Shipping Markets Outlook...6 Shipping Markets Out ook 2019 Shipping Markets Out ook 2019 7 All they...

Shipping Markets Outlook

2019 Edition

Contents

Foreword 4ConsultancyDivision 5Introduction 6TheEconomicBackdrop 9

Global Macro Environment Charts 16TheDryBulkMarket 27

The Dry Bulk Market Charts 33TheTankerMarket 41

The Tanker Market Charts 46TheContainershipMarket 57

The Containership Market Charts 64Conclusion 68Appendices 69AboutUs 71

Shipping Markets Outlook 2019Shipping Markets Outlook 20194 5

Foreword

ThethemeofShippingMarketsOutlook2018was“TackingintotheWind”asweanticipatedthatthemarketwouldcontinuetobuffetusbackandforthaswesailedintoheadwinds,makingforslowforwardprogress.Thatturnedouttobeafairassessmentof2018asitwasnotaneasyyearinanyofthethreemainsectors.However,aswemoveintothesecondquarterof2019,wedoperceivethatsupplyanddemandarebecomingbetterbalancedandthisshouldleadtoimprovedearningsandassetvalues.Frustratingly,itisalltakingmuchlongerthanwehadexpectedastherateofprogressslowedin2018afterthequickerpaceof2017.Therefore,thethemeforShippingMarketsOutlook2019is“TheLongandWindingRoad”.Westillhavequitealotofworkaheadofustogettothatbetterplace.

Thishasreallybeenthestoryofshippingsince2009,alongandwindingroadtorecoveryaftertheexcessesof2004to2008,especiallythetonnagesupplygrowthcausedbyover-orderinginthoseyears.Asfortheroadahead,weconsiderthatwehavegoodvisibilityintermsofthesupplyanddemanddatabut,inreality,wearenotentirelysurewhatliesaroundthenextcorner.FuturedemandislessclearaswefaceslowerEurozonegrowth,weakerChinesegrowth,aglobaleconomicslowdownandunresolvedtradewars.FuturesupplylooksmuchbetterwithlowordersattheshipyardsandthepotentialconstrainingeffectofIMO2020andotherregulations.Theoptimismthatwefeltattheendoflastyearwastemporarilydentedbyvolatilebulkcarrierandtankerearningsanddepressedcontainerfreightratesinthefirstquarter,butthiswillchange.

MayItakethisopportunitytothankourcustomersaroundtheworldfortheircontinuedsupportandtoourstaffinLondon,SingaporeandShanghaifortheirhardworkandbestefforts.Westillfacechallengingfactors,manyofwhichhavelittleornothingtodowithshipping,butwecontinuetobelievethatourmarketsareontheroadtorecovery.Torepeatwhatwesaidinlastyear’sforeword:“Thesupplyanddemandfundamentalsindicatethatwehavethemostbenigntonnagesupplysituationthaninmanyayear,withhistoricallyloworderbooktofleetratios.”Thisremainsthecase,aftermarketsstalledlastyear,settingthingsupforabetter2019.Fromthemiddleofthisyearweshouldbegintoseethefundamentalsassertingthemselvesandforthatall-importantingredientofsentimenttolift,helpingustorediscoveroursenseofconfidenceandoptimism.

ChrisOhlson ManagingDirector HartlandShippingServicesLimited

Introduction to the Consultancy Division of Hartland Shipping Services

TheConsultancydivisionofHartlandShippingServicesisaspecialisedshippingandshipbuildingindustryteam.ItprovidesdetailedsectorresearchandconsultancytoexternalclientsinadditiontoconsultancyservicestotheHSBCGrouponaglobalbasis.TheConsultancydivisionhasatrackrecordofsuccessfullycompletingshippingindustrystudiesandconsultations.Theseincludeprovidingcommercialduediligenceforinvestmentsinshippingandshipbuilding,conductingfeasibilitystudiesfornewshippingoperations,counsellingbanksonportfoliorisk,engagingincommercialrestructuring,andworkingonleadingshippingmergersandacquisitionsandequitycapitalmarketsprojects.

Researchpublicationsinclude:

• ShippingMarketsOutlook(annualpublication)• WeeklyCommentary• MarketMonitor(weeklypublication)• On-demandbespokeshippingandshipbuilding• Newbuildingmarketreport

Consultingandadvisoryworkscopeincludes:

• Commercialandstrategicadvice• Feasibilitystudyandbusinessriskassessment• Commercialduediligenceforinvestments• Vesselvaluationandfleetanalysis

TheConsultancydivisionofHartlandShippingServicesaimstoofferin-depthcoverageoftheinterfacebetweenshippingmarketsandtheglobaleconomy.

Team members

Welcome to Hartland Shipping Services Shipping Markets Outlook 2019

NigelBPrentis Director/HeadofShippingConsultancy E-mail:[email protected]

MaartenVandenBroeck ResearchAnalyst E-mail:[email protected]

MorganeRosec ResearchAnalyst E-mail:[email protected]


AlltheycanrelyuponistheallegedhighcostofrefineryconversionfromHFOtoLSFO(typicallyover$1billion)andthelongleadtime(typicallyover5years).TheassumptionisthattherewillbesufficientHFOavailableinworldwidebunkeringportsforscrubber-fittedshipsforyearstocome.ItisanuncomfortableassumptionforthosewhoplantoinvestinexhaustgascleaningequipmenttocontinueburningHFOthattheIMOarguablyshouldhavedecisivelybannedfortheavoidanceofambiguity.5-10%ofthecommercialfleetisexpectedtobefittedwithscrubbersintime.TherestofthefleetwilldefaulttoLSFOorMGOandexpecttorecovertheextracostsfromcharterers,andultimatelyfromtheendconsumer.Itisapolarisingissuewithoneofthelargestlistedbulkcarrierplayers,StarBulk,goingall-inforscrubbersandthelargestlistedtankercompany,Euronav,stayingall-out.Thedebateisemotionalandofteninvolvesthehighlyselectiveuseofresearchanddata.

Thereareplentyofopinionsaboutscrubbersbutthereisratherlesshardevidenceatthisstage.SufficetosaythatEuronavperceivestheretobeapublicrelationsriskinbeingseentoconvertairbornepollutionintoseabornepollution.StarBulkpointsoutthattheseawaterwashingofexhaustgasinanopenloopscrubbersimplyaddssulphatestotheoceanthatalreadyexistinlargequantities,aswellashelpingtoremoveotherimpuritiessuchasparticulatematter.Furthermore,suchscrubberswereactuallyapprovedbytheIMO,whichcomplicatesmatters.TheWorldscalesystemneedstobereformediftankerownersaretobecompensatedfortheiractualfuelcostsandbunkeradjustmentfactorsneedtoberefinedifthecontainerlinesaretorecovertheircosts.Bulkcarrierownersenjoyabetterpass-throughmechanismonvoyagetermsandcanalwaysoptfortimecharteroutifcharterersareunwillingtopayfreightlevelsthatcovertheactualcostofbunkers.

DNVestimatesthatsome2,700commercialshipsofalltypesmaybefittedwithscrubbersby2020,withover80%beingopenloop.ScorpioGroup,withfleetsofbothtankersandbulkers,hascommittedtoinstallingopenloopscrubbersonmorethan100ships.TakentogetherwiththeothermajorIMOinitiative,theobligatoryinstallationofballastwatertreatmentsystems,itisfacingacapitaloutlayofaround$500millionforitsfleet.Itmentionsthat,asfarasBWTS,about30%ofthe108systemsthatithaspurchasedtodatehavebeendeclarednon-operationalthroughacombinationofdefects.Thishasinvolvedsevenmanufacturersandfourdifferenttechnologiesoverthepastfiveyears.Itmustfearsimilarrisksforlargelyuntestedscrubbers.StarBulk,isfittingitsentirefullydeliveredfleetof112largebulkcarriers,rangingfromsupramaxtonewcastlemax,withopenloopscrubbers.Thetotalcapitalcostisestimatedat$185mwithabout70%ofthistobefinancedbyloans.AswithScorpio,itisreliantuponIMO2020beingenforcedfrom1stJanuary2020.

ItisofconcerntosuchcompaniesthathavecommittedtosignificantscrubberinvestmentsthattheIMOhasreopeneddiscussionsaroundscrubbertechnologysoastoharmonisefuturerulesrelatingtoscrubberuse.AnIMOsubcommitteeentitledPollution,PreventionandResponse6(PPR6)metbetween18-22FebruaryinLondontoconsiderlatestsubmissionsfromIMOflagstatesandNGOs.Justaheadofthemeeting,theEuropeanCommissionreportedonthesubjectandsuggestedthat“thesooneruniformandunambiguousregulatorymeasuresaredevelopedandadopted,thebetterthepotentialpollutionwillbecontrolledandthelesssignificanttheeconomicimpactwillbebothonindustryandadministrations.”ItsfindingswerebaseduponaGermanstudythatwaspresentedtotheIMOattheendof2018.TheEC’sconcernshavefoundsupportfromtheflagstateofPanamawhichpresentedareportthatitcommissionedfromtheMassachusettsInstituteofTechnology(MIT).ItsuggeststhatdamagecanindeedbedonetothemarineenvironmentbyopenloopscrubbersanditquestionstheassumptionofequivalencebetweenburningHFOwithscrubbersandtheburningofLSFO.

TheGermanreportassertedthat“theoperationbyshipsofexhaustgascleaningsystemsisexpectedtoleadtoadegradationofthemarineenvironmentduetothetoxicityofwaterdischarges.”Itpointedoutthatthecompositionofexhaustgasesmadeitinevitablethatscrubbereffluentwashwatercontainsheavymetals,nitricacid,sulphuricacid,sulphates,nitratesandpolycyclicaromatichydrocarbons(PAH).Thisappearstobeacondemnationofthepracticeofdeployingscrubbers,especiallyopenloopmodels,despitethefactthattheIMOhadapprovedtheirusein2015.Thereportmentionedthatabouttwo-thirdsofthenearly1,500scrubbersalreadyinstalledoronorderareoftheopenloopvariety.Scrubberusershaveconductedtheirownscientificstudiesthatrefuteclaimsthattheirusemayharmthemarineenvironment.IndirectchallengetotheECreport,aJapanesegovernmentstudyintoopenloopscrubberswasalsopresentedtothePPR6meetinganditfoundthattherearenounacceptableeffectsfromtheiruseonmarineorganismsorthequalityofthesea.

Thestudyestablishedthattheamountofheavymetalsintheseaemanatingfromopenloopscrubberuseisabout100timeslessthanthelimitofheavymetalconcentrationpermittedfromlanddischargesinJapan.Japanistheworld’ssecondlargestshipowningandthirdlargestshipbuildingnation,soitsopinionmayprovetobeinfluential.Furthermore,JapanisbackedupbytheCleanShippingAlliance2020whichproducedalong-termstudyoftheshipsinthefleetofoneofitsmembers,CarnivalCorp.ThefindingswereinlinewiththoseoftheJapanesegovernmentwithscrubberdischargewaterfallingwithinsafetystandards.IntherealworldthelikesofChina,SingaporeandFujairahhavealreadyintroducedlimitationsontheuseofopenloopscrubbersintheirportsandterritorialwaters.Anyway,thedebateaboutscrubbers

Introduction

2018 built on the improvements witnessed in 2017 across the three main

sectors of bulkers, tankers and containers although tankers and containers

found it to be a more challenging year than bulk carriers.

TheClarkSeaIndex,abroadmeasureofoverallperformanceacrosstheshippingsectors,rose13%in2018to$12,144perday,havingrisen14%in2017.Thistakestheindextojustaboveitsaveragelevelof$11,751perdaysincetheglobalfinancialcrisisinthe10-yearperiodbetween2009and2018.Thismakes2017and2018yearsofsteadyifunspectaculargains.Overallfleetgrowthwasat2.6%in2018after3.4%in2017andtradegrowthwasat2.7%in2018after4.2%in2017.The2.7%tradegrowthlastyear(3.1%intonne-miles)tooktotalseabornevolumesto11.9billiontonnes.In2019wewillneedtowatchChina’sindustrialproductiongrowthandprogressinavertinganescalationinUS-Chinatradefriction.Only11%ofthefleetisonorderwhiledemolitionfell12%year-on-yearin2018to31m-dwt,implyingexpectationsofbetterearningsahead.

Westillhavesomeexcesstonnagesupplytoburnoffaftersuccessiveyearsinwhichsupplygrowthhasoutgunneddemandgrowth,butatleastwearenowseeingbettersupply-demandbalance.Withmodestexpectationsofsupplygrowthaheadwearehopingthatcontinuedpositivedemandgrowthwillreturnusbetterearningsandhigherassetvaluesacrossallthreemainsectors.So,withsupplyunderreasonablecontrol,itisdemandthatwillholdthekey,anditisthisareathatisposingsomerisksaswemoveinto2019.OutinAsia,weareseeingsignsofslowergrowthinChinaandJapanthatdoesnotbodewellforthemaindriversofconsumptionintheregion.InEurope,wehavetheconundrumoftheUKpossiblyleavingtheEUandupsettingtheeconomicorderacrossEurope.Europe’seconomyisevidentlyailingjudgingfromItalybeinginrecession,drasticallyslowingGermaneconomicperformanceasitsexportsfall,andFranceinthegripoflowleveldisruptionfromthepopulistgiletsjaunesmovement.

Inthefourthquarterof2018,theUKregisteredGDPgrowthofjust0.2%,after0.6%inQ3.ThistookannualGDPgrowthdownto1.4%for2018,thelowestsince2012,accordingtotheOfficeforNationalStatistics.TheEuropeanUniondidnobetterlastyear,merelymatchingtheUKrateof1.4%.SinceQ1,itsgrowthratefellfrom0.5%inQ2,to0.3%inQ3andto0.2%inQ4.TheEUleader,export-dependentGermany,managedannualGDPgrowthof1.5%in2018after2.2%in2017and2016.InQ3itcontractedby0.2%andinQ4itcamebacktozerogrowth.2018wasGermany’sworstperformancesince2013.FrenchGDP

growthmatchedGermany’sat1.5%in2018following2.3%in2017.ThetrendisalreadyclearasEuropeiswitnessingslowereconomicgrowthonfearsoftheconsequencesofBrexitlocallyandofUS-initiatedtradefrictionglobally.

AcrosstheAtlantic,USGDPgrowthcameinatastronger2.9%for2018,boostedbycorporatetaxcuts,after2.2%in2017.However,itpostedthreeconsecutivequartersoffallinggrowthingoingfrom4.2%inQ2,to3.4%inQ3andto2.6%inQ4.Signsofgrowthfatiguewereevidencedby12consecutivemonthsoffallingpendingexistinghomesales,aprocessthatacceleratedinQ4.AprotectionistUS,belatedlytryingtogetevenandleveltheplayingfieldwithitsoverseascompetitors-rangingfromneighboursCanadaandMexicotomoredistantEurope,IndiaandChina-hassetupamorehostileglobaltradeenvironment.TheFedhasgraduallyraisedratesfrom0.25%tothecurrent2.5%whereitisnowlikelytopauseaseconomicuncertaintiesdemand.ItisintheprocessofunwindingQEwhiletheECBisstrugglingtoenditsownstimulusprogramme.TheBankofJapanhasnotyetstartedanypauseorreversalofitsownQEprogrammeasdomesticandglobalgrowthslow.TheJapaneseeconomyexpandedbyanestimated1.0%in2018following1.7%in2017.

Environmentalissues,andmostimmediatelyIMO2020,areamongstthegreatesttechnicaluncertaintiesfacingshippingtoday,andtheythreatentoimposeextracostsonallparticipantsintheshippingindustry.Theswitchfrommaximum3.5%sulphurcontentfuel(effectivelyHFO)to0.5%sulphurcontentfuel(closetoMGOat0.1%)isabigshift.IMOcompliantlowsulphurfueloil(LSFO)shouldbeavailableinsufficientquantitieswhenthedeadlineof1stJanuary2020isreached.Thiswillrequireanestimatedswitchofsome2.5m-bpdofHFOtoLSFOorMGO.Theworld’srefinersarenotyetprovidinguswithconfirmationthattheywillhavesufficientquantitiesofLSFOavailableintime,astodosowouldonlyunderminefutureLSFOpricing.NoraretheyguaranteeingsufficientquantitiesofHFOfortheyearsfollowingIMO2020,asthiswouldunderminethefuturepriceofHFO.Thusships,powerstationsandotherusersofHFOthatareinvestinginscrubbersareleftwithoutaclearpictureofthefutureavailabilityorpricingofhighsulphurfuel.


willrageonandtheuncertaintieswillcontinueasPPR6decidedthattherewasinsufficientleadtimefortheIMOtoreviseits2015scrubberguidelineswhenitsEnvironmentalProtectionCommitteeconvenesits74thsessioninLondoninMay.AnynewguidelineswillnotbereadyuntilPPR7inayear’stime,afterthenewrulesbecomeeffective.

AnothertopicarisingfromtheIMO’sPPR6meetingconcernedthecontinueduseofHFOintheeventofconcernsaboutthequalityandsafetyofavailablecompliantfuels.ItmightbeinterpretedasanalltoofamiliarfudgeandtheperceptionofapotentialweakeningofenforcementproceduresagainsttheburningofHFOwithoutscrubbersafterthe1stJanuary2020deadline.TheIMOagreedthatshipscancontinuetoburnHFObeyondthedeadlineiftheownerscanprovethattheyhavelegitimateconcernsaboutthequalityandsafetyofavailablecompliantfuels.Thissafetyget-outclausewillbeaddedtothefueloilavailabilityreport(FONAR)whichcanbepresentedviatheflagstatetoPortStateControlasproofthatcomplaintfuelwasnotavailablewithoutmakinganunreasonabledeviationintheship’stradingroute.TheIMOhasatoughtaskgettinguniversalmemberagreementtopolicyandenforcementissues.Inthisinstance,PortStateControlwillhavetobethejudgeofwhatconstituteslegitimategroundsforcontinueduseofnon-compliantfuelsin2020.TheInternationalChamberofShipping(ICS),insupportoftheIMO,haswarnedthatFONARscannotbeusedasafreepasstocontinuecarryingnon-compliantfuel.Measureswillbeputinplacetoavoidabuse.

ThereisnodoubtthatIMO2020andotherenvironmentalregulations,suchasBWTS,aresettoplayasignificantroleinreshapingthesizeandoperationalcharacteristicsoftheglobalcommercialfleet.Thepopularperceptionisthattheseregulationswillimposeextraburdensandcostsupontheindustry.Themostlikelyupshotisthatwewillseeanincreaseinscrappingandadecreaseinvesselspeeds,thusreducingeffectiveshippingcapacityatthemargin.Thisisgoingtohappenoverthenextfewyearswhenweexpectquitelimitedfleetgrowthineachmajorsectorthankstopoorearnings,lackoffinance,highnewbuildingpricesandregulatoryuncertainties.Thispositivesupply-sidedevelopmentisaccompaniedbycorrespondingpotentiallynegativedemand-sidedevelopments.TheseincludetheUSpullingoutoftheTPPandrejiggingNaftaandembarkingupontradedisputeswithCanada,Mexico,EuropeandAsia.

ThebiggestongoingtradedisputeistheonebetweentheUSandChina,thetwolargesteconomiesintheworld.Itiseithercausingorcontributingtoslowereconomicglobalgrowth.Thesoonerthetwosidescometoashort-termagreementontariffs,andagreetoengageinalongertermdiscussionabouttradingpractices,thebetterforshipping.

