-largest consumer, behind Japan, South Korea and China.
Petroleum and Natural Gas Minister Dharmendra Pradhan told The Nikkei on a recent trip to Japan that LNG imports are set to surge even further by 2020, to about 30 million tons, a roughly 60% increase from last year. “Ultimately, gas is the cheapest commodity” when taking the environmental impact into account, Pradhan said.
This is part of the government’s target to boost the natural gas portion of India’s primary energy mix to 15 percent by 2030, up from 6.5 percent now.
With limited domestic natural gas resources, international pipeline connections, and investment much of this new demand will be satisfied through seaborne imports.
LPG
India’s LPG purchases have surged from just 1 million tons a month in early 2015 to approximately 2.4 million tons in December.
Ted Young, chief financial officer at Dorian LPG told Reuters: “The growth in India is amazing. The fact that they have grown from 140 million subsidized household connections in 2015 to 181 million now is very impressive.”
China, India and Japan together make up about 45 percent of global LPG purchases. The December month saw India overtake China for the first time in LPG imports by 0.1 million tons. India’s average monthly imports have surpassed that of Japan, which stands at about 1 million tons.
The majority of LPG imports into India originate from the Middle East but recently LPG from the United States has started finding its way into the subcontinent. In fact, from January to December of 2017 trade between the two quadrupled, increasing from 50,000 tons to more than 200,000 tons. Those numbers should continue to rise, leading to an increase in ton mile demand for LPG vessels.
Dry Bulk
Over the past several years India has been a wildcard when it comes to the coal trade. The year 2018 might see an extension of this uncertainty, brought on by a tug of war between increasing met coal imports and potentially waning thermal coal imports.
Also, growth in the Indian steel industry will contribute to a hefty increase in seaborne met coal imports over the coming years.
In just a couple years, they may even exceed that of Japan, according to analysts at Macquarie. They project that next year, India could take in 56 million mt of seaborne met coal, from 47 million mt this year, in a report published in October.
On the other hand, there are plans by Coal India to expand production significantly by 2019, which might represent an approximate 50% increase in domestic supply to 1 billion tons annually, the majority of users being thermal sector.
This move is expected to wipe out the need for imported thermal coal. If this proves to be the case, then the relatively small increase in met coal imports will be nowhere near enough to offset the intermittent declines.
Few considerations
First, the fact that those production goals might not be achieved.
Second, that coal produced domestically is of low quality than those imported.
Third, a ban of petroleum coke around the Indian capital of New Delhi could raise demand for coal.
Finally, Indian coal plants are running on low capacity, which is currently around 60%. Also, coal fired power generation is expected to increase for several more years.
As these issues play out, India may be one of the more interesting markets to watch in terms of shifting appetites for coal.
Bonus Item: USA Exports
Above all, it is likely that energy exports out of the USA are poised to contribute heavily to ton mile demand in 2018.
LPG, LNG, product, crude, and even coal exports all gained ground in 2017. With a pro-energy export administration in office, it stands to reason that policies hindering trade or regulations pushing up prices of exploration and production, will likely be reconsidered.
But, of course, this thought is not a surprise as 2017 was the year that established this trend. It stands to reason that 2018 will likely be an extension of this trend, in a greater magnitude, and should provide a tailwind to a variety of segments.
Conclusion
These highlights some factors to watch in 2018, which could play a role in maritime trade.
Not all of these are guaranteed, in fact, most are pretty speculative. But the groundwork appears to be laid, for many of these factors, reach its fruition.
Did you subscribe for our daily newsletter?
It’s Free! Click here to Subscribe!
Source: By James Catlin, Seeking Alpha