Themostrecentnews,inmidMarch,isthattheUSandChinaappeartobeinchingtowardsadealthatmaybescopedoutbyendMarchandratifiedbyPresidentsTrumpandXibyendApril.Theleadersofeachcountryarekeentoavoidbeingblamedforcausingadamagingdecelerationineconomicgrowth.Chinaisreportedlyofferingtoboostitspurchasesoffarmandenergyproducts(suchassoybeansandLNG)whilemakingmodestconcessionsontechnologytransfer,intellectualproperty,marketaccess,industrialpolicyandsubsidies.Thiscoversabroadrangeofshort-termandlong-termissues.ThefirstcoversthetariffsandtheUSbilateraltradedeficit(whichwasat$375bnin2017androsetoanall-timerecordof$419bnin2018)andthesecondcoversstructuralchangesthatwilltakemuchlongertothrashout.Separatingthetwomighthelpreachasolution.ChinaisagreeingtobuymoreUScrudeandLNG,whichitwasontargettodoinanycase,attheexpenseofothersupplierssuchasCanada,Russia,AustraliaandtheMiddleEast.Itshouldnothaveaproblemwiththat.

ChinacanresumebuyingmostofUSsoybeanexports,whichisinevitableinanycase,attheexpenseofrivalexportersinBrazil,ArgentinaandUkraine.Onceagain,itshouldhavenoproblemwiththat.Chinahasothertoolsatitsdisposaltocompensateforanylossoftractionwiththosenationsthatloseoutintheshortrun.Chinacanalsoincreaseitscapitalgoodspurchases,especiallyaircraft,whichwillpleaseBoeingbutmaybenotAirbus,althoughthisconceptdoesfacesomeproblemsafterthegroundingoftheglobalfleetofBoeing737Maxaircraft.PresidentTrump’sre-electionprospectsnextyearwillcertainlygetaboostfromeasingthepainthatisbeingfeltinthefarmingandenergydependentstates.PresidentXiwillalsogetsomerelieffromthepricerisesthathavebeencausedbyitstariffsonassortedUSimportsatatimewhentheeconomyisgrowingatitsweakestratein30years.TheUSandChinahaveidentifiedeachotherasleadingtechnologycompetitorsandstrategicadversariesbut,fornow,bothpresidentsstandtogainfromatruce;sotoowillshippingandtrade.

The Economic BackdropVolatile stock markets

Stockmarketshadarollercoasteryearin2018,commencingstronglybutendingtheyearlowerthanwheretheystartedafterapoorlastquarter.Bytheendoftheyear,theDJIAwasdown5.6%,theS&P500was6.2%lowerandtheNasdaqwasdown3.9%.EvensteeperfallsweresufferedoverseaswiththeFTSEAllShareIndexoff12.0%,theFTSE100down12.5%andtheEuropeanStoxx600offby13.2%.InAsia,theNikkei225was12.1%lowerandtheHangSengwasdown13.6%.However,somewhatominously,thesteepestlosseswerebookedinChinawiththeShenzhenCompositedown33.1%andtheShanghaiCompositeoff24.6%.

Thisallchangedin2019.Asweapproachtheendofthefirstquarter,Chinesestockmarketindiceshaveperformedbetterthanothers.ChinaisdefyinggloomyexpectationsaswellasbenefitingfromareboundininvestmentinflowsaheadofchangestoMSCIindexweightings.IntheyeartoFriday15March,theShenzhenCompositewasup30.6%andtheShanghaiCompositewasup22.6%,evenafterhavingsufferedsharp3-4%correctionsattheendofthefirstweekinMarchonacombinationofmarketjittersandaboutofprofittaking.DespitetheseearlyMarchcorrections,theChineseindicesarestillaheadoftherest.

Bywayofcomparison,intheyeartoFriday15Marchmarketclose,theDJIAwasup10.7%,theS&P500was12.5%higherandtheNasdaqhadrebounded13.8%.TheFTSEASIrose7.8%overthisperiodwhilethemorefocusedFTSE100wasup7.3%.TheEuroStoxx600managedtoputon13.0%whileitstwomainGermanandFrenchcomponentswereeithersideofthismeasurewiththeDAXup10.4%andtheCAC40up15.3%.InSpain,theIBEX35wasup9.3%.OutinAsia,theNikkei225was9.7%strongerwhiletheHangSengwasup15.4%.Thesestockmarketgainsin2019todateareallthemoreremarkablegiventhemanifestuncertainties.

Weaker Chinese growth

OfficialfiguressuggestthattheChineseeconomygrewatarateof6.6%in2018havingslowedto6.4%inthefinalquarter.Thisistheslowestrateofgrowthsince1990whentheChineseeconomywasjustgettingintogear.ThisyearChineseGDPgrowthissettoslowtoaround6.3%accordingtoconsensus.TheChineseGDPfiguresarenominalgiventheofficialpracticeofsmoothing;actualgrowthin2018wasprobablycloserto5%.Thelatestgovernmenttargetfor2019isinthe6.0-6.5%range,assetbytheNPCinearlyMarch.

Chinaisdefinitelysufferingfromaslowdownaccordingtoanassortmentofmetrics.Weakerdomesticdemandisillustratedbya6%fallindomesticcarsalesin2018to22.7millionunits,accordingtotheChinaPassengerCarAssociation.OneleadingChineseautomotivemanufacturer,Geely,sawitssalesdropby44%year-on-yearinDecember2018alone.ThisisthefirsttimethatsalesofcarshavefalleninChinainatleast20years.Itcoincidedwiththeendingofgovernmentsubsidiesforvehiclepurchaseslastyear.

Chineseconsumersappeartohavebeenaffectedbythetit-for-tatimporttariffsimposedonimportedUSgoods.Thepricesthattheyhavetopayhavegoneupandsotheirpurchaseshavegonedown.ManyChinesecitizenswouldalsohavebeeninfluencedbythesharpdropindomesticstockmarketindiceslastyear,leadingtoretailsalesgrowthfallingtoa15-yearlowin2018.InearlyMarch,BeijingrevealedthatChina’sexportsinFebruaryfell20.7%year-on-year,thesteepestdropsince2016,anditsimportswere5.2%lowerthaninFebruary2018.Theseweakimport-exportfiguresmayalsoreflectthedistortingeffectsoftheCNYholidays.

Stronger US growth

IncontrasttoChina,theUSeconomygrewby2.9%in2018,upfrom2.2%in2017,whileinflationwassubduedataround2%.TheUSstockmarketboomwasinitiallyinflatedbyPresidentTrump’staxcutsandthendeflatedbyhispursuitoftradewarswithbothfriendandfoe.Otherimpedingfactorsweretheeffectofrisingrates,theunwindingofQEandthe35-daypartialgovernmentshutdown.S&P500companiessawtheiraverageearningsrisebyabout20%in2018witharound8%ofthisapparentlyattributabletothetaxcuts.InearlyJanuary,WallStreetconsensuswasthattheymightexpecttogrowearningsbysome8%in2019.ThiswouldgiveanaverageP/Eratioofjustbelow15,ataboutthemeanforthepasttenyears,andafewpointsbelowtheaverageforthepastfiveyears.BylateJanuary,theconsensusforecastofearningsgrowthhadslippedto6.5%in2019.Thisdeclineisallthemorerelevantinthecontextofthe10%forecastasrecentlyaslastOctober.

TheUSisstilldoingwellwhenitcomestojobcreation.Non-farmpayrollsroseby222,000lastDecemberandthenby304,000inJanuary.Thiswasfollowedbyashockingdroptojust20,000jobsgrowthinFebruary,againstaforecastof180,000.Itwastheworstreadingin17monthsbutmighteasilybeputdowntotheuncertaintycausedbythegovernmentshutdown.Itwasinconsistentwiththeunemploymentratefallingfrom

With modest expectations of supply growth ahead we are hoping

that continued positive demand growth will return us better earnings

and higher asset values across all three main sectors. So, with supply

under reasonable control, it is demand that will hold the key, and it is

this area that is posing some risks as we move into 2019.


4.0%to3.8%inFebruaryandwiththe3.4%year-on-yearriseinhourlyearnings,thebestratesince2009.

BackinJanuary,OxfordEconomicswasexpectingrealUSGDPgrowthtoslowfromaround3%year-on-yearin2018toabout2%bytheendof2019aspolicy-driveneconomicheadwinds–tradepolicy,fadingfiscalstimulus,andtightermonetarypolicy–wouldweighoneconomicmomentum.ByearlyMarch,mostforecastersweretrimmingtheirUSgrowthforecastsfor2019:theOECDto2.6%;theWorldBankandIMFto2.5%;theEconomistto2.3%;GoldmanSachsandMorganStanleyto2.0%orless.ItappearsthattheUSwillfailtoescapecontaminationfromslowingglobalgrowth.

ThismeansthatPresidentTrumpislikelytofallwellshortofachievinghisambitiousaimof4%growth.NodoubthewillblametheFederalReserve,EuropeandChinaforanyfailuretodeliveronhis2016campaignpromises.HisbiggestcampaignpledgewastobuildawallonthesouthernborderwithMexicoandgettheMexicanstopayforit.IntheendhedecidedthatCongressshouldadvance$5.7bntopayforitinexchangeforabudgetdealtoavoidasecondshutdown.

On15February,afterCongressrefusedtoadvancethemoney,MrTrumpapprovedthe$333billionfederalgovernmentspendingbillbut,atthesametime,hedeclaredastateofnationalemergency.Thisenabledhimtoallocateabout$8billioninemergencyfundsthatweresetasideforthemilitaryanddisasterrelief.Acoalitionof16USstates,ledbyCaliforniaandallgovernedbyDemocratswiththeexceptionofMaryland,issuingtheTrumpadministrationhopingtoblocksuchaperceivedmisuseofpresidentialpower.

US-China trade friction

InearlyJanuary,theOfficeoftheUSTradeRepresentativedeclaredthatthreedaysoftalkshaddiscussedwaystoachievefairness,reciprocityandbalanceintraderelationsbetweentheUSandChina,andtheneedforeffectiveenforcementofanydeal.Chinapledgedtobuyasubstantialamountofenergy,manufacturedfoodsandagriculturalproductsfrom

theUSasameanstowardsnarrowingthebilateraltradegapwhichreached$375billioninChina’sfavourin2017.TheUSpresidentisdeterminedtoseeanarrowinginthistradegapbut,unfortunately,mostrecentdatashowsthatitactuallywidenedin2018.

TheUSTRexpectedtousherinstructuralchangestoChina’stradepoliciesthatwouldprotectUSintellectualpropertyandcurtailtechnologytransferstoChinesefirms.PresidentTrumpmightoriginallyhavebeenhopingtoannounceanendtothetradewarstocoincidewiththeWorldEconomicForuminDavosattheendofJanuary.However,MikePompeo’svideo-linkedaddresstotheWEFgavenohintofanybreakthroughandthetalkslookedsettogoallthewaytothe1Marchdeadline.Shortlybeforethedeadlinewasreached,thepresidentdecidedtotemporiseanytariffincreasestogivethetwosidesachancetoreachagreement.

Aspartoftheongoingtradetalks,Chinahaspledgedtobuyanadditional$1.2trillionofUSgoodsimportsoversixyears.Thiswouldincludemorepurchasesofsoybeans,corn,naturalgas,crudeoilandcapitalgoods.Boeingaircraftareakeycomponentofthelattercategory.TheworldwidegroundingoftheBoeing737MaxseriesaftertworecentcrashescomplicatestheissueasChinaisthoughttoaccountforabout10%oftheunfilledordersforthisaircraft.Avolonanditssubsidiariesaresaidtohaveover100orders,BOCAviationhas90onorderandChinaDevelopmentBankhas77.Chinaisunlikelytoconfirmitspurchasesofthe737MaxuntilthesafetyissuesareresolvedandthiscouldmakeitmoredifficultforChinatoreachthe$1.2tntarget.

UK is weakened by Brexit

TheUKeconomyisstrugglingaheadofitsplanneddeparturefromtheEuropeanUnionon12April.On10January,JaguarLandRoverannouncedthatitwascutting4,500jobsinBritainblaminga12%fallinglobalsalesinSeptemberanda46%dropinsalesinChina,itsbiggestmarket.ItalsonotedtheacceleratingmoveawayfromdieselenginecarsinEurope.Onthesameday,FordannouncedthatitwouldcutthousandsofjobsacrossEuropeandtheUK.Slowingsalesandnew

The result of China’s state-driven economic and trade policy is global

overcapacity in industries such as steel and cement which leads to

excess production being dumped in overseas markets, including

Europe. In this sense, one might see President Trump’s ‘America

First’ and ‘Make America Great Again’ campaigns as much needed

antidotes to China’s ‘Made in China 2025’ campaign.

environmentalrules,bothfamiliarsubjectsinshipping,demandradicalrestructuring.TheongoingpoliticaluncertaintyintheUKcausedbyBrexithasmadetheUKautoindustryanobvioustarget.InearlyFebruary,NissanannouncedthatitwillnolongerbebuildingitsX-TrailSUVatitsplantinSunderland,shiftingproductiontoJapaninstead.On12March,itannounceditwillceaseUKproductionofitsluxuryInfinitibrandinSunderland.

On19February,HondaannouncedtheclosureofitsflagshipBritishplantinSwindonin2022,leadingtoatleast3,500joblosses,andpossiblyuptodoublethat.ThisisHonda’sonlyplantinEuropewhichlastyearmade160,000Civics.90%wereexportedtotheEUandtheUS.ItcitedthesmallEuropeanmarketandtheshifttoelectriccars.Swindon’scapacityroseto250,000carsayearin2001,butitonlyevergottoapeakoutputof230,000unitsbeforethe2008downturn.Afterthatoutputlevelscollapsed,leavingit36%belowcapacity.Bycomparison,itmakesaround2millioncarsayearinbothChinaandtheUS.ThethreatofUSimporttariffsofupto25%setalarmbellsringingbutitwastherecentEU-JapantradedealthatprobablysealedSwindon’sfate.Undertheseterms,Japanese-builtcarscanbeexportedtotheEUatzerotarifflevelsfrom2027,avoidingthe10%commontariffthatwouldbepayableoncarsimportedfromtheUKonceithaslefttheEU.

TheUK’sOfficeforNationalStatisticsrecordedaquarter-on-quartergrowthrateofjust0.2%inQ4of2018from0.6%inQ3,0.4%inQ2and0.1%inQ1.InmidMarch,theONSreportedthattheunemploymentratehadfallento3.9%,thelowestsince1975.Year-on-yeargrowthinaverageweeklywagesroseto3.4%suggestingthatthelabourmarketisquitetight.DomesticinvestmentintheUKeconomydeclinedquarter-on-quarterineachofthefirstthreequartersof2018asbusinesseshavenoclarityofthetermsoftradebeyondtheendofMarch.InQ3lastyear,investmentwas2.2%lowerwhencomparedwiththelastquarterof2017.ItislikelytohavefallenagaininQ4whentheONSreleasesitslatestdataattheendofMarch.70%ofinvestmentintransportequipment,machineryandIT,intangibleassets,andbuildingsandinfrastructureisbycompanies;therestisbycentralandlocalgovernment.SuchinvestmentlevelsnowfallwellbelowtheUK’sEuropeanpeersinItaly,FranceandGermany.InmidMarch,theOfficeforBudgetResponsibilityreduceditsforecastofUKgrowthto1.2%forthisyear,theweakestsincethefinancialcrisis.TheOBRalsoestimatedthatbusinessinvestmentwillfall1%thisyear,similartolastyear’sdrop.

Germany joins the US in pushing back at China

InearlyMarch,theECBreduceditsforecastofEurozonegrowthin2019to1.1%fromitsprevious1.7%.Itannouncedthatitwouldkeepinterestratesonholdandbewillingtodeploynewstimulusifnecessary,thustemporising

thestimuluswithdrawalprocess.SlowinggrowthinEurope,matchingslowdownselsewhere,isnowheremoremarkedthaninGermany.Itsgrowthratefellto1.5%in2018,from2.2%in2017,andisexpectedtofallfurtherto0.7%thisyear,evenbehindtheUK’s0.8%,accordingtotheOECD.Germany’sexport-dependenteconomyisfindingthatdemandforitsgoodsinoverseasmarketsiswaning.Insympathywiththisobservation,Germany’sindustrialordersfell2.6%year-on-yearinFebruary.AleadingGermanindustrybody,theFederationofGermanIndustries(BDI),possiblyemboldenedbyPresidentTrump’sattacksonunfairChinesecompetition,recentlyspokeoutagainstuncheckedcompetitionfromChina’sstate-controlledeconomy.

TheBDIcomplainedthatBeijingisnotliberalisingitseconomy,despiteclaimstothecontrary,asitsmarketsandpricesaredistortedbystateaid.Itisinsteadestablishingitsownpolitical,economicandsocialmodelthatentersintosystemiccompetitionwithmoreliberaleconomiessuchasthatofGermany.TheresultofChina’sstate-driveneconomicandtradepolicyisglobalovercapacityinindustriessuchassteelandcementwhichleadstoexcessproductionbeingdumpedinoverseasmarkets,includingEurope.TheBDIhaswarnedthatthesamemayhappeninotherareas,suchasroboticsandbatteries.IturgedBrusselstoadaptitslegalframeworktoconfrontdumpingandsubsidiesaswellasstate-financedacquisitionsofforeigntechnologycompanies.TheBDIacknowledgedthatChinaremainsthedrivingforceoftheglobaleconomyandisanimportantsalesandprocurementmarketforGermanindustry,butitseeksbetterprotectionfromnon-EUnon-marketeconomiesthatseektobeactiveinEurope.

Inthissense,onemightseePresidentTrump’s‘AmericaFirst’and‘MakeAmericaGreatAgain’campaignsasmuchneededantidotestoChina’s‘MadeinChina2025’campaign.FromtheBDI’sperspective,whatisrequiredisasharpeningofEUstateaidlegislationandanti-subsidyinstrumentsasGermanywakesuptothefactthatChinaisacompetitoraswellasapartner.In2017,Sino-Germantradereached€187billion,being€86billioninexportsand€101billionofimports.Thiswasequivalentto30%oftotalEU-Chinatradein2017,makingChinaGermany’smostimportanttradingpartneroutsideoftheEU.TheproblemwithcurrentUStradepolicyisthatitisnotaimedexclusivelyatChina,itisalsoathreattoothersincludingGermany.

TheTrumpadministrationistoyingwiththeideaofimposingpunitivetariffsofupto25%oncarssourcedfromtheEuropeanUniononnationalsecuritygrounds.ThiswouldonlymakeGermany’scurrenteconomicproblemsworse.VW,DaimlerandBMWhavelargeplantsintheUSthatcouldendupbeinghitveryhard.In2018,theUSboughttheequivalentof$31billionworthofGermanvehiclesandcomponents,makingitthelargest


exportmarketfortheGermanautomotiveindustry.VDA,theGermanautoindustryassociation,reportsthatGermanbrandssuchasVW,Porsche,Mercedes,BMWandAudisold1.34millioncarsintheUSlastyear.

ReutersinformsusthatGermancompaniesbuiltsome750,000luxurycarsatUSplantsin2018,ofwhich44%weresolddomesticallyandtherestwereexportedoverseas,includingalmost100,000carstoChina.Around690,000GermanvehiclesweresoldintheUSin2018thatwereimportedfromfactorieswithintheEuropeanUnion,ofwhich470,000camefromGermanplants,accordingtotheVDA.Mercedessold316,000carsintheUSlastyear,14%ofitsglobalsales,whileBMWsold355,000carsandVW638,300carsintheUSin2018.Evercoreanalystsestimatethat,intheeventof25%tariffs,VWGroupwouldtakea€2.5bnhit,Daimler€2.0bnandBMW€1.7bn.Thestakesarehigh,andtheunpredictableMrTrumpisontheothersideofadeal.

IMF downgrades global growth

TheIMFdowngradeditsforecastsofglobalgrowthinresponsetoJanuarydatathattheChineseeconomyhadgrownatitsslowestratesince1990.Itnowpredictsglobalgrowthof3.5%in2019,downfromitsOctoberforecastof3.7%.Growthfor2020isputat3.6%,0.1%downonitspreviousestimate.WeaknessinEuropeandJapancausedittoreduceitsgrowthforecastforadvancedeconomiesfrom2.3%in2018to2.0%in2019andto1.7%in2020.GlobalrisksincludeBrexitandagreaterthanexpectedslowdowninChinathanpreviouslyenvisaged.ChinaseemstobesufferingfromtheimpactofitsinitialtradeskirmisheswiththeUS,exacerbatedbythefactthatthesearehappeningatatimeofastructuraleconomicdeceleration.

Moregovernmentstimuluswillfollowintheformofinfrastructurespendingandlooserbanklendingrules,butthisisonlylikelytoincreasethenationaldebtburden.Itisunlikelytohelptheraftofprivatecompaniesthatarefailingastheycannotaccesstraditionalfinancing.XiJinping’spolicyistosupporttheunreformedstate-ownedsectorandprojectitssubsidisedmightstrategicallyininternationalmarkets.ItisconfrontationalandChina’smajorwesterntradingpartners,includingtheUSandGermany,arebelatedlyrealisingthatChinacanbebothfriendandfoe.TheUSuseoftradeconfrontationmayyetreapsomeshorttermrewardsbutithasbackfiredin

otherwaysasthe2018bilateraltradedeficitwithChinaroseto$419billionin2018from$375billionin2017.

The rise in populism

Theriseofpopulistauthoritarianmovementsacrosstheglobe,alliedtoattacksonmultilateralinstitutions–suchastheIMF,WorldBank,WTOandNato–findtheirmostobviousandrecentmanifestationsinBrexitandTrumpbut,inreality,theycanbetracedbackatleasttotheaftermathofthe2007-08globalfinancialcrisis.Theregulatoryandpolicyresponsetotheglobalfinancialcrisisprovedtobesociallydivisiveandfinanciallypolarisingasthosethatcauseditseemedtogetfurtherahead,whilethosethatwerevictimsofitappearedtogetleftfurtherbehind.Thisviewiscontested,ascentralbankpolicyresponses–slashinginterestratesanddeployingquantitativeeasing–actuallydidwork;andthebenefitsweremorewidelydistributedthanoftenclaimed.Thefactremainsthat,beyondtheUS,wehaveyettonormalisethesepolicyresponses,andnowtheUShasstoppedinitstracksaswell.

Thepopulismthathasbeenincubatingoverthepasttenyearsispartofabacklashagainstglobalisationthathasservedshippingsowell.AsFTcolumnistMartinWolfhasobserved,theessenceofauthoritarianismistheabsenceofdemocracy;thisiswhendemocraciesmorphintodictatorships.Intheperiodfrom2000to2010,examplesofthistransformationwereRussiaunderPutin,TurkeyunderErdoganandVenezuelaunderChavez.Morerecently,thePhilippinesunderDuterte,HungaryunderOrbanandBrazilunderBolsonaroappeartobewellontheroadfrompopulismtodictatorship.ThewellsupportedUSviewisthatVenezuelaunderMaduroisanillegitimatedictatorshipafterfraudulentre-election.SincemidFebruary,TrumpandMadurohavebeenonacollisioncourseastheUShastightenedsanctions.TheVenezuelanpresidenthasrefusedtoyieldofficetohispoliticalrival,JuanGuaido,whohaswidespreadexternalrecognitionasthecountry’slegitimateleader.Theregime’sblockageofUSandforeignaidattheborderiscausinganationalandregionalcatastrophe.

ManypeopleseeMrTrumpasarightwingpopulistwithauthoritariantraits.Suchtraitsincludehavingloyalistsinpositionsofpower(suchasinthegovernmentandinthecourts),thepromotionoffamilymembers,assertingthatthetraditionaleliteiscorruptandincompetent,

This trade dispute is about much more than Chinese intellectual

property theft or the widening US-China trade deficit. It is about who

wins the technology race and is a tug of war for global domination.

thatexpertsandthemediaarenottobetrusted,andthepromotionofpersonalrulebyintuition.InthecaseofMrTrump,heisatleastconstrainedbytheveryinstitutionsthathedespises,sothechecksandbalancesexistevenafterthefailureofpartisanself-servingpoliticians.Populistandauthoritarianrulersaregreatlyassistedbythedeclineoftheoldmediaandthemulti-messagingcapabilitiesofthenewmedia.Newmediaspreadsdoubtbydestroyingtheauthorityofexperts,elitesandthetraditionalmediathroughacasualattitudetothetruth.However,autocraciesusuallyfail.MrPutinhaspresidedoverpostColdWarRussianeconomicdecline.Inthenewcoldwar,ChinahasreplacedRussiaasthegreatestthreattotraditionalwesternvalues.

Business confidence is lower

AbusinessconfidencesurveyconductedbyPwCinJanuaryshowedthatalmostathirdofchiefexecutivesbelievethattheglobaloutlookisdarkening,comparedwithjust5%ayearago.Tradetensionsandrisingprotectionismaretoblame.Onealsoneedstotakeintoconsiderationthatglobaltradingactivityacceleratedinthefinalquarterof2018asimportswerebroughtforwardaheadofanticipatedUStariffincreasesfrom1JanuaryandsubsequentChineseretaliation.UNCTADreporteda19%fallinglobalforeigndirectinvestmentin2018asUScompaniesrepatriatedvastoverseasprofitsinresponsetolowercorporatetaxes.LatestdataindicatesthatpendingexistinghomesalesintheUSslumped9.9%fromayearearlierinDecember2018,followinga7.9%declineinNovemberanda6.4%fallinOctober.InJanuary,theyweredownanother2.3%markingthe13thconsecutivemonthofdeclinesinsuchsales.

TherateofdeclineinexistinghomesalesintensifiedinQ4fromtheearlierquartersin2018butmoderatedinJanuary,givinguscauseforhope.Thedeclinestillseemssignificantwhentakentogetherwithothereconomicindicators.AnyfutureescalationintheUS-Chinatradedisputewouldbeharmful.ItisatleastwelcomethatthethreattoincreaseUStariffson$200billionofChineseimportsfrom10%to25%hasbeenindefinitelypostponed.Bothsideshavebeengivenmoretimetostrikeadeal.CrunchtalksarebeingheldinlateMarchbutthereisnoclarityonthechancesofsuccess.ThistradedisputeisaboutmuchmorethanChineseintellectualpropertytheftorthewideningUS-Chinatradedeficit.Itisaboutwhowinsthetechnologyraceandisatugofwarforglobaldomination.USvictimisationofChinesetelecompowerhouseHuaweiisemblematicofthestruggleasitisreckonedtobeatleastayearaheadinitsdevelopmentofglobal5Gnetworks.

Complicated geopolitical risks

Thegeopoliticalsituationisunusuallycomplicated.TheUSisprovingitselftobeanunreliablepartnerafterMrTrump’spublicattacksonGermany,theEUandNatoandonothercountries,blocsandmultilateralinstitutions.TheUS,quiteunderstandably,wishesitsEuropeanNatoalliestopaytheirfairshareforhavingAmericanforcesandequipmentdeployedinEuropefortheirprotection.ManyEuropeancountriesarebehindontheirdefencebudgetobligations;thelatestUSdemandisthattheypaythefullcostplusanother50%onaccount.AstheUSplayscatch-upinthe5Gnetworksofthefuture,itisdemandingthatitspartnersintheFiveEyesintelligencealliance(Australia,Canada,NewZealand,UKandUS)dropHuaweifromtheir5Groll-outorfindthemselvesexcludedfromintelligencesharing.Suchistheextent


ofUSfearofChineseespionageanditsinfiltrationofwesterncompaniesandgovernmentagenciesviatechnologicalmeans.TheseUSthreatsagainstitsusualalliesriskthebreak-upofthepowerfulalliancesthathavehelpedpreventwarsbetweensuperpowers.

AftertheObamaadministrationfailedtoactonitsredlinesinSyria,relatingtotheuseofchemicalweapons,Russiaseizedtheinitiative.ItworkedwithAssad,IranandHezbollahtoweakenandpushbacktheregime’smultipleopponents,allconvenientlylabelledasterrorists.IslamicStateisnotyetdefeatedbut,backinmidDecember,MrTrumpunilaterallyannouncedhisintentiontopullUStroopsoutofSyria.HewaseffectivelywillingtoabandonhisKurdishalliestoapossibleTurkishattackandtheregiontoevengreaterIranianandRussianinfluence.IranalreadyhasitsShiacrescentstretchingfromTehrantoBeirutviaIraqandSyria,givingitanoutletontheMediterraneanSea.EversinceMrTrump’sannouncement,USadministrationofficialshavebeentryingtoreassureits‘allies’intheMiddleEastthatithasnointentionofanimmediatepull-out,butthishasnotstoppedIsraelandIrandirectlyengagingwithoneanotherinSyria.Itisacceptedthat,iftheUSleavestoosoon,thenSyriawillbecomeanextendedbattlefieldandISwillregroupamidstthechaos.

IranissufferingfromUSsanctionsagainstitsoilindustry,cuttingoffitsaccesstofinance,andweakeningitsabilitytofurtherextenditsinfluenceacrosstheMiddleEastgiventhedeprivationsofitscitizensathome.ThemediawouldhaveusbelievethatthereisverylittlesupportamongmoderateIraniansfortheregime’sinterventionistactivitiesinYemen,Syria,IraqandLebanon.However,MrTrump’slackofrespectforhisgeneral’sdoesnotbodewellforregionalpeace.SaudiArabia’swaragainstIran-backedHouthirebelscontinuesinYemenwhileUS-SaudirelationsremainstrainedaftertheKhashoggiaffair.Furthereast,thereisanever-presentriskofmilitaryconfrontationbetweentheUSandChinaasthelatterextendsitscontrolovertheSouthChinaSea,withitsninedashline,andtheformerchallengingit.NoprogresshasbeenmadewithNorthKoreaondenucleari-sationaftertheSingaporesummitinJunelastyearandtheHanoisummitinFebruary.Thelatterbrokedownafteralackofpreparationandamisunderstandingofthescaleofeachother’sambitions.LatestnewsisthatthereissatelliteevidencethatNorthKoreaisrebuildingpreviouslydismantledpartsofitsmissileinfrastructure.FailuretomakeanyprogressinHanoionNorthKorea’snuclearthreatmaymaketheUSadministrationkeenertoachievesomekindofdealontheUS-Chinatradefront.

State of the Union

Inhis5FebruaryStateoftheUnionaddresstoCongress,PresidentTrumpmanagedtosendouttheusualparadoxicalmessages.Aswithallpoliticalleaders,he

tookcreditforeverythinggoodthathashappenedonhiswatchwhileblamingothersforeverythingbad.Hecalledforanendtopartisanpolitics,whichmakessensegiventhathehaslostcontroloftheHousetotheDemocrats,butstillhewasunabletoavoidattackinghispoliticalopponents.HehasaccentuateddivisionsbetweenRepublicansandDemocratsandhehaspolarisedopinionsacrossAmericaonlinesofrace,religion,genderandwealth.Internationally,heisinretreatfromthemultilateralinstitutionsthathavesecuredworldpeaceinfavourofbilateraldealsinwhichAmericacanbullyitswaytovictory.Despiteallthis,MrTrumpiswidelyadmiredforhispugnaciousattemptstoleveltheplayingfieldandfightbackagainstunfaircompetitionfromAmerica’sfoesandbelow-parcontributionsfromitsfriends.Hisunconventionalapproachhasnotbeentriedbeforeduetotheconstraintsofdiplomacyandpolitesse.

HehasthreatenedmilitaryinterventioninbackyardVenezuela,whileoverlookinghumanrightsabusesinotherLatinAmericancountries.HeisseekingregimechangeinCaracasafterallegedriggedelectionsandtheinstallationofpro-USJuanGuaido.ThismovehasallowedPresidentMadurotoclaimthattheUSisafteritsoilreserves,whicharethelargestintheworld.ThisisfancifulgiventhatUSoiloutputisalreadytheworld’shighest,averaging11.0m-bpdin2018,whileVenezuela’shasdwindledtobelow1.5m-bpd.OthermajorproducerssuchasRussia(11.2m-bpd)andIran(3.8m-bpdforJan-Sep2018)arealsounderUSsanctionswhileSaudiArabia(10.3m-bpd)iskeptclosedespiteitswelldocumentedissuesinYemenandTurkey.MrTrumphasprioritisedweaponsalesoverhumanrightsinSaudiArabiabutthisisnodifferenttoothersuppliers,includingtheUK.ItisnodoubttruethattheRussiansandChinesewouldbehappytostepinandfillanyvoidbuttheworldwouldprobablypreferamorediplomatic,nuancedandlesspublicapproachtosuchconflictsofinterest.

Trump seeks re-election by being tough

Thispresidenttendstoseeeverythingthroughthelensofmoneyanddeal-makingwithmoralprinciplesnotcountingformuch.Hestillhasaloyalhard-coresupportbasethatidentifiesasmuchwithhisabrasivepoliciesaswithhiswelldocumented,andaccepted,humanfailings.Thisbaseispredominantlywhite,male,middleincomeandRepublican.ArecentPolitico/MorningConsultpollindicatedthathisapprovalratinghasslippedfromapeakof56%twoyearsagoto41%today.Hehaslostgroundineverysinglecategoryofrace,gender,income,party,educationandage.HischancesofasecondtermappeartobediminishingalthoughtheDemocratoppositionhashandedMrTrumpagiftinallowinghimtocampaignagainsttheirincreasinglysocialistleanings.Hecannowrunonananti-socialismticket.Thepresidenthastakencreditforstrongeconomicgrowthandrecordlowunemployment,

ignoringthefactthatgrowthmomentumpickedupunderPresidentObama.Meanwhile,thestimulatingeffectsofMrTrump’sDecember2017$1.5trilliontaxcutshavealreadyfaded,leavingalegacyoftrilliondollarannualdeficitstobepaidbackbyfuturegenerations.

MrTrumpregularlycallsforanendtothewitchhuntintopossiblecollusionbetweenhiscampaignandRussiainthe2016election.TheinitialresultsoftheMuellerenquiryabsolvethepresidentofcolludingwithRussia,althoughallegationsofobstructionofjusticeremainopen.HehaswithdrawntheUSfromtheIntermediate-RangeNuclearForcesTreaty,accusingRussiatobeinviolation,anassertioninwhichheissupportedbyNato.ThetradediscussionswithChinacontinueasthetwosuperpowersjockeyforleadershipintechnicalinnovationandfutureworlddomination.TellingChinathat“itmustincludereal,structuralchangetoendunfairtradepractices,reduceourchronictradedeficit,andprotectAmericanjobs”isquiteabigask.China’sstate-centricmodelisthebasisforChina’sfuturedomesticeconomicgrowthandoverseasexpansionanditisinseparablefromChina’sone-partypoliticalsystem.MrTrumphasnoshortageofinternationalsupportfortakingthisstridentapproachwithChina.Tohiscredit,heisquitewillingtobypasstheconventionaldiplomaticchannelstoputhisopponentsoffbalanceandthisoftenprovestobeasmuchofasurprisetoWashingtonasitisinBrussels,Moscow,

NewDelhiandBeijing.HeishappytotaketheleadoutfrontinattemptstocutdealsforAmerica,leavinghisunderlingstoworkoutthemechanicsofexecution.

So,whateverthepollssay,itisuptotheoppositionDemocratstofieldastrongopponentandtoassembleapowerfulmessage.InvokingasocialistagendawillallowtheRepublicanstorunaMcCarthyistcampaignthatcouldgainrealtractionwithvoters.IftheUSeconomycontinuestoout-performthenMrTrumpwillseehispopularityrise.Tothisend,aconclusionofpartoneoftheUS-Chinatradedispute,thebitconcerningmutualtariffs,willgiveaneconomicboosttobothsidesandtoglobaltrade,especiallyifeachsidecanclaimtowinsomething.Parttwo,concerningopenmarketcapitalismversusstatecapitalism,willtakeverymuchlongertoresolve.Bylinkingtheavoidanceoftariffescalation,andtheremovaloftheoriginaltariffs,withdemandsthatChinareininindustrialsubsidies,reduceforcedtechnologytransferandcrackdownonintellectualpropertytheftmakescomingtoanagreementthatmuchmoredifficult.Hence,escalationmaybemorelikelythanresolution.AnewcoldwaristakingshapewiththeUSanditsalliesononesideandChinaanditsalliesontheother.Actualmilitaryconfrontationmaybeavoidablebutwarsincyberspaceappearlikelyaseachnationviesfortechnologicalsupremacy,whetherbyfairmeansorfoul.

Shipping Markets Outlook 2019: Global Macro EnvironmentShipping Markets Outlook 2019: Global Macro Environment16 17

Global Macro Environment

We are facing a slowdown in China and Europe that the United States may not insulate itself from, while the US-China trade talks cast a shadow over markets.

We also have record low unemployment, rising wages, low interest rates and benign inflation - these pro-growth conditions should be enjoyed while they last.

The global economy is doing well in the context of geopolitical instability, rising nationalism and a race for technological supremacy between the two superpowers.

1. 2018 growth was solid but 2019 may prove to be softer.

3. …manufacturing activity…

2. The global rebound in trade…

4. ...and industrial production is decelerating.

Global GDP growth YoY % (Nominal)Source: IMF, Hartland Shipping

Global and China Manufacturing PMI (Seasonally Adjusted)Source: Thomson Reuters, Hartland Shipping

Global Trade growth YoY %Source: IMF, Hartland Shipping

Global industrial production and new export ordersSource: World bank, Hartland Shipping

5. Trade war tensions remain unsolved and elevated...

6. …which affected stock market performance last year.

7. Although unemployment levels reached record lows….

Current and threatened tarriffs between China and the US ($ Billion)Source: United State trade representative, Hartland Shipping

2018 Stock market indices performance YoY %Source: Hartland Shipping

Unemployment rateSource: Thomson Reuters, Hartland Shipping

Eurozone US UK

0

2%

4%

6%

8%

10%

12%

14%

2003

2003

2004

2005

2006

2007

2008

2008

2009 2010 2011

2012

2013

2013

2014

2015

2016

2017

2018

2019

% of

labo

ur fo

rce

-5.6%-6.2%

-3.9%-12.0%

-12.5%

-13.2%-12.1%

-13.6%-33.1%

-24.6%

DJIAS&P 500

NasdaqFTSE ASIFTSE 100

European Stoxx 600

Nikkei 225Hang Seng

Shanghai Composite

2018's % change

Shenzhen Composite

50

505

50

130

200

60

267US tariffs - Annual value of imports

Total US imports from China - 2017

Chinese tariffs - Annual value of imports

Total Chinese imports from US - 2017

Threatened additional tariffs1st Tranche 2nd Tranche

47

48

49

50

51

52

53

54

55

3.5%

4.0%

4.5%

5.0%

5.5%

Jun-17

Sep-17

Dec-17

Mar-18

Jun-18

Sep-18

Inde

x

YoY %

Global Industrial production (LHS) New export orders (RHS)

47

48

49

50

51

52

53

54

55

Jan-

16Ma

r-16

May-

16Ju

l-16

Sep-

16No

v-16

Jan-

17Ma

r-17

May-

17Ju

l-17

Sep-

17No

v-17

Jan-

18Ma

r-18

May-

18Ju

l-18

Sep-

18No

v-18

Inde

x

Global Manufacturing PMI China Caixin PMI

4%6%

11%

8%9% 8%

3%

-10%

13%

7%

3% 4% 4% 3% 2%

5% 4.2%

-15%

-10%

-5%

0%

5%

10%

15%

20022003200420052006200720082009201020112012201320142015201620172018

3.7%

2.3%

4.7%

3.7%

2.4%

4.7%

3.5%

2.1%

4.7%

World Developed market Emerging market

2017 2018e 2019f


8. …and wage growth is improving, albeit slowly...

9. …inflation expectations are revised down…

10. …partly supported by a cheaper oil price environment...

12. Policy divergence ended global synchronised growth.

14. …leading the Fed to hike interest rates 4 times last year…

16. This de-synchronization led to US dollar appreciation…

11. …and core inflation is expected to remain below target.

13. US: $1.5tn tax cuts stimulated investment and demand…

15. …while the ECB and the BoJ are not yet ready to tighten.

17. …pressurising EM servicing of dollar-denominated debt.

Wages growth YoY %Source: HSBC Global Research, Hartland Shipping

Consumer price index YoY %Source: HSBC Global Rsearch, Hartland Shipping

Brent spot priceSource: Thomson Reuters, Hartland Shipping

GDP growth by regionsSource: HSBC Global Research, Hartland Shipping

US interest ratesSource: Thomson Reuters, Hartland Shipping

US dollar IndexSource: Thomson Reuters, Hartland Shipping

Core Consumer Price Index YoY %Source: Thomson Reuters, Hartland Shipping

US Investment and domestic demand growthSource: World bank, Hartland Shipping

Euro Area and Japan interest ratesSource: Thomson Reuters, Hartland Shipping

US dollar-denominated credit to non-banks in EMEs, by regionSource: BIS, Hartland Shipping

0

5,000

10,000

15,000

20,000

25,000

30,000

Jan-

10

US$ P

Er DA

y

Jul-1

0Ja

n-11

Jul-1

1Ja

n-12

Jul-1

2Ja

n-13

Jul-1

3Ja

n-14

Jul-1

4Ja

n-15

Jul-1

5Ja

n-16

Jul-1

6Ja

n-17

Jul-1

7Ja

n-18

Jul-1

8Ja

n-19

Clarksons Average Bulker Earnings Avg earnings since 2010

Africa Middle EastAsia and PacificEuropeLatin America

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2000

2001

2002

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2013

2014

2015

2016

2017

2018

US$ B

illio

n

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Jan-15 Jan-16 Jan-17 Jan-18 Jan-19

Inde

x

86

88

90

92

94

96

98

100

102

104

Jan-

17

Mar-

17

May-

17

Jul-1

7

Sep-

17

Nov-

17

Jan-

18

Mar-

18

May-

18

Jul-1

8

Sep-

18

Nov-

18

Jan-

19

Inde

x

-1.0%

0%

1.0%

1.5%

2.0%

2.5%

3.0%

Dec-09Dec-10

Dec-11Dec-12

Dec-13Dec-14

Dec-15Dec-16

Dec-17Dec-18

Euro Area Japan

0%

1.0%

1.5%

2.0%2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Jan-09Jan-10

Jan-11Jan-12

Jan-13Jan-14

Jan-15Jan-16

Jan-17Jan-18

Jan-19

0%

1%

2%

3%

4%

5%

6%

2013

2014

2015

2016

2017

2018

YOY %

Domestic demand Investment

2.2%

6.9%

4.5%

2.5%

1.7%

2.9%

6.6%

4.2%

1.9%

1.6%

US China Asia-Pacific

Eurozone LatinAmerica

GDP growth 2017

GDP growth 2018

0

5,000

10,000

15,000

20,000

25,000

30,000

Jan-

10

US$ P

Er DA

y

Jul-1

0Ja

n-11

Jul-1

1Ja

n-12

Jul-1

2Ja

n-13

Jul-1

3Ja

n-14

Jul-1

4Ja

n-15

Jul-1

5Ja

n-16

Jul-1

6Ja

n-17

Jul-1

7Ja

n-18

Jul-1

8Ja

n-19


-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2016

2017

2018

2019

Eurozone US UK Japan

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000


Inde

x

2030

4050

607080

90100

110120

Jan-14Jun-14

Nov-14Apr-15

Sep-15Feb-16

Jul-16Dec-16

May-17Oct-17

Mar-18Aug-18

Jan-19

US$ p

er ba

rrel

s

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2010 2011 2012 2013 2014 2015 2016 2017 2018

US Eurozone UK

US Eurozone UK

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019f


18. China slowdown is structural, 6-7% the new normal.

24. …prompting policy makers to use other means of stimulus…

26. The US trade war is adding further stress to the economy…

27. …by undermining domestic sentiment.20. …along with global offshore holdings…

22. Deleveraging slowed fixed asset investment…

19. Shadow banking has been reined in… 25. …including local government bonds and lower RRRs.

21. …and corporate debt has stabilised, but at a high level.

23. …especially in infrastructure…

China quarterly official GDPSource: Thomson Reuters, Hartland Shipping

Chinese local government special bonds issuanceSource: Thomson Reuters, Hartland Shipping

Share of goods imports affected by new tariffs, 2018Source: World bank, Hartland Shipping

China consumer confidence indexSource: Thomson Reuters, Hartland Shipping

Chinese Foreign Direct Investment into North America and EuropeSource: Baker & McKenzie, Hartland Shipping

China fixed asset investment YoY %Source: NBS, Hartland Shipping

China total credit & Core shadow banking items*Source: World Bank, Hartland Shipping

China required deposit reserve ratioSource: Thomson Reuters, Hartland Shipping

Chinese debt as % of GDPSource: World Bank, Hartland Shipping

China FAI in infrastructure YoY %Source: Thomson Reuters, Hartland Shipping

28. Car sales contracted for the first time in more than 20 years…

China passenger car sales YoY %Source: Thomson Reuters, Hartland Shipping

* Core shadow banking items include entrusted loans, trusted loans and undiscounted bankers’ acceptance.

-10%

0%

10%

20%

30%

40%

50%

60%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

China passenger car sale YoY %

90

95

100

105

110

115

120

125

20072008

20092010 2011

2012 2013 2014 2015 2016 2017 2018

Inde

x

0%

2%

4%

6%

8%

10%

12%

14%

United States

China World Mexico European Union

EMDEs ex. China

% sh

are o

f tot

al im

port

s

Major banks Minor banks

10%

12%

14%

16%

18%

20%

22%

24%

Feb-09Feb-10

Feb-11Feb-12

Feb-13Feb-14

Feb-15Feb-16

Feb-17Feb-18

DEC-18 30,000

35,000

40,000

45,000

50,000

55,000

60,000

65,000

70,000

75,000

JAN-17MAR-17

MAY-17JUL-17

SEP-17NOV-17

JAN-18MAR-18

MAY-18JUL-18

SEP-18NOV-18

Hund

red m

illio

ns of

CNY

0

5,000

10,000

15,000

20,000

25,000

30,000

Jan-

10

US$ P

Er DA

y

Jul-1

0Ja

n-11

Jul-1

1Ja

n-12

Jul-1

2Ja

n-13

Jul-1

3Ja

n-14

Jul-1

4Ja

n-15

Jul-1

5Ja

n-16

Jul-1

6Ja

n-17

Jul-1

7Ja

n-18

Jul-1

8Ja

n-19

Clarksons Average Bulker Earnings Avg earnings since 20100%

5%

10%

15%

20%

25%

Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 20180

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000


Inde

x

5%

6%6%

7%

7%8%

8%9%

9%

10%10%

Jan-17Mar-17

May-17Jul-17

Sep-17Nov-17

Jan-18Mar-18

May-18Jul-18

Sep-18Nov-18

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

20072008

20092010 2011

2012 2013 2014 2015 2016 2017 2018

% of

GDP

Non-financial enterprises Households

General government94

111

30

0

20

40

60

80

100

120

2016 2017 2018

US$ B

illio

n

Core shadow banking items* Total credit

-10%

-5%

0%

5%

10%

15%

20%

2016 2017 2018

YOY%

China GDPChina's 4th quarter

5%

6%

7%

8%

9%

10%

11%

12%

13%

Q1 20

09Q3

2009

Q1 20

10Q3

2010

Q1 20

11Q3

2011

Q1 20

12Q3

2012

Q1 20

13Q3

2013

Q1 20

14Q3

2014

Q1 20

15Q3

2015

Q1 20

16Q3

2016

Q1 20

17Q3

2017

Q1 20

18Q3

2018

Quar

terl

y %


30. …with falling house sales.

32. …overall exports & imports dipped sharply in December...

29. …and the property market is cooling…

31. Old metrics are still positive but the economy is changing…

China residential and commercial house sale YoY %Source: Thomson Reuters, Hartland Shipping

China imports and exports YoY %Source: Thomson Reuters, Hartland Shipping

China real estate - domestic loans YoY %Source: Thomson Reuters, Hartland Shipping

Li Keqiang index YoY %Source: Thomson Reuters, Hartland Shipping

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000


Inde

x

-6

-5

-4

-3-2

-1

0

1

2

3

Mar-16May-16

Jul-16Sep-16

Nov-16Jan-17

Mar-17May-17

Jul-17Sep-17

Nov-17Jan-18

Mar-18May-18

Jul-18Sep-18

Nov-18Jan-19

China PMI manufacturing - New export ordersChina PMI Non-manufacturing - New exports order

6.7%

6.5%

6.4% 6.4%

6.5%

6.6%

6.7%

2Q18 3Q18 4Q18 1Q19 2Q19f 3Q19f 4Q19f

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Jan-17Mar-17

May-17Jul-17

Sep-17Nov-17

Jan-18Mar-18

May-18Jul-18

Sep-18Nov-18

Jan-19

Exports Imports-16%

-11%

-6%

-1%

4%

9%

2012 2013 2014 2015 2016 2017 2018

Electricity output growth

Railway freight volume growth

GDP growth

0%

5%

10%15%

20%25%

30%35%

40%45%

Feb-

16Ma

r-16

Jun-

16Au

g-16

Oct-1

6De

c-16

Feb-

17Ma

r-17

Jun-

17Au

g-17

Oct-1

7De

c-17

Feb-

18Ma

r-18

Jun-

18Au

g-18

Oct-1

8De

c-18

YOY%

Commercial Residential

-15%

-10%-5%

0%5%

10%15%

20%

25%30%

Feb-

14Ma

y-14

Aug-

14No

v-14

Feb-

15Ma

y-15

Aug-

15No

v-15

Feb-

16Ma

y-16

Aug-

16No

v-16

Feb-

17Ma

y-17

Aug-

17No

v-17

Feb-

18Ma

y-18

Aug-

18No

v-18

China real estate - Domestic loans

33. …but supportive policies will be more evident as the year goes on…

China PMI - Contraction or expansionSource: Thomson Reuters, Hartland Shipping

34. …China has embarked on a choppy start to 2019. Much will depend on the size and effect of further economic stimulus.

China’s quarterly GDP growthSource: HSBC Global Research, Hartland Shipping

Chartbook

This is a brief commentary to the chartbook that gives us a rolling pictorial

sequence of how various shipping relevant issues are evolving.

TheIMFisforecastingworldeconomicgrowthtoslowfrom3.7%in2018to3.5%in2019withdevelopedmarketsslowingfrom2.4%to2.1%andemergingmarketsholdingsteadyat4.7%.Worldtradevolumesrecoveredtoafirmerrangeof4-5%year-on-yeargrowthin2017and2018fromaweakerrangeof2-4%growthoverthepreviousfiveyearsfrom2012to2016.GlobalandChinesepurchasingmanagers’indices(PMI)havebeenindeclinesincethestartof2018whileglobalindustrialproduction(IP)andnewexportordershavebeendeceleratingoverthesameperiod.US-Chinatradewarsremainunresolved,althoughwearehopingthatthepotentiallydebilitatingeffectsofescalationshouldleadtoanimminentcompromise.In2017,Chinaimportedsome$130billionofgoodsfromtheUSwhiletheUSimportedaround$505bnofgoodsfromChina.

TheUShasalreadyimposedimporttariffson$250bnofChinesegoods,intwotranchesof$50bnand$200bn,leavinganother$267bnatrisk.Meanwhile,Chinahasretaliatedon$110bnofUSimports,intwotranchesof$50bnand$60bn.China’stariffsaredesignedtotargetkeyRepublicanandTrumpsupportbaseswhiletheUSisconfidentthatitcanoutgunChinabyimposingdutiesonthetotalityofitsimportsinordertoreducethe2017$375bnannualtradedeficit.Sofar,thispolicyhasnotworkedastheUStradedeficitwithChinaroseto$419bnin2018.ThefactofvoluntarilyimposingtaxesofUSdomesticconsumersisnotarecipeforincreasingsalesandthusglobalstockmarketssoldofflastyear,withtheChineseindiceshitbyfarthehardest.Giventhehugedeficit,theChinesehavelessscopeforretaliationbutwillrelyupontheone-partystateandaperceivedgreatercapacityforsufferingtosquaretheoddswithvulnerableAmericanworkersandvoters.

UnemploymentlevelsintheUS,UKandEurozonereachedtheirlowestlevelsin15yearsin2018whilewagegrowthhasbeensteadilyrisinginthe1-3%peryearrangeoverthepastfiveyears.Inflationexpectationsacrosstheseregionsarebeingreviseddown,helpedbyloweroilpricesandtheprospectofslowerglobaleconomicgrowth.Thesuppressionofinterestratesthroughquantitativeeasinghasmadeborrowinganddebtservicingmanageablewhilepushingfinancialassetshigher.Thisnecessarypolicyremedyhasalsohurtsavers,pensionersandworkerswhohavelessbargainingpowerandlowerincomes.Wages

arerisingbut,ifcoreinflationremainsatorbelowcentralbanktargets,thenwagegrowthandreturnsonsavingsarelikelytocontinuebeingconstrained.Theincreasingadoptionofrobotics,artificialintelligence,part-timeandcasualworkingcontinuestoputpressureonlabour,makingitmoreofaprice-takerratherthanaprice-maker.

Thegloballysynchronisedgrowthof2016-17cametoanendin2018andnowwehavemoredivergentgrowthpaths.USGDPgrowthroseto2.9%in2018from2.2%in2017whileEurozonegrowthfellto1.9%lastyearfrom2.5%in2017.Chinesegrowthfellto6.6%in2018from6.9%inthepreviousyearwhiletheAsia-Pacificweakenedto4.2%lastyearfrom4.5%in2017.USdomesticdemandandinvestmentgotaboostfrom$1.5trillionintaxcutsandtherepatriationofoverseascorporateprofits.ThisenabledtheFederalReservetoraiseratesfourtimeslastyearonitspathto‘normalisation’.Thefadingeffectsofthetaxcutshaveledittopauseitsraterisesfornow.ThisisinresponsetoslowingChineseandglobalgrowth,thepossibilityofescalatingUStradetensionswithitspartners,andrisinggeopoliticalrisksasmulti-lateralismgiveswaytonationalism.TheECBandBoJhaveeitherfailedorbeenunabletoraiseratesandnowhavelittleroomtocutintheeventofarecession.

ResilientUSeconomicperformancehasseenthedollarstrengthenagainstabasketofcurrenciesputtingpressureonemergingmarketsfromtheMiddleEastandAfricatotheAsia-PacificandLatinAmericathathavegorgedonUS$-denominateddebt.OfparticularconcernisChina’sstructuralslowdownasittransitionsfromstatetoprivate,frommanufacturingtoservices,andfromheavypollutingindustrytolessenvironmentallydamagingeconomicactivity.China’sGDPgrowthrateof6.6%lastyearwasitslowestsince1990andissettofallfurther.Chineseshadowbankinghasbeenreinedin,totalcreditistrendingdown,overseasinvestmenthasbeendrasticallyreducedandcorporatedebthasstabilised,albeitatahighlevelofaround160%ofGDP.Thisdeleveragingprocesscausedfixedassetinvestmenttoshrinkin2018andforinfrastructurespendingtobecurtailed.

Thesehavebeenkeygrowthdriversinpreviousslowdownsbutnowadayssuchcentralgovernmentspendinggeneratesdiminishingreturnsandincreasedwastage.Inresponse,emphasishastransferredtothe


regionsandlocalgovernmentspecialbondissuancehasincreasedandtherequiredreserveratios(RRR)ofbothmajorandminorbankshavebeensignificantlyreducedoverthecourseoflastyear.ChinesepremierLiKeqiang,inhisopeningaddresstotheNationalPeople’sCongressinBeijingon5March,announcedsomelimitedstimulusmeasures,includingtaxcutsandspendingincreases,inanattempttokeepthegrowthrateabovethe6%mark.ThethreatofescalatingUS-ChinatradewarshascausedChineseconsumerconfidencetowobbleasthereareunlikelytobeanywinnersiftheworld’stwolargesteconomiescontinueapolicyofraisingtit-for-tattariffs.

Chinesemanufacturingandnon-manufacturingPMIsindicateyear-on-yearshrinkageinnewexportordersinninemonthsof2018,possiblyreinforcingtheobservationthatstimulusmeasuresarehavinglesseffect,anddomesticcarsalescontractedforthefirsttimeinmorethantwodecadeslastyear.Ontopofallthis,thenormallyrobustdomesticrealestatemarkethaswitnessedmeaningfulloanshrinkageinalmosteverymonthof2018afterstrongloangrowthineverymonthof2017.Commercialrealestateandresidentialhousesaleshavebeenonadecliningtrendsince2016andfelltobelow5%year-on-yeargrowthin2018comparedwithabove30%intheearlymonthsof2016.LiKeqiang’sfavouriteeconomicindicatorsofelectricityconsumption,railfreightvolumesandloanssawthefirsttwogouparound8%year-on-yearwhileloangrowthslowedtothetuneofaround5%year-on-yearin2018.

TherelevanceoftheLiKeqiangIndexislessthanbeforeastheeconomyrotatesawayfrommanufacturingandheavyindustrytowardsgreateremphasisonconsumptionandservicesasrisingprosperitychangesspendingpatterns.XiJinping’scommitmenttothelargelyunreformedstate-ownedenterprises,attheexpenseoffastergrowingprivateenterprises,representsanotherpossiblethreattofuturegrowth.Astate-controlledeconomythatdirectsstate-ownedcapitaltowardsSOEsbothathomeandabroadshowsnovisionofatransformedfuture.ItalsoputsChinaoncollisioncoursewithmarket-basedeconomiesintheUS,EuropeandotherAsia.Chinaexperiencedasharpdipinexportsandimportsattheendof2018andthiscontinuedintoQ12019.Onthebrightside,evenapartialresolutionoftheUS-Chinatradespatmightreversethesedeclinesandleadtoamoreimaginativeandlessconfrontationaltradepolicy.

Asmentionedearlier,theUS-ChinatradedisputeisaboutmuchmorethantariffsandtheyawningUSdeficitwithChina.PresidentTrumphasmadeanysettlementofthetradedisputeconditionaluponChinaendingallegedunfairtradepractices,ceasingstatesubsidiesandwindingdownsupportofthestate-ownedenterprises.ItamountstoademandthatChinachangesitseconomicmodel,andthisissimplynotgoingto

happenanytimesoon,ifatall.TheUSlongagochoseademocraticsystemandanopenmarketeconomy.70yearsagoChinachoseasinglepartyautocracyandaclosedsocialistmarketeconomy.Theeconomicsystemsineachcountryareweddedtothepoliticalsystemsineachandhavebecomeinseparable.TheUSandChinaneedtodealwithtariffsandthetradedeficitseparatelyfromthemuchlongertermdiscussionofreformingChina’sstatisteconomyandmercantilisttradepolicy.

ShippingandtradewillbedamagedintheshorttermiftheUSandChinaareunabletocomeupwithacompromiseontariffsandtrade.ThatcouldserveasapreludetourgingChinatocontinuewithpastpledgestoreformtheSOEsandchannelmoresupporttoChina’sfastgrowingbutcash-starvedprivatesector.ButthisdoesrepresentadilemmaforChina’sleadership,asencouragingprivateenterpriseasanengineoffutureeconomicgrowthwillinevitablyunderminethecentralcontroloftheChineseCommunistParty.ThatiswhyPresidentXiJinpingprefersthesaferrouteofstickingwiththeunreformedandinefficientstate-ownedeconomy,asitshoresupthepartyandhisleadershipandcontainstheambitionsandpowerofthepeople.

Finally,wemightobservethattheChinesepeoplearebeginningtoshowsignsoflosingconfidenceintheirpoliticalclass,justasthisisevidentabroadincountriesrangingfromtheUKtotheUSandfromFrancetoGermany,andmanymorebesidesasdissatisfiedpopulismspreads.PresidentXiJinpingmayhavemadeastrategicmistakeinrollingouthis‘MadeinChina2025’campaignasthiswaseffectivelyakintothrowingdownthegauntletandchallengingtheUSforworldsupremacy.ThismanifestopledgemakesclearthatChinawishestoclosethegapwiththeUSinfuturetechnologysectorsrangingfromaerospaceandbiotechnologytoindustrialrobotsandelectricvehicles.Inaworldwheremuchtechnologyhasbothmilitaryandcivilianapplications,someinChinaseesuchanovertchallengetoAmericansupremacyasunnecessaryprovocation.

PresidentTrump’s‘AmericaFirst’response,datingbackaboutayearago,wastoinitiateaUS-ChinatradewarasameansofcontainingChina’saspirations,oftennowperceivedasthreats.Thishasputtheworld’stwolargesteconomiesatloggerheads.Thedriftbacktosupportingstate-ownedenterprisesattheexpenseofthefast-growthprivatesectorappearstobearetrogressivestep.ItcharacterisesMrXiasmoreMaoZedongandlessDengXiaoping,andasmoreofareactionarythanareformer.TheUScanrightlyclaimthatstatesubsidiesandstate-financedcompaniesrepresentunfaircompetitionininternationalmarketsandtheUShasgoodreasontohitbackatChina’saggressiveindustrialstrategy.TheUSvictimisationofChinesetelecomscompanyHuaweiisagoodexampleofhowsuspicionshaverisen.Itbegsthequestionofjust

howindependentasuccessfulprivatecompanycanbeasithasanoverridingobligationtoputthestatefirst.ItwillbeinstructivetoseehowthecasesoftheUSgovernmentversusHuawei,andvice-versa,areresolved.

WesternsuspicionofChina’soverseasexpansion,asseeninitsannexationofvastswathesoftheSouthChinaSeawithitsninedashlineanditsMarcoPoloinspiredBeltandRoadInitiative,willonlygrow.China’sdecadesofinsistingonintellectualpropertysharing,andanundefinedmeasureofIPtheft,haveprovidedeverygoodreasonfortheUSanditsalliestopushbackagainsttheChinesestateongroundsofnationalsecurity.ForthisdevelopmentalonemanypeoplewouldapplaudPresidentTrump.ThereformsthatMrTrumpisinsistingupon,suchasendingstatesubsidiesandprotectingintellectualpropertyrights,mightalsoendupbeinginthebestinterestsoftheChinesepeople.Hemayeventransitionfrombeingshort-termenemytolong-termfriend.AneconomicallyreformedChina,ledbyafast-growingandentrepreneurialprivatesector,willactuallybemuchmoreofacompetitivethreattotheUSanditsalliesthananeconomicallyunreformedChinaledbyalumberingandinefficientstate-ownedsector.


Shipping Markets Outlook2019 Edition

The Dry Bulk Market“RainbowQuest”ImagecourtesyofMarineCapital


The Dry Bulk Market

In the context of general uncertainty, shipping is involved in a dogged

recovery as we move further into 2019, trusting that even tepid demand

growth will reward a rare phase of supply discipline.

Thebroadestbarometerofthedrybulkmarket,theBDI,rosefrom1,230pointson2January2018to1,271pointsby24December2018,representingaminisculeriseofjust41points,or3.3%.Naturally,therewasplentyofvolatilityduringthecourseoftheyearasthemarketreachedapeakof1,774pointson24Julybeforetrendingbackdowntotheendoftheyear.Intimecharterequivalentearnings(TCE),theBaltic’sBCI-5TChadcapesizeaverageearningsstartingtheyearon$15,125dailyandendingiton$14,797perday,a2.2%declinefromstarttofinish.Theannualpeakwaspostedon6Augustwhenthereadingwasamorerespectable$27,283daily.Thesamefiguresforkamsarmax,asdefinedbytheBPI82-TCA,were$11,720atthestartand$12,484attheendof2018withayearlypeakof$16,110perdayon16October.

TheBSI58-TCA,coveringsupramaxaverageearnings,startedtheyearon$10,312perdayandendedit9.1%higheron$11,252dailyhavinghititsannualpeakof$13,431on11October.Finally,theBHSI-TCA,representingaveragehandysizeearnings,kickedofftheyearat$8,924andendediton$8,636perday,some3.2%lower,havinghitayearlypeakof$9,772dailyon25October.Allfourindicessufferedaweakfinishto2018followedbyapoorstartto2019.Thankfully,anabysmalJanuarywasatleastfollowedbyabouncebackinFebruaryforallsegments,apartfromcapesize,butwearestillwelldownonstartyearlevels.Capesizestarted2019on$15,344onlytofalltoanannuallowof$4,236perdayon8Marchfollowedbyawelcometurnbackupto$6,387by15March.Kamsarmaxaverageearningsstartedtheyearon$12,243beforefallingtoalowof$5,898on5Februaryandthenpullingbackto$8,876dailyby15March.Thesupramaxaveragestarted2019at$11,141beforedroppingtoalowof$4,837on6

Februaryandthenrecoveringbackto$8,709perdayby15March.Thesamefiguresforthesmallerhandysizewere$8,524atthestarttoalowof$4,198on7Februaryandthenbackupto$6,437perdayby15March.

The best gain in earnings was back in 2017…

TheaboveBalticExchangedataillustratesstartyear,peakyearandendyearaverageearningsin2018ineachmainsegment,followedbyadispiritingperformanceinQ12019,althoughthesewereallontheturnbackupbymidMarch.Averageannualearningsarealittlemoreupliftingastheystillmanagetoshowagentlyimprovingtrendacrosstheentirebulkcarriersector,buttheyalsodemonstratethatmostofthebiggainswerebookedthepreviousyearin2017.In2017,averageearningsforamoderncapesizewereup123%year-on-yearfrom$6,035to$13,475dailywhereas,in2018,theywereuponly4%to$14,026perday.Averageearningsforamodernpanamaxrosealmost58%year-on-yearin2017from$6,712to$10,570perdayand,in2018,theyincreasedafurther22%to$12,866daily.Thistrendwasrepeatedfurtherdownthesizescalewithaverageearningsforamodernsupramaxrising69%year-on-yearin2017from$6,264to$10,590perdaybut,in2018,managingonlyanincremental14%riseto$12,112daily.

Baltic FFAs – a good buy?

TheBalticExchangeForwardFreightAssessmentsdolittletocreatepositiveexpectations.Baseduponthe15Marchreadingsforamodern180,000-dwtcapesize,the5TCaveragewassetat$8,688in2Q19,$12,633in3Q19and$16,083in4Q19.GoingforwardtotheannualFFAs,on15Marchthefigureswere$12,988forCal20,$12,208

forCal21,$12,200forCal22,$12,575forCal23,$13,458forCal24,$13,650forCal25and$13,767forCal26.Givenwidespreadexpectationsofbettersupply-demandbalanceandraterecoveryahead,onecanimaginethattheselownumbersmaysendoutastrongbuysignaltothosewhotradepaper,asforwardcoverlookscheap.Attheotherendofthesizescale,thesamemightbesaidoftheBalticForwardAssessmentsfora58,000-dwtsupramax.On15March,the10TCS-FFAstoodat$9,825for2Q19,$10,629for3Q19and$11,238for4Q19.Forwardcovercouldbeboughtat$9,788forCal20,$9,108forCal21,$8,592forCal22,$8,163forCal23,andat$8,263forCal24,Cal25andCal26.Thereisnotmuchevidenceoftheanticipatedrecoveryintheseforwardfreightassessments.

Baltic SPAs – slower asset value appreciation in 2018

BalticExchangedatafor5-yearoldbulkcarriersshowsminorgainsinassetvaluesinthe12-monthperiodbetween2Jan2018and2Jan2019.Thisisareflectionofthemurkyeconomic,tradeandgeopoliticalbackdropandlowergrowthinspotmarketearningsin2018.A180,000-dwtcapesizewasup8.2%from$32.8mto$35.5min2018.Thiswasarelativelygentlegaincomparedtothe46.4%riseovertheprevious12-monthperiodfrom$22.4minearlyJanuary2017.A74,000-dwtpanamaxwasup5.3%from$20.5mto$21.6m.Thiscomparedwitha48.6%gainfrom$13.8movertheprevious12months.Finally,a58,000-dwtsupramaxwasup5.8%from$17.3mto$18.3m.Overtheprevious12-monthperiod,spanning2017,thenominalvaluehadrisen26.3%from$13.7m.Hence,thestrongvaluegainsof2017gavewaytomuchslowerassetvalueappreciationover2018reflectingthedecelerationofgainsinaverageearnings.

S&P activity snapshot in 2018

Theindexgainoverthecourseof2018fora5-yearoldcapesizewasmodestat8.2%andactualsalesseemedtobearthisout.InthecaseofelderlyJapanese-builtcapes,inearlyJanuary,theKerkis177,4892006wasreportedassoldfor$22.5mand,byearlyAugust,asistershiptheRoyalChorale177,544Mitsui2006wasreportedatthesameprice.InlateAugust,theNSSGrandeur176,882Mitsui2006wasreportedataslightlylower$22.0mand,inmidSeptember,thelargerCapeDover185,805Kawasaki2006wasreportedsoldforaslightlyhigher$23.0m.Therewasnotmuchmovementinpricesinthefirstninemonthsoftheyearandthen,inlateOctober,theoneyearyoungerPacificExplorer177,456Mitsui2007wasreportedatalower$21.0m.Therehavebeennoreportedsalesofcapesofthispopularvintagesincethen.

InearlyDecemberlastyear,UniseawasreportedasthepurchaseroftwomodernHyundai-builtcapesfromPILfor$33.0meach.TheyweretheShagangHongfa179,461HHI2011andtheShagangHongchang179,469HHI2011.BackinlateMay,theNewMighty179,851HHIC-Subic2011wasreportedatamuchlower$27.5m,thedifferenceaccountedforbyaweakermarketandaPhilippinediscountfortheHanjinSubicfacility.StarBulkwasontheacquisitiontrailin2018withpurchasesofthemini-capes,conventionalcapesandkamsarmaxsizesfromAugustea,SongaandE.R.Schiffahrt.ThelatterlateAugustpurchaseinvolvedsix179,000-dwtcapesizeunitsthatdeliveredfromKorean-controlledyards(HHI,HyundaiSamhoandDaewooMangalia)in2010,inacashandsharesdeal.

Theindexrisefora5-yearoldpanamaxroseonly5.4%during2018andsalesbasicallyreflectedthisratherflatchangeinvalues.Inthekamsarmaxsegment,thedifference

Since the bottom of the bulk carrier slump in early 2016, newbuilding

prices have risen in line with increased input costs. Along with

regulatory confusion, this has fortunately acted as a deterrent to

new vessel contracting and rendered the secondhand marketplace a

better hunting ground.


inperceivedqualitybetweenAsianshipbuildingnationswasillustratedinreportedtransactions.InlateJanuary,theKeySpring80,596Universal2012wasmentionedashavingbeensoldfor$22.5mwhiletwomonthslater,inearlyMarch,theSeaAce81,755Longxue2012wasreportedatamuchlowerpriceof$18.5m.Thatsetanindicative$4m,or22%,premiumforJapaneseoverChinesebuilt.ByendOctober,theKorean-builtPrimeLily81,507SPP2012wasreportedataninbetweenpriceof$20.5m,insertingtheKorean-builtatthemidwaypointbetweenJapaneseandChinese.

Salesof10to15-yearoldconventionalpanamaxtonnagerevealedinconsistentpricing.InearlyFebruary,theDrake76,781Sasebo2006wasreportedsoldfor$13.6mandin,midApril,theoneyearolderDRBravo76,806Sasebo2005wasreportedat$12.6m.TowardstheendofJuly,thetwoyearyoungerLadyMariaOcean76,662Imabari2007wasmentionedasbeingsoldforadisappointing$13.0m.ByearlyOctober,theDoubleProsperity76,633Imabari2005wasreportedatthelowlevelof$10.6m.StarBulkalsopickeduptonnageinthissegmentofthemarketalongsideitscapesizeacquisitions.AspartoftheAugusteadeal,itscoopedupthree92,000-dwtpost-panamaxandfive82,000-dwtkamsarmax.TheyalldeliveredfromtopJapaneseandKoreanshipyardsbetween2010and2017.AspartoftheSongadeal,ittookovercontroloften80,000to83,000-dwtkamsarmax.TheyalldeliveredfromtopJapaneseandKoreanyardsbetween2008and2014.

The2018Balticindexgainfora5-yearoldsupramaxwasonly5.8%and,onceagain,thiswasbroadlybackedupbyactualsalesinthemarketplaceduringtheyear.Therewereplentyofsalesofthisclassin2018and10-yearold56,000-dwtunitsbuiltatJapanesecontrolledyardsprovedpopular.InmidJanuary,thePoseidonSW55,688Oshima

2008wasreportedsoldfor$12.5mwhereas,bymidJuly,theNaviosArmonia55,522Kawasaki2008wasreporteddoneatastronger$14.2m.ByMidNovember,themarkethadeasedoffabitandtheGeminiPioneer55,624Mitsui2008wasreportedsoldfor$13.6m.ItwasasimilarpatternforsatelliteJapaneseshipyardsas,inearlyFebruary,theAngelB58,679TsuneishiCebu2008wasreportedat$14.2mandthen,bylateJuly,theTschaikowsky58,790TsuneishiCebu2008wasreportedlydoneat$14.0m.ByearlyOctober,theMediFirenze58,722TsuneishiCebu2008wassaidtohavegoneforalowerpriceof$13.0m.

Therearealwaysgoodreasonsfordifferencesinsellingpricesrangingfromconditionandequipmenttosurveystatusandmarkettiming.Thesupramaxsecond-handmarketlostmomentuminthesecondhalfof2018andactuallydeclinedinQ12019.Theshipsareofcourseoneyearolderafterwehavemovedintothenewyearof2019but,whencombinedwithafallingmarket,thechangeinvaluescanbequitesevere.InmidFebruary,theAlsterBay55,430Kawasaki2008wasreportedsoldfor$12.0mwhichis$1.6mlowerthanthereportoftheGeminiPioneerabove.ScrollforwardtomidMarchandtheNordExpress58,785TsuneishiCebu2007wasreportedsoldfor$11.0m,quitealowpricebutmaybereflectiveofbeingoneyearolderthantheabovereportsandsoldintoaweakeningmarketwithpoorsentiment.

Dry bulk supply-demand balance

AccordingtoSINmacrodata,in2018,thebulkcarrierfleetexpandedbyjust2.9%from817.4m-dwtto841.2m-dwtwhiletotaldrybulktraderoseby2.3%inabsolutetermsandby2.7%intonnemileterms.Inotherwords,supplygrowthwasjustaheadofdemandgrowthin2018.Thisyear,adeliveryscheduleof42.4m-dwtindicatesmaximumfleetgrowthof

5.0%,butthiswilldwindlewithdemolitionandslippage.Drybulktradeisforecasttoexpandby2.3%inabsolutetermsandby3.1%intonnemiletermsin2019.Ifthesenumbersprovetobecorrectthenweshouldseeanotheryearofearningsgrowthandassetvaluegains,withmuchofthispostponeduntilthesecondhalfoftheyear.Thetotalbulkcarrierorderbookis88.5m-dwt,or10.5%ofthefleet,itslowestratiosince2002.Thelargestbulkcarriersaresettoseethegreatestfleetgrowthwhilemediumandsmallersizeswillseemoremodestexpansion.Areturntobettersupplyanddemandbalanceisessential,butweshouldnotforgetthatsupplygrowthexceededdemandgrowthformanyyearsinthelastdecade,meaningthatwehaveembeddedoversupply.

Brazil and China hold key to demand

Onthedemandside,thegreatestthreatstogrowthareUS-Chinatraderelationsandtheslowingglobaleconomy.Theironoretradeiscriticaltothebulkcarriersectorasitsetsthetonefromthetopdown.Monthlyimportsinthefinalquarterof2018weresubdued,with86.7mtinDecemberafter86.3mtinNovemberand88.4mtinOctober.The2018Chineseironoreimporttallywas1,064billiontonnes,downjustover1%fromthe2017annualrecordof1,075bt,thefirstannualdeclinesince2010,accordingtotheGeneralAdministrationofCustoms.ChinesesteelexportscontinuetofallasUSimporttariffsbiteandcompetitionfromIndia,RussiaandTurkeytakesitstoll.Steelmillswillresorttostockdrawdownandtotakinglowergradesofironoretorescueprofitmargins,whichfell70%in4Q18.In2019,Chinesesteeloutputissettodeclineonwaningdomesticandinternationaldemand.Thetragicdamruptureon25JanuaryatVale’sCorregodeFeijaoironoremine,aboveBrumadinhoinMinasGerais,hascostover300livesmakingittheworstenvironmentalaccidentinBrazil’shistory.Thiseventreinforcednegativesentimentinthedrybulksectorinthefirstquarter.

Vale’s problems

Valeannounceditsintentiontodecommissiontensimilardamsovera3-yearperiodatanestimatedcostof$1.3bn.NineothersuchupstreamdamshadalreadybeencompletelydecommissionedsincetheSamarcoMarianadamaccidentinNovember2015.Onaphasedbasis,thelatestannouncementwillinvolvetakingofflinesome40mt,orabout10%,ofVale’scurrentannualproduction.Thelosstotheseaborneironorespotmarketwouldbesignificant,as40mtrepresents

two-thirdsofthe60mtperyearthatisexportedfromBrazilonaspot,uncontractedbasis.Thisisestimatedtoequatetoaround65standard180,000-dwtcapesizeBrazil-FarEastroundvoyages.However,onemustaccountforphasingandalsofornewandrestartedoutputfromotherdomesticmines.ValemodestlyestimatesthatitsS11Dminewillraiseoutputby15mtthisyearwhileanother10mtofironorethatwastobefeedstockfor11mtofpelletswillnowbeexportedasfines.Thisstillleavesit15mtdown,butthisamountcanbecoveredintheexportmarketbylastDecember’srestartofAngloAmerican’sMinasRiomine.Itclosedearlylastyeartofixtwopipelineleaksandmanagedonly3.4mtofexportsin2018after17mtin2017.In2019,itshouldrecoverto19mt,leadingtoa15.6mtgainover2018.

Thedirepredictionsofcargobeinglosttothelargestbulkcarriersegmentsseemedtobeabitoverdoneandknee-jerkatthetime.Butthenewsdidhitsentimenthardwhencombinedwithvariousotherfactors.InearlyFebruary,thesituationgrewevenmurkierasaBraziliancourtorderedthatuseoftheLaranjeirasdamatVale’sBrucutumineinMinasGeraisbehalted,potentiallyaffecting30mtofannualproduction.Withindaysthemine’soperatinglicencewasrevoked.Thiswasindeedamoreserioussituationthanoriginallyenvisaged.ItsentthesharepricesofcompetingminerssuchasBHPandRiosoaring,andironorepriceswerefirmingupevenassteelpricesremainedflat.Partofthereasonforsuchapoorstarttothe2019capesizemarkethasbeenthetendencyforChinesesteelmillstodrawdowncheaperandlowerqualityportinventoriesthathavebeenverylarge.Theyhita2018peakof162mtinearlyJune2018,beforefallingbacktoanannuallowof137mtatend2018,andthenrecoveredto145mtbyendFebruary2019.Thisprocesshasbeenreinforcedbytherisingpriceofironore,flatsteelpricesandanuncertaindemandoutlook.ThesubstitutionofhighFeironfromBrazilwithlowerFeironfromAustraliatranslatesintoalossoftonnemiles.Thepotentialdropoffinseaborneironoretradewasmakingabadsituationevenworseforcapes.Then,on19March,ValeannouncedthattheBrucutususpensionwassoontoend,usheringinapossiblereprieveforcapesize.

Global seaborne iron ore trade

Itisworthtakingalookattheglobalprospectsfortheseaborneironoretrade.ThemostrecentFebruary2019DryBulkTradeOutlookcontainsupdatedestimatesfortotalseaborneironoretradeandthislatestversioninvolves

Interesting changes are evident in the demand side as we face

declining growth in major bulks and rising growth in minor bulks. The

former might be correlated with old school industrial production, as

they are dominated by iron ore and coal, while the latter are usually

considered to be better correlated with overall GDP growth.


quiteconsiderabledowngradesfromJanuary.Itstoodat1,473mtin2017(up3.9%year-on-year);1,473mtin2018(nochange);1,480mtin2019(up0.5%)andat1,501mtin2020(up1.4%).Thisrepresentsthreeconsecutiveyearsofflatgrowthfrom2017.Brazil’sseaborneironoreexportshavebeenreviseddowntotakeintoaccountVale’sproductionproblems,mitigatedslightlybynewprojectsthatithascomingonstream.Inroundednumbers,itsexportsstoodat380mtin2017(+2.7%)andareestimatedtohaverisento388mtin2018(+2.0%).Theyareforecasttofallto370mtin2019(-4.6%),downfrom406mtinJanuary,andrecoverto397mtin2020(+7.4%),downfrom416mtinJanuary.Finally,China’sseaborneironoreimportsareshowingsignsofslowingdownaccordingtolatestestimates:1,058mtin2017(+5.0%);1,047mtin2018(-1.1%);1,048mtin2019(+0.1%)and1,059mtin2020(+1.0%).The1.1%declinein2018canbeattributedtoheavyportinventorydrawdown,increaseduseofsteelscrapandageneraleconomicgrowthslowdown.Goingforward,theriskisthatdemandforironoreandsteelwillplateauasgrowthslowsinatransitioningeconomy.

Other major dry bulk trades

ThegrainsandoilseedstradeshavebeenaffectedbytheongoingandunresolvedUS-Chinatradedispute.Inretaliation,Chinaimposed25%importdutiesonUSsoybeansandlookedtobuyreplacementsuppliesfromBrazilandotherbeans,processedsoyoilandsoybeanmealfromArgentina.TheravagesofAfricanswinefeveracrossChina’sprovinceshaveresultedinamassivepigcullwhichalsodentedimportdemandforsoybeansandsoybeanmeal.Inroundednumbers,Chinesesoybeanimportsfellover7%year-on-yearfrom95mtin2017to88mtin2018and,inthemonthofJanuaryofthisyear,suchtradefellby13%year-on-yeartoaround7.5mt.Infullyear2019,China’ssoybeanimportsareforecasttoreboundbyover5%to93mt,whichwillbeslightlydownon2017levels.RecentlyannouncedChinesepurchasesofsoybeans,ofupto10mtorso,areprobablypurchasesbystatebuyersforinventorybuilding,andthusexcludedfromthe25%importtariff.Overallglobalseabornetradeinsoybeansisexpectedtorecoverabout6%to158mtin2019afteraroundonly

2%growthin2018.Totalworldseabornetradeingrains(soybeans,wheat,corn,barley,sorghum,oatsandrye)wasflatat477mtyear-on-yearin2018andisforecasttorise4%to496mtin2019andby3%to511mtin2020.

TheglobaloilseedtradeisprovingtobesurprisinglyfungiblewithChinaabletobuynon-USoriginsoybeansfromBrazilandArgentinaandotherplacessuchasCanadaandtheUkraine.CanadaprocessesandconsumesitsowncropbutthisyearithastakenadvantageofhigherpricesinChinatoexportsomeofitsbeanstoChinawhileimportingcheaperUSbeansforitscrushersinanopportunisticpricearbitrage.Theglobalseabornegrainstrade,ataround500mtayear,isnotassignificantasironoreorcoal.Theglobalseabornetradeincoalroseover3%year-on-yearin2018to1,240mtandisforecasttoexpandbyalmost2%in2019to1,264mtandbyanother1.5%in2020to1,283mt.EstimatesandforecastsofChina’sseabornecokingcoalimportsareflatataround36mtin2018(down16%on2017’s43mt)risingonlymarginallyto36.5mtin2019and2020.Thesamenumbersforseabornethermalcoalare191mtin2018(whichwasup10%year-on-year)fallingto184mtin2019(-4%)and176mtin2020(-4%).FallingChinesecoalimportswouldseemtobeconsistentwithdecliningindustrialoutput,asthegovernmenttacklesovercapacityandpollution,andaslowingeconomy.

Incontrast,India’sseabornethermalcoalimportsarerisingwithanestimateof161mtin2018(up7%year-on-year)risingto170mtin2019(+5%)andto175mtin2020(+3%).JapaneseandSouthKoreanseabornethermalcoalimportsarequiteflatoverthe2018to2020periodaveragingabout131mtand117mtayearrespectively,thustheyareunabletocompensateforChina’sretreat.Duringthis3-yearperiod,Japan’sseabornecokingcoalimportsareexpectedtobeflatatabout55mtayearwhileSouthKorea’sareestimatedtobeconstantataround25mtayear.Indiancokingcoalimportsbysea,incontrast,areestimatedat60mtin2018(+14%year-on-year),risingto63mtin2019(+6%)andto66mtin2020(+5%).AtatimeofslowingdemandinChina,itisencouragingtoseethatIndiaisgeneratingextrademandthatpartiallycompensatesforChina’sloss.

Dry Bulk Market

The capesize segment has delinked from the others as Vale’s production problems, and other supply interruptions, have temporarily cut seaborne iron ore supplies.

Sentiment was poorly affected in the first quarter of this year but, by the second half of 2019, better supply and demand fundamentals should assert themselves.

We continue to believe that IMO 2020 and other regulations will further cut effective tonnage supply through a combination of rising scrapping and slower steaming.

0

5,000

10,000

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Jan-

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Er DA

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0Ja

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Jul-1

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n-13

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n-14

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Inde

x

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Sep

Oct

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Dec

Jan

Feb

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US$ p

er da

y

2017 & 2018 2018 & 2019

- 2,000

Capesize Panamax Supramax* Handysize

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

US$ p

er da

y

2011 Avg 2018 Avg

1. Average earnings enjoyed their best year since 2011…

2. …but capes did badly in Q4 2018, and even worse in Q1 2019

3. The BDI stayed above 1,000 points for most of last year…

4. …but upside earning potential became restrained by…

Average earnings comparison by segment typeSource: Baltic Exchange, Hartland Shipping

Capesize earnings in the Sep-Mar period by comparisonSource: Baltic Exchange, Hartland Shipping

Baltic Dry IndexSource: Baltic Exchange, Hartland Shipping

Average monthly bulker earningsSource: CRS, Hartland Shipping

Shipping Markets Outlook 2019: Dry Bulk MarketShipping Markets Outlook 2019: Dry Bulk Market34 35

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Handysize Supramax Panamax Capesize

-1%

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2011 2012 2013 2014 2015 2016 2017 2018

YOY %

World seaborne dry bulk trade (tonne-miles)World seaborne dry bulk trade (tonnes)

0102030405060708090

0100

200300400500600700800900

100020

0520

0620

0720

0820

0920

1020

1120

1220

1320

1420

1520

1620

1720

18

DWT

No of

ship

s

Net deliveries by no (LHS) Net deliveries by DWT (RHS)

-1,000

-500

0

500

1,000

1,500

2000

2001

2002

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2005

2006

2007

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2009

2010 2011

2012

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2016

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2018

No of

ship

s

Total Bulkcarrier Deliveries Total Bulkcarrier DemolitionS

0

50

100

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0%

5%

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15%

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25%

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45%

20092010 2011

2012 2013 2014 2015 2016 2017 2018

M-dw

t

Slip

page

rat

e

Annual Slippage rates (LHS) Bulkcarrier Orderbook (RHS)0%

2%

4%

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18%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

YOY %

7. We had fewer deliveries, but also much less demolition.

9. …while seaborne trade growth expanded at a slower pace.

6. …on the back of falling slippage rates.

8. Therefore net deliveries were on par with 2017…

10. Middle-aged Handysize and Supramax were popular…

Bulkcarrier annual fleet developmentSource: CRS, Hartland Shipping

Bulkcarrier deliveries and demolitionsSource: CRS, Hartland Shipping

Drybulk seaborne trade growthSource: CRS, Hartland Shipping

Bulkcarrier annual slippage and orderbookSource: CRS, Hartland Shipping

Bulkcarrier net deliveriesSource: CRS, Hartland Shipping

Bulkcarrier second-hand sales by segment and age rangeSource: CRS, Hartland Shipping

5. …faster than expected fleet growth…

0%

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Major bulk Minor bulk

2.9% 3.0%3.3%

2.8%

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2017 2018e 2019f 2020f

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2

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v-17

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Bulk carrier monthly contracting (LHS)

Bulkcarrier NB Price Index YOY% (RHS)

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20092010 2011

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US$ M

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Avg 10-yr old supramax Avg 10-yr old handysize

11. …helping to push values close to their post GFC average.

13. This resulted in slightly fewer orders when compared to 2017…

15. …suggests that fleet growth will be above 3% this year.

12. Higher NB prices terminated strong ordering of Q1 2018.

14. …and the delivery schedule over the next two years...

16. 2018’s demand growth was dominated by minor bulks.

Supramax and Handysize 10-year old valuesSource: Hartland Shipping

Bulkcarrier contractingSource: CRS, Hartland Shipping

Drybulk fleet growthSource: CRS, Hartland Shipping

Bulkcarrier monthly contracting and newbuilding price indexSource: CRS, Hartland Shipping

Drybulk orderbook delivery scheduleSource: CRS, Hartland Shipping

Drybulk seaborne trade growthSource: CRS, Hartland Shipping

Shipping Markets Outlook 2019: Dry Bulk MarketShipping Markets Outlook 2019: Dry Bulk Market36 37

Infrastructure Manufacturing

Real estate Total FAI

0%

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Q2 2014Q3 2014Q4 2014Q1 2015Q2 2015Q3 2015Q4 2015Q1 2016Q2 2016Q3 2016Q4 2016Q1 2017Q2 2017Q3 2017Q4 2017Q1 2018Q2 2018Q3 2018Q4 2018

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Iron ore 62% Fe - CFR China

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020406080

100120140160180

APr-13APr-14

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Iron ore 65% Fe fines Iron ore 62% Fe fines

740760780800820840860880900920940

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17. Iron ore imports peaked in 2017 but 2018 still over 1bt.

19. …as China raised use of higher grades and steel scrap…

21. Steel mill margins being squeezed by higher ore prices…

18. Despite this, steel production reached another record…

20. …as well as drawing down its iron ore port stocks.

22. …and uncertainty about the size of future stimulus…

China annual iron ore importsSource: Thomson Reuters, Hartland Shipping

Iron ore pricesSource: Thomson Reuters, Hartland Shipping

Iron ore pricesSource: Thomson Reuters, Hartland Shipping

China annual crude steel productionSource: Thomson Reuters, Hartland Shipping

China iron ore inventoriesSource: Thomson Reuters, Hartland Shipping

China fixed asset investment YoY % growthSource: Thomson Reuters, Hartland Shipping

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Soybean imports from US - Trade flows (Feb through Marare projections) (LHS)Soybean imports from Brazil - Trade flows (RHS)

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23. …leaves little room for more import demand this year.

25. …while thermal coal imports rose on higher electricity use.

27. …while trade wars upset seasonal export flows.

24. Low steel prices and winter cuts reduced coking coal imports…

26. Grain exports stayed flat last year on a net basis…

28. Nonetheless, supply and demand are coming into better balance!

China iron ore incremental importsSource: CRS, Hartland Shipping

China thermal coal imports and electricity consumptionSource: Thomson Reuters, Hartland Shipping

China soybean imports from US and BrazilSource: Thomson Reuters, Hartland Shipping

China coking coal imports YoY%Source: CRS, Hartland Shipping

2018 Grain exports, main changes by countrySource: Thomson Reuters, Hartland Shipping

Drybulk supply & demand balanceSource: CRS, Hartland Shipping


Chartbook

In our chartbook we can see in graphic terms how the dry bulk sector has

performed in recent years, thus providing some context for this year and

last.

Bulkcarrierearningshavebeenslowtopickupbuttheyareimprovingnonetheless.Infact,averageearningsacrossthebulkcarriersectorin2018werethebestsince2011,albeitstillbelow2011levelsineachsegment.Capesizeaveraged$15,465dailyin2018,justbehindthe$15,639perdaythattheyearnedin2011.Panamaxwereat$11,654dailyin2018comparedwith$14,000perdayin2011;supramaxwereat$12,783versus$13,814andhandysizewereat$8,700comparedwith$10,552perday.Westillhaveawaytogotogetbackevento2011averageearnings.However,capesizewerenotsofarbehind2011andwouldhaveexceededthoselevelsbutforadisappointingperformanceoverthepastsixmonths.On8March,theBCI-5TCsunktoa2019annuallowof$4,236perdaybuthassincebegunatentativerecovery.

AmoregenericmeasurementistheBalticDryIndex.TheBDIaveraged1,353pointsin2018,18%uponthe1,145pointreadingof2017,anditsbestyearsince2011whenitaveraged1,549points.ThisyearwehaveunexpectedlyhitthedoldrumswiththeBDIplungingtoa2019lowof595pointson11February.EveryonehadexpectedabouncefollowingChineseNewYearbutithasnotbeenforthcoming.MiningproblemsinBrazilandtheshadowcastbytheunresolvedUS-Chinatradewarsaredamagingtobothtradevolumesandsentiment.Lookingfurtherback,wehavewitnessedsteadyimprovementssincethebeginningof2016whentheBDIsanktoanall-timelowof290pointson10February.Averagebulkcarrierearningsrecoveredfromalowof$3,636dailyinFebruary2016toaninterimhighof$14,297perdayinDecember2017.InFebruary2019,wefoundourselvesbackdownto$6,637dailyandwonderingwhentheimprovingsupply-demanddynamicswouldkickin,overwhelmanynegativesentiment,andfinallytakerateshigher.

Fleetdevelopmentinthebulkcarriersectorhasslowedinrecentyearsbuthasyettorecoverfromtheexcessesofthe2004to2008period.Theover-orderingofthoseyearswasdrip-fedintothemarketoverthefollowingfiveyearsormore,evenaftercancellationsandconversions,andthisstillprovedtobetoomuchfordemandgrowthtocontendwith.From2004to2008,year-on-yearfleetgrowthwasrunningatbetween6%and7%ayear,after

whichitaccelerated.In2009,itrosebyover10%,in2010by17%,in2011bycloseto11%,andin2012byover10%.Bytheendof2012thefleetwascloseto688mt-dwt.Since2012,wehaveseenaslowerrateofyear-on-yearfleetgrowthasmarketforceshavereducednewsupplyandhelpedtocompensateforchronicembeddedoversupply.Besides,ownershadlittlemoneytospendandbankslittleappetitetolend.Thegrowthratesubsequentlyslippedtobelow6%in2013,tojustover4%in2014andthentobetween2%and3%inthefollowingyearstoend2018.Theend2018fleetstoodatjustunder841mt-dwt.

Thebulkcarrierorderbookhasprogressivelyfallensincethe2008marketcrash,althoughdeliveryslippagerateshaveremainedhighandvolatileuntilquiterecently.Slippageincludesghostorders,miscountedoptions,cancellations,default,negotiateddelaysandnon-negotiateddelays.Thisprocesscreatesalotofuncertaintyoverfuturesupplygrowthbut,astimepassesandmoreshipsdeliver,theactualsituationbecomesclearer.Thebulkcarrierorderbookhasfallenfrom326mt-dwtatthestartof2009to91mt-dwtatthebeginningof2019whilebulkcarrierannualslippagerates,expressedasapercentageoftheoverallorderbook,averagedaround30%intheyearsbetween2009and2015.Theverypoormarketof2016sawtheslippageratespikeupto42%,asownerssucceededinstallingdeliveriesfromtheshipyards,beforefallingbackto27%in2017and14%in2018.

Since2008,bulkcarrierdeliverieshitapeakin2012of1,253unitstotalling100.7mt-dwt.2012wasalsothepeakdemolitionyearwith590unitsof33.4mt-dwtleavingthefleet.Marketconditionsdictatedthatasmorenewshipsdeliveredmoreoldshipshadtomakeway.By2018,deliverieshadsunktoa10-yearlowof293unitsof28.2mt-dwtwhilegraduallyimprovingearningsandvaluessentdemolitiontoan11-yearlowof57unitsof4.5mt-dwt.Thesimultaneousreductionintherateofdeliveriesandscrappingsawnetfleetgrowthinthesectorof235unitsof23.8mt-dwtin2018following232unitsof22.5mt-dwtin2017.Boththeseyearscomparefavourablywiththepeakpost-2008yearof2010whichsawnetfleetgrowthof906unitsof74.9mt-dwt.Weareslowlyreturningtoearlyboomgrowthlevelsasseenin2005whennetfleetgrowthstood

at300unitsof22.6mt-dwtand2004with249unitsof19.2mt-dwt.Before2004,fleetgrowthranatlowerlevels.

Turningtothedemandside,weappeartobecomingtotheendofa15-yearperiodofChinese-driventurbochargeddemandgrowth.Thisstartedin2003followingChina’sentryintotheWTOattheendof2001andmayhavecometoanendin2017.Worldseabornetrade,intonne-mileterms,wasexpandingatjust2%year-on-yearin2001and1%in2002beforejumpingto7%in2003andto10%in2004.Importantly,thisunexpectedboostindemandcaughtsupplyonthehopandittooksomeyearsbeforewegotthetime-delayedsupply-sideresponsethatculminatedinegregiousover-ordering.Tonne-miletradegrowthmaintained6-7%annualexpansionbetween2005and2007beforecollapsingtojust1%in2008andthencontractingby3%in2009.Bythen,thesectorwascommittedtofantasylevelsofsupplyjustasdemandwasbeginningtocool.2010enjoyeda13%year-on-yeardemandsnapback,setagainstthebaseeffectsof2009’scontraction,anddemandthengrewatanannualrateof6%eachyearbetween2011and2014.Wehavesinceslowedto3%in2018withasimilarsubduedlevelpredictedfor2019and2020.

Undersuchcircumstancesofstructurallyslowerdemandgrowthitisevenmoreimportantthaneverthatsupplybekeptundercontrol.On5March,2019,openingtheNationalPeople’sCongressinBeijing,ChinesepremierLiKeqianginformedtheworldthatChineseGDPgrowthwillcontinuetoslowafterpostingitsslowestratesince1990at6.6%lastyear.Thisyear,thetargetgrowthratehasbeenloweredtobetween6.0%and6.5%.ThereissomedegreeofmessaginggoingonhereasChinaiskeentoheadoffanyescalationinitstradedisputeandtariffwarwiththeUS.FallingChinesedemandisaproductofChina’sshifttowardsamoreconsumer-drivenandservice-basedeconomy.Astheworld’ssecondlargesteconomyaftertheUS,a6%growthrateisstillrespectableinthecontextofUSgrowthofaround3%in2018.BothcountriesareenduringaneconomicslowdownasUSgrowth,atanannualisedrate,slowedfrom4.2%in2Q18,to3.4%in3Q18,to2.6%in4Q18,anditissettoslowfurtherin2019.IftheUSandChinacanseeawaytounwindingexistingtariffsandavoidingnewones,thentheireconomiesandtheglobaleconomywillbeinabetterplace.PremierLialludedtotoughtimesaheadandannouncedalimitedseriesofstimulusmeasuresrangingfromlowerVATratestoRmb800bn($120bn)inlocalgovernmentbondissuancetofundinfrastructurespending.

Accordingtoreportedsalesinthebulkcarrierspacein2018,themostinterestwasgeneratedbythehandysizeandsupramaxsegments.Themostpopularagegroupwasfrom6to10yearsofage.Inthisagegroup,65handysizetotalling1.9mt-dwtand82supramaxtotalling4.6mt-dwtwerereportedsoldlastyear.Thiswasalsothemostpopularageprofileforlargerpanamaxandcapesizesegmentswith31capesizeof5.1mt-dwtand43

panamaxof3.6mt-dwtreportedsold.Thekeeninterestinhandysizeandsupramaxbulkcarriershelpedtorestore10-yearoldvaluestoaroundthepost-GFCaverageof$12.0mforhandysizeand$15.5mforsupramax.Sincethebottomofthebulkcarrierslumpinearly2016,newbuildingpriceshaveriseninlinewithincreasedinputcosts.Alongwithregulatoryconfusion,thishasfortunatelyactedasadeterrenttonewvesselcontractingandrenderedthesecondhandmarketplaceabetterhuntingground.Forexample,newbuildingpricesfelleachmonthonayear-on-yearbasisfromthebeginningof2016totheendof1Q17.Fromthatpoint,themonthlychangeintheNewbuildingPriceIndexwentfroma1%year-on-yeargaininApril2017toan8%gaininDecember2017.

TherisingpricetrendledtoastrongmonthofcontractinginDecember2017of70unitsof9.3mt-dwt,followedby50unitsof7.9mt-dwtinJanuary2018.MaybeitwasacaseofFOMO,fearofmissingout.Ordersstartedtailingoffbymid-2018aspricesshowedinexcessof10%gainseachmonthonthepricesinthesamemonthofthepreviousyear.Itillustrateshoweveryonewantsabargainbutittakesawhiletoidentifythetrend,anditalsohelpstohavethecompanyofotherswhenmakingsuchlargeinvestments.Acombinationofanimprovingearningsmarketandrisingpricesdefinitelyaffectedcontractingbehaviourasbulkcarrierordersbynumberwentfrom64in2016,upto379in2017,andbackto307in2018.

Thedeliveryscheduleforthecurrentbulkcarrierorderbookisnaturallyconcentratedon2019and2020withamuchthinnerdeliveryschedulefor2021,sofaratleast.40.5mt-dwtisscheduledtodeliverin2019,41.3mt-dwtin2020,12.1mt-dwtin2021,and0.9m-dwtin2022andbeyond.The94.8mt-dwtbulkcarrierdeliveryscheduleisbrokendownas50.9mt-dwtofcapesize,23.9mt-dwtofpanamax,15.1mt-dwtofsupramaxand4.9mt-dwtofhandysize.Theaverageunitsizeonorderineachsegmentis236,318-dwtincapesize,82,833-dwtinpanamax,61,840-dwtinsupramaxand33,618-dwtinhandysize.Overall,recentandfuturegrowthinthedrybulkfleetisputat2.9%in2017andestimatedat3.0%in2018andthenforecastat3.3%in2019and2.8%in2020.Whatreallymattersistheestimatedforecastsfor2019and2020astheseshouldbemoreorlesssetinstonebynow.Thecapesizesegmentisforecasttogrowby3.6%in2019and4.3%in2020,panamaxby4.0%in2019and3.3%in2020,supramaxat3.0%in2019followedby1.0%in2020,andhandysizeby1.4%in2019followedby0.2%in2020.Hence,thehandysizesegmentfacesthemostbenignsupplygrowth.

Interestingchangesareevidentinthedemandsideaswefacedeclininggrowthinmajorbulksandrisinggrowthinminorbulks.Theformermightbecorrelatedwitholdschoolindustrialproduction,astheyaredominatedbyironoreandcoal,whilethelatterareusuallyconsideredtobebettercorrelatedwithoverallGDPgrowth.Majorbulks,



The Tanker Market

carriedmostlybylargerbulkcarriers,rose3%in2016,5%in2017andjust1%in2018whileminorbulks,carriedmostlybysmallerbulkcarriers,sawflatgrowthin2016,followedby3%in2017and4%in2018.Significantly,wemaybeseeinganinflectionpointinChina’sironoreimportswhichhavebeenrisingsteadilysincethe2008shockoftheGFC.In2009,China’sironoreimportsstoodat614.6mtrisingsteadilytoapeakof1,058mtin2017.Then,lastyearin2018,theyfellback1%year-on-yearto1,047mt.Wewillneedtomonitortheimportdatafor2019toassesswhetherornotChinaisapproaching‘peaksteel’.Theanswerisprobablynot,asChinaisraisingthequalityoftheironoreitimports,thusincreasingefficiencyandneedinglessproduct.Itisalsousingmoresteelscrapforprocessinginelectricarcfurnaces.China’scrudesteelproductionhasbeensteadilyrisingfrom804.8mtin2016,to867.5mtin2017andto927.5mtin2018.

Sincethebeginningof2016,Chinahasbeenrampingupitspurchaseofhighergradesofironore,thussupportingawideningpricedifferentialbetween65%and62%FeironorefinesCFRTianjin.Theswitchtohighergradesincreasesefficiencyandalsolowerspollution,andonecannotunder-estimatetheurgencyofthedrivetoreducepollutioninChina’smaincities.However,onemustalsorespectChina’sabilitytopragmaticallychangecoursewhenthefactschange.TheFeijaominedisasterinJanuary,andacourtrulinginFebruary,couldhaveshutinasmuchas70mtofValeproduction.Thisistheequivalentof18%ofBrazil’sexportsand5%ofglobalseabornesupply.TheresultingfirminginglobalironorepricespromptedmanyChinesesteelmillstoswitchbacktolowergrades,orevenseekalternativefeedstock.ThefinalneteffectwilldependupontheactualrampupofVale’sS11Dmine,thereturntoformofAnglo’sMinasRiomine,andanyotherBraziliancontributionsthatmightclosetheactualsupplygap.Thenegativeimpactforthebiggestshipsinthecapesizesegment,andabove,isalreadyreflectedintheawfulQ1averageearnings.Ithasnegativelyaffectedsentimentwithtimecharterequivalentratesfallingtobelow$5,000dailyinfirsthalfMarchfromover$16,000inearlyJanuary.

AnotherfactorforChinesesteelmillsistheirexistinginventoriesofironoreaswellastheirportstocks.Theserosequiteconsiderablyin2018from151mtinearly2018

toapeakof162mtinearlyJunebeforefallingbacktoanannuallowof137mtattheendoftheyear.Itisneverquiteclearwhatproportionoftheseinventoriesisbeyondusefromaqualityperspectiveorbeyondsalefromapriceperspective.Anyway,sincetheendoflastyearinventorieshavebeenbuildingagainandwerebackupto145mtbytheendofFebruary.ThereasonsforthisrestockingmayhavebeeninfluencedbythetimingoftheChineseNewYearholidays;butalso,purchasesmayhaveincreasedtoprotectagainstthepossibilityofsupplydisruptionfromBrazil.ThereissomethingofaneconomicclashbetweentherecenttrendofrisingironorepricesandfallingChinesedomesticsteelpriceswiththeShanghaiSteelPriceIndexdownover15%from140attheendofDecember2018to118attheendofFebruary.Fortunately,ChineseironoreimportsarelikelytobesupportedbytheenforcedreductionofChineselowgradeandillegalminingintheinterestsofhigherqualityandlowerpollution.Chinesedomesticironoreoutputhasfallenfromamonthlyaverageofabout130mtin2014tolessthan70mtamonthin2018.

WecanonlyspeculateastotheprospectsforChineseironoreimportsoverthebalanceof2019giventhecurrentdisconnectbetweenironoreinputpricesandsteeloutputprices.Thesituationshouldnormalisesoonenoughoncewegetabetterideaofironoresupplyandsteeldemand.Asthingsstand,China’sironoreimportsfelltoa10-monthlowof83.1mtinFebruary,after91.3mtinJanuary,andwereabout1.5%belowthe84.3mtofFebruary2018.TheJan-Feb2019totalcameinat174.4mt,being5.5%belowtheJan-Feb2018tallyof184.6mt.ThereisalsothequestionoftheamountofnewcapitalthatwillbeinvestedinChineseinfrastructureasstimulusisgeneratinglessbangperbuckinvestedandChinesebanksarebecomingdangerouslyover-extended.PremierLiKeqiang’srecentannouncementattheNPCdidnothintatastimulusprogrammelargeenoughtoreallymovetheneedle.Chinaisalsoamajorimporterofcoalbuttheseimportshavebeenunderdownwardpressurefromslowergrowth,lowersteelprices,domesticenvironmentalissuesandtacticaltradedisputeswithAustralia.China’sgrainsimportsin2018sawariseinRussianandBrazilianimportsthankstobumpercropsandadeclineinAustralianandArgentinianimportsduetodrought.


The Tanker Market

Tankers had a dreadful year for most of 2018 before a rousing final quarter

illustrated just how quickly fortunes can change.

Tankershadadreadfulyearformostof2018beforearousingfinalquarterillustratedjusthowquicklyfortunescanchange.AccordingtoSINdata,thelargercrudeoiltankersegmentsperformedbroadlyinlinewithoneanotherin2018.AverageearningsforamodernVLCCcameinat$15,561dailyfortheyear,whileamodernsuezmaxwasat$16,466andamodernaframaxwasat$16,175perday.Theseannualaverageswouldhavebeenmuchlowerbutforbeingredeemedbyastrongfourthquarterwhenspotearningsspikeduptoandbeyond$50,000perdayineachofthelargecrudeoiltankersegments.

UptomidMarch2019,wehaveseenaV-shapedperformanceinspotmarketVLCCearningssothat,intheyearto15March,amodernVLCChasaveraged$26,924perday.Incontrast,amodernsuezmaxhasenduredslidingearningssincethebeginningoftheyearbuthasstillmanagedtoaverage$23,784daily,notsofarbehindtheVLCC.Amodernaframaxhasfollowedasimilarpathtothesuezmax,withearningshavingcomeoffsharplysincethestartoftheyear,givingayear-to-dateaverageof$24,169perday.Justasin2018theybroadlytrackedoneanother,andsotooin2019sofar,butatanaverageof55%abovefullyear2018earnings.

BalticExchangedataindicatesthattheVLCC-TCEpeakedat$35,772on3Decemberbeforesinking91%toatroughof$3,110on8February,backtoapeakof$22,793on1March,andthenbackdownto$15,021on15March.Suchvolatilityisnotforthefaint-hearted.TheSuezmax-TCEfell81%fromitspeakof$50,633on24DecemberandthenfellthroughoutQ1toatroughof$7,054on15March,withnosignsofaturnaround.Meanwhile,theAframax-TCEhasfallen70%invaluefromitsQ4peakof$44,167on19Decemberto$14,949on15March.IthasatleastrecoveredfromitsQ1troughof$10,843perdayasrecordedon12February.

Finally,onthecleanside,MRearningsaveraged$8,750perdayin2018andwere52%higherat$13,286dailyintheyearto15March.EarningshavebeeninsteadydeclineinQ12019butarestillbenefittingfromthegradualsteppingdownfromthemuchstrongerlevelsrecordedinQ4lastyear.BalticExchangedatashowsthattheMRAtlanticBasketpeakedat$33,118on12Decemberandhassincefallen58%toareadingof$13,791on15March.Theprospectsforthebalanceof2019shouldbebrighteroncethebettersupplyanddemandfundamentalsassertthemselves,andaswegetclosertotheregulatorychallengesof2020.

2018 still saw tanker asset values rise

TankerassetvaluesmadeahesitantrecoveryoverthecourseoflastyearaccordingtoBalticExchangedatathattracks5-yearoldtankervalues.Inthe12monthsbetweenearlyJanuary2018andearlyJanuary2019,a305,000-dwtVLCCwasup4.6%from$61.4mto$64.2m;a105,000-dwtaframaxwasup5.2%from$29.5mto$31.0manda51,000-dwtMRwasup11.5%from$23.7mto$26.3m.ItwasaKingCanutelikeachievementforassetvaluestoriseagainsttheincomingtideofdisappointingearnings.

Intheearlymonthsof2019wearestillwitnessingimprovementsinnominalpricesdespitethegenerallyweakerearningsenvironment.TheBaltic’smeasurementof5-yearoldvaluesseestheVLCCup4.5%from$64.2minearlyJanuaryto$67.1mon18March.Similarly,theBaltic’s5-yearoldaframaxisup6.8%from$31.0minearlyJanuaryto$33.1mon18Marchandits5-yearMRisup5.3%from$26.3mto$27.7moverthesametimeframe.Buyinginterestisstrongbaseduponbeliefinanearningsrecoveryoverthecourseof2019.

In2019,afterareasonablefirstquarterperformance,weareexpectingfurtherimprovementsinaverageearningsthatwilltakeassetvalueshigher.TheTankerSecondhandPriceIndex

hasshownsimilarvolatilitytospotearnings.Itwentfrom110pointsinDecember2018to117inJanuary,to117.5inFebruaryandthendownto114.5bymidMarch.ThestrongupwardsadjustmentinJanuarywasbaseduponthemarketrallyinQ4whichhasgraduallydissipatedasweapproachtheendofQ1.

Tanker Asset Sales

VLCCs

InFebruary2018,OceanYieldpurchasedfour319,000-dwtHHI-builtVLCCresalesfromKykladesMaritimeforareported$335menbloc,givingaunitpriceof$83.75mwithdeliveryinQ2andQ32019.Itwasacomplexinvestmentdealinvolvinga15-yearbareboatcharterbacktoclientsofthesellersanda5-yearsub-timechartertoanindustrialenduser,believedtobeKochIndustries.Thesellershaveoptionstobuythevesselsbackatpre-agreedstrikepricesaftersevenyearsintothecharter.Theseweretheonlyresalesrecordedlastyear.InmidJune,Euronavsoldsix300,000-dwtSWS-builtVLCCstoInternationalSeawaysforareportedenblocpriceof$434masasidedealtoitspurchaseoftheGener8fleet.FiveofthesehaddeliveredfromtheChineseyardin2016andtheotheronein2015.

SomeolderVLCCswerealsosoldstartingwiththeSeaLatitude309,285-dwtHHI2001reportedinAugustat$22.5mfromAgritradetoOceanTankers.InSeptember,theSeawaysSakura298,530Hitachi2001wasreportedsoldbyInternationalSeawaystoHellenicTankersfor$18.5mandsometendayslaterthesisterFrontAriake298,530-dwtHitachi2001wasreportedsoldforahigher$20.7mbyShipFinancetoundisclosedinterests.ItwasrumouredthattheshiphadgonetobuyerswhowillconvertittoanFPSO,andthepurchaseprocessusuallyattractsapremiumprice.InNovember,theAlterEgoI309,371Samsung2001wasreportedsoldbyNGMEnergytoKunlunShippingfor$21.5m.

HigherpriceshavebeenachievedthisyearforsimilarvintageVLCCsincluding,inJanuary,thePacificGlory299,999Imabari

2001reportedsoldfor$23.5mfromSinokorMerchantMarinetoKunlunShippingand,inFebruary,theVLSakura298,530Hitachi2001whichwasreportedsoldfor$24.0mfromHellenicTankerstoFPSOoperatorsNathalinGroup.ThislatestsalewouldsuggestthatHellenicTankerspocketeda$5.5mor30%profitinlessthansixmonthsinresellingthistankertotheThaioffshorecompany.Itconfirmsthefirmingtrendinassetvaluessincethebeginningof2018.

Suezmax

Therewerefewnotabledealsinthesuezmaxspacein2018but,inSeptember,CentralShippingofMonacowasreportedtohavesoldtworesale157,000-dwttankerstoPolembrosfor$65.0meachwhichwilldeliverfromHyundaiSamhoin2020.InNovember,IconwasreportedastheselleroftheShamrock156,516-dwtRongsheng2011toNavigarefor$30.0m.Inthesamemonth,CepsawasreportedtohavesolditsToldeoSpirit149,990Daewoo2005toEurotankersforalittleover$19.0m.InJanuarythisyear,EurotankerswasreportedastheselleroftheirvintageEurohope159,539-dwtDaewoo1999toMiddleEastbuyersfor$12.9m.

Aframax

Therewasmoreactivityintheaframaxcrudetankersegment.InFebruary,HansaShippingwasreportedtohavesolditsHSCarmen113,033-dwtHyundaiSamho2003for$11.0mtoCoralShipping.Inthesamemonth,MaerskTankerswaslinkedwiththesaleofitsMaerskPrivilege105,483-dwtSumitomo2003for$12.5mtoWinsonOil.ByJune,EneselwasreportedtohavesoldapairofsistershipaframaxtankerstoThenamaris,beingthePantelisandtheSparto,both114,500-dwtSamsung2004,for$11.5meach.ComeJuly,K-LinewasthereportedselleroftheRiverEternity105,445-dwtSumitomo2006toGreekbuyersfor$13.25m.

InNovember,DHTwasreportedtohavesolditsDHTSophie112,045-dwtHyundaiSamho2003for$11.9mand

We have a constrained supply side and the prospect of IMO 2020

disruption to effective tonnage supply growth. We are less clear on

trade flows as the US ramps up its crude oil exports while Opec and

Russia cut their output by 1.2m-bpd or more to protect oil prices.


itsDHTCathy111,928-dwtHyundaiSamho2004for$12.4m,bothtoHorizonTankers.Alsoatthattime,HansawaslinkedtothesaleofitsHSTosca115,635-dwtHHI2004for$13.0mtoUnionMaritime.MoremodernshipsincludedthereportoftheGloryCrescent105,405-dwtHHI2013fromMitsubishitoAGShippingfor$24.5m.Finally,inJanuary,VikenShippingwasreportedtohavesoldatrioof115,341-dwtSamsung-builtshipstoMiddleEastbuyers:theTroviken(2006),ToftevikenandTelleviken(both2005)for$48.5mintotal.

MR

TherewasplentyofactivityintheMRsecond-handsegmentin2018,althoughvalueswerefairlyflatduringtheyear,asillustratedbytheMarchreportedsaleofthePacificRainbow45,986-dwtShinKurushima2008for$16.0mfromTaiheyotoMaritecandtheDecemberreportedsaleoftheAyesha47,134-dwtHMD2008for$16.0mfromProductShippingtoNorden.InJanuary,theMarineExpress45,902-dwtShinKurushima2009wasreportedsoldbyMitsuiWarehousetoundisclosedinterestsfor$16.0mand,inFebruary,theQueenExpress45,902-dwtShinKurushima2009wasreportedsoldbyFuyoKaiuntoTransoceanMaritime,alsofor$16.0m.Laterinthesamemonth,thesamebuyerswerelinkedtothepurchaseoftheHighStrength46,646-dwtNaikai2009for$16.4mfromD’Amico.Buyingandsellinginteresthasbeenkeeninthissegment.

InSeptember2017,ScorpioTankerssoldfive50,000-dwtHMD2012-builtMRproducttankerstoBoComLeasing.Thereportedunitpricewas$27.5meachwitha7yearsbareboatcharterbackat$9,025dailypervessel,withthree1-yearextensionoptionsandpurchaseoptionsfromendyeartwo.Assumingthesedetailstobecorrect,thenthisisaclassicexampleofone-wayoptionality,inthisinstanceallagainstthelessor.Theproducttankerhighlightsof2018werefivefollow-ondealsannouncedbetweenMayandJuly.Theyinvolved23MRsand5LR2sfromtheScorpiostable.ThebuyerswereAvicLeasing,HuarongLeasing,CMBLeasing,ICBCLeasingandoneotherundisclosedfinancialinstitution.Thetypicalmodelwas7-8yearsbareboatcharterback,purchaseoptionsfromendyearthree,andpurchaseobligationsatcharterexpiry.InthiswayScorpiowasabletodestressitsbalancesheetwhilestillkeepingoperationalcontroloftheassets.

Tanker supply and demand balance

Thetotaltankerfleet(crudeandproduct)roseonlymarginallyin2018,byjust1.1%,goingfrom581.9m-dwtto588.1m-dwt.Thecombineddeliveryschedulefor2019is41.3m-dwt,orjust7.0%ofthestartyearfleet.Thiswillreduceduringthecourseoftheyearwithscrappingandslippage.Thetotalorderbookissetat11.3%ofthefleet,whichishistoricallylow.Insimpleroundednumbers,in2018totaltankersupplyrose1%againsttotaltankerdemandof2%.In2019,supplyanddemandareexpectedtoriseby3%each.Drillingdown,crudetankerfleetgrowthwasonly0.2%in2018andforecasttoexpandby3.6%in2019whilecrudetankerdemandwasat2.2%in2018andforecasttogrowby3.6%in2019.Supplyanddemandiscomingintobalancebutwestillhaveatonnageoverhangfromprioryearsofoversupplyingactualdemandgrowth.

Theproducttankerfleetgrewby1.6%in2018andisforecasttoexpandbyanother2.6%in2019.Thiscompareswithproducttankerdemandrising2.3%in2018andforecastdemandgrowthof3.2%in2019.Thissupply-demandcombinationsuggeststhatgoodtimeslieaheadforcleantankers.WehaveaconstrainedsupplysideandtheprospectofIMO2020disruptiontoeffectivetonnagesupplygrowth.WearelessclearontradeflowsastheUSrampsupitscrudeoilexportswhileOpecandRussiacuttheiroutputby1.2m-bpdormoretoprotectoilprices.BothVenezuelaandIranaresufferingfromdwindlingoutputandexportsastheUSsubjectsbothcountriestosanctions.InVenezuela,theUSdoesnotrecognisethere-electionofPresidentMaduroandinIrantheUSwantstochokeoffoilincomewhichitsuspectsisfinancingIran’snuclearweaponambitions.

Rising US crude output

TheUSgovernmentistighteningitssanctionsontheoilindustriesofIranandVenezuelaandthisisgivingtheoilbearspauseforthought.USproductionandexportoflightsweetgradescontinuestoriseastheEIAputaverageproductionat11.0m-bpdin2018andisforecastingUSoutputgrowthof1.4m-bpdin2019to12.4m-bpdandthenanother0.8m-bpdin2020to13.2m-bpd.ThiswilltakeUSoutputwellclearofRussiaandSaudiArabiathatarepartofanOpec-plusgroupthathaspledgedtoreduceproductiontocounterbalancetherelentless

riseinUSoutput.Asitstands,theUSisexpectedtoeclipsetheOpec-plusreductionallonitsownthisyear.WithreducedoutputfromsanctionsandunreliableoutputfromvariousAfricanproducersthemarketmaybetippedintoshortagein2019,thuspushingupoilprices.BymidMarch,Brentwasupto$67abarrelfroma52-weeklowof$50abarrelonChristmasEve.

Oil trading patterns

Theseabornetradingofcrudeoilandoilproductsfacesashake-upasrefinersjockeyforthesweetorsourcrudefeedstockthatareoptimalfortheirrefiningsystems.However,inmanywaysnotmuchhaschanged.IMO2020willseearound2.5m-bpdofheavyfueloil(HFO)replacedbyIMOcompliantlowsulphurfueloil(LSFO)orMGO.ThenewerrefinerieseastofSuezarebestplacedtoproduceLSFOandcandosowithsweetorsourcrudeswiththechoicedrivenmainlybytherelativecostofeach.ThisshouldreinforceAsiandemandforimportedcrudeoil,thussupportinglong-haulcrudeshipmentsfromtheAtlantictotheIndianOceanandtheFarEast,whilealsounderpinninglong-hauloilproductshipmentsfromeastofSuezintoconsumermarketsintheAtlantic.Thelong-haulmovementofcrudefromwesttoeastandofproductfromeasttowestisapatternthathasexistedformanyyearsalready,withIMO2020settogiveitasignificantboost.

China crude imports

Inthelargestcrudeoiltankersegment,itisworryingthat65VLCCsaresettodeliverover2019,with11havingalreadydeliveredinJanuary,3inFebruaryandanother51scheduledtodeliveroverthebalanceoftheyear.VLCCsinparticulararefacingthedisruptionoflowerexportsfromSaudiArabia,Iran,RussiaandVenezuelaasacombinationofsanctionsandoutputcutstakeeffect.AtleastChinaisstillraisingitsoilimports.In2018,China’stotalcrudeoilimportsaveraged9.2m-bpd,up10%year-on-year,accordingtoChinesecustomsdata.Itsetmonthlyrecordhighsin4Q18(i.e.higherthananymonthpreceding4Q18)at9.6m-bpdinOctober,10.4m-bpdinNovember(itshighestever,andup8.5%year-on-year)and10.3m-bpdinDecember.Thiswaslargelyinspiredbytheteapotrefineriesrushingtotakeuptheirannualimportallocations,possiblyanticipatingimminentpriceincreasesshouldtheChinesecentralgovernmentimposetariffsonimportedUScrudeoil.InJanuary2019,China’scrudeoilimportswereup5.1%year-on-yearto

10.1m-bpd,followedby10.2m-bpdinFebruary,upalmost22%onthe8.4m-bpdofayearago.Thisisapromisingstarttotheyear.IncrementaldemandisbeinghelpedbythegradualrampingupofthroughputattwonewChineserefinerystart-ups:HengliPetrochemicalandZhejiangPetrochemical.

US-China trade tensions

Earlierthisyear,Reutersreportedthatoiltradershadviewedthe1MarchdeadlinefortheresolutionofUS-Chinatradefrictionasthemostsignificantdateinthecalendar.On25February,theUSpresidentblinkedfirstandannouncedthatgoodprogressinthebilateraltalkswouldwarrantanindefinitedelaytothetariffescalationdeadlinesothattheUSandChinacouldcutadeal.Ithasbecomeevidentthatthetradewarbetweenthesetwosuperpowersisalreadyaffectingglobalgrowthevenatthelowertarifflevels,amplejustificationfortryingtoavoidanincrease.Thismayonlybeatruceinamuchlongerwar.Thereistheshort-termdiscussionaroundtariffsandthebilateraltradebalanceandthelong-termpoliticalissueofreformoftheChineseeconomicmodel.TheUSistakingexceptiontoChina’sformofstatecapitalismthatisgroundedintheonepartystate.Itinvolvescentralandlocalgovernmentsupportofstate-ownedenterprisesandislubricatedbypolicybankloansandsubsidies.

Thiscreatesaclashwiththewesternconceptofopenmarketeconomiesandalevelplayingfieldthatofficially,atleast,outlawsstateaid.ItshouldbepossibleforChinatogiveadequatepledgestoincreasethepurchaseofUSagriculturalandcapitalgoods,openupitsdomesticmarketandcrackdownonintellectualcopyrightbreaches.Theeconomicreformagendaisoneforthebackburnerasitwillrunandrunanditcanonlygetinthewayofachievingdeliverablegoalsonthemoreimmediatetradeissues.Thissimmeringdisputebetweentheworld’stwolargesteconomiesistransmittingnegativedemandimpulsesaroundtheworld,eatingintotheglobalconsumptionofmiddledistillatesusedintransport,manufacturing,miningandfarming.DistillateconsumptionhasbeencloselycorrelatedwiththeUSandglobalbusinesscycleoverthepast50years.WecanimaginethatevenapartialresolutionoftheUS-Chinatradeissueswillgiveaboosttothetankertradesasitwillclearthewayfornewinvestmentandstrongereconomicgrowth.

The newer refineries east of Suez are best placed to produce LSFO and

can do so with sweet or sour crudes with the choice driven mainly by

the relative cost of each. long-haul movement of crude from west to

east and of product from east to west is a pattern that has existed for

many years already, with IMO 2020 set to give it a significant boost.

Distillate consumption has been closely correlated with the US and

global business cycle over the past 50 years. We can imagine that

even a partial resolution of the US-China trade issues will give a

boost to the tanker trades as it will clear the way for new investment

and stronger economic growth.


The Tanker Market Global oil demand is still rising despite slower global economic growth. The IEA forecasts global oil demand growth of 1.4% in 2019. Seaborne oil demand is forecast at over 3%.

Lower crude output from Opec, Russia, Iran and Venezuela favour more long-haul west to east exports from non-Opec Atlantic producers. The converse should apply to products.

This year we foresee both crude and product seaborne demand exceeding crude and product tanker supply in what promises to be a harbinger of better rates and values.

2. …helped by higher OPEC production in Aug-Nov 2018…

4. …led to a surplus in the second half of 2018. 8. Strong Chinese and Indian crude import growth helped…

1. The rise and fall of oil prices in 2018….

3. …offsetting lower Iranian exports as sanctions bit…

5. It was also a reflection of the status of OECD commercial inventories.

6. Absolute growth in the global seaborne trade of crude oil and oil products weakened last year…

7. ...despite stronger gains in oil product tonne-mile trade.

Opec and non-Opec monthly productionSource: EIA, Hartland Shipping

World oil supply and demand balanceSource: IEA, Hartland Shipping

China and India crude oil importsSource: EIA, Hartland Shipping

Brent and WTI quarterly average priceSource: HSBC Global Research, Hartland Shipping

Iran crude oil exportsSource: Thomson Reuters, Hartland Shipping

OECD, crude and product commercial inventoriesSource: Thomson Reuters, Hartland Shipping

Crude and product seaborne tradeSource: CRS, Hartland Shipping

Crude and product seaborne trade (tonne-miles YoY%)Source: CRS, Hartland Shipping

-1.5

-1.0

-0.5

0

0.5

1.0

1.5

2.0

96

97

98

99

100

101

102

103

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18

MBPD

MBPD

Total stock change & Misc (RHS) Demand (LHS) Supply (LHS)

0%

1%

2%

3%

4%

5%

6%

7%

Oil product trade Crude oil trade2016 2017 2018

YOY %

9%

1%

5%

14%

10% 10%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2016 2017 2018India Crude oil imports Yoy % China crude oil imports Yoy %

YOY %

0

0.5

1.0

1.5

2.0

2.5

3.0

Jan-16Apr-16

Jul-16Oct-16Jan-17

Apr-17Jul-17Oct-17

Jan-18Apr-18

Jul-18Oct-18Jan-19

Mbpd

56

5758

59

6061

6263

6465

30.0

30.5

31.0

31.5

32.0

32.5

Jan-

18Fe

b-18

Mar-

18Ap

r-18

May-

18Ju

n-18

Jul-1

8Au

g-18

Sep-

18Oc

t-18

Nov-

18De

c-18

Jan-

19

Mbpd

Opec monthly production (LHS)Non-Opec monthly production (RHS)

-4%

-2%

0%

2%

4%

6%

8%

2014 2015 2016 2017 2018

YOY %

(ton

nes)

Oil product Crude oil50

55

60

65

70

75

80

Brent WTI

US$/

Barr

el

1Q18 2Q18 3Q18 4Q18

-500

50

100

150 200

250

300

2,600

2,700

2,800

2,900

3,000

3,100

Feb - 17

Mar-

Apr- May

Jun

Jul - 17 -

-

- - -

Jan - 18

Feb

Mar - 18

Apr - 18

May - 18

Jun - 18

Jul - 18

Aug - 18

Sep - 18

Oct - 18

Nov - 18

Dec - 18

Jan - 19

Feb - 19

Mar - 17

Apr - 17- May - 17

Jun - 17

Aug - 17-

Sep - 17- Oct - 17

-

Nov - 17-

Dec - 17-

Feb - 18

Mill

ion b

arre

ls

Mill

ion b

arre

ls

2017-18-19 estimated surplus (RHS) OECD, Crude and Product commercial inventories (LHS)Latest 5-yrs avg (2012-17) & (2013-18) & (2014-19)(LHS)

Jan - 17


10. Overall, US crude oil export growth played a big part…

16. … but a rebound in Brazilian oil output is expected to partially offset the loss…

15. Sanctions on Iran and Venezuela, with the OPEC cuts, is reducing the supply of medium and sour crude grades…

12. …while production is reaching new highs…

14. This left Opec and its allies with no choice but to curtail output yet again this year, with an intended 1.2m-bpd cut in 2019.

9. …while US sales to Europe offset falling Venezuela exports.

17. …and IMO 2020 is expected to lift demand for light sweet grades.

18. Tankers endured another difficult year but the last quarter proved how quickly earnings can recover…

11. …supported by a deepening WTI discount...

13. …with plenty of potential for additional new supply.

US crude exports and US crude imports from OPEC countriesSource: Thomson Reuters, Hartland Shipping

2019 Incremental oil supply forecastSource: Clarksons, Hartland Shipping

Crude differential - Heavy vs light gradeSource: Thomson Reuters, Hartland Shipping

US total crude imports and US crude productionSource: Thomson Reuters, Hartland Shipping

Oil demand growth, US oil supply growth and OPEC and allies production cutsSource: EIA, Hartland Shipping

US Gulf crude exports to Europe and Venezuela crude exportsSource: Thomson Reuters, Hartland Shipping

Oil product demand forecastsSource: Argus, Hartland Shipping

Average crude oil and product tankers earningsSource: CRS, Hartland Shipping

WTI discount versus BrentSource: Thomson Reuters, Hartland Shipping

Drilled but uncompleted rig count - Permian BasinSource: Baker Hughes, Hartland Shipping

1.5

2.0

-1.2-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

2019

Mbpd

Global oil demand growth expectationUS oil supply growth Opec & Allies production cut

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Jan-14Mar-14

May-14Jul-14

Sep-14Nov-14

Jan-15Mar-15

May-15Jul-15

Sep-15Nov-15

Jan-16Mar-16

May-16Jul-16

Sep-16Nov-16

Jan-17Mar-17

May-17Jul-17

Sep-17Nov-17

Jan-18Mar-18

May-18Jul-18

Sep-18Nov-18

Jan-19

US$P

D

COT PT

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Mar-

14Ju

n-14

Sep-

14De

c-14

Mar-

15Ju

n-15

Sep-

15De

c-15

Mar-

16Ju

n-16

Sep-

16De

c-16

Mar-

17Ju

n-17

Sep-

17De

c-17

Mar-

18Ju

n-18

Sep-

18De

c-18

No of

DUC

6

7

8

9

10

11

12

13

6

7

8

9

10

11

12

13

Jan-

13

MBPD

MBPD

May-

13Se

p-13

Jan-

14Ma

y-14

Sep-

14Ja

n-15

May-

15Se

p-15

Jan-

16Ma

y-16

Sep-

16Ja

n-17

May-

17Se

p-17

Jan-

18Ma

y-18

Sep-

18

Imports (RHS) Production (LHS)Imports (RHS) Production (LHS)

7.2

7.4

7.6

7.8

8.2

8.4

8.6

7.0

7.2

7.4

7.6

7.8

8.0

8.2

8.4

8.6

-0.5

0

0.5

1

1.5

2

LPG & Ethane Naphtha Gasoline Jet-Kero Diesel Fuel oil

Incr

emen

tal C

hang

e (Mb

pd)

2018e2019f2020f2021f

-14

-12

-10

-8

-6

-4

-2

0

2

4

Feb-

14

US$

Jun-

14

Oct-1

4

Feb-

15

Jun-

15

Oct-1

5

Feb-

16

Jun-

16

Oct-1

6

Feb-

17

Jun-

17

Oct-1

7

Feb-

18

Jun-

18

Oct-1

8-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

Iran Venezuela Brazil

MBpd

2019F 2020F

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan-

16Ma

r-16

May-

16Ju

l-16

Sep-

16No

v-16

Jan-

17Ma

r-17

May-

17Ju

l-17

Sep-

17No

v-17

Jan-

18Ma

r-18

May-

18Ju

l-18

Sep-

18No

v-18

Mbpd

Exports US Crude import from OPEC countries

-4

-3.5

-3

-2.5

-2

-1.5

-1

-0.5

0

0.5

Feb-14

US$

Feb-15 Feb-16 Feb-17 Feb-18 Feb-19Urals - North Sea Brent light crude differentials

0

0.5

1.0

1.5

2.0

2.5

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan-

15

May-

15

Sep-

15

Jan-

16

May-

16

Sep-

16

Jan-

17

May-

17

Sep-

17

Jan-

18

May-

18

Sep-

18

Jan-

19

Mill

ion b

arre

ls

Million barrels

US Gulf crude export to Europe (LHS)Venezuela - crude export (RHS)


19. Attractive second-hand values rose on strong buying interest. 22. …and in the small to medium size product tankers…

20. The pace of deliveries slowed, but still remained elevated. 23. …helped to minimise fleet growth in 2018.

21. Active crude tanker scrapping, particularly in the medium to large size segments… 24. The OB/FL ratio stayed at its lowest level on record…

Change in asset values by segment and age group (Jan-18 to Jan-19)Source: Hartland Shipping

Oil product tanker quarterly demolitionsSource: CRS, Hartland Shipping

Quarterly vessels deliveriesSource: CRS, Hartland Shipping

Crude oil and product tanker fleet growthSource: CRS, Hartland Shipping

Crude oil tanker quarterly demolitionsSource: CRS, Hartland Shipping

Tanker orderbook as a percentage of the fleetSource: CRS, Hartland Shipping

0

1

2

3

4

5

6

7

8

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q17 4Q18 1Q19 qtd

Mill

ion D

WT

vlcc

suezmax

aframax

panamax

0%

5%10%15%20%25%30%

35%40%45%50%

0

100

200

300

400

500

600

700

19961998

20002002

20042006

20082010 2012 2014 2016 2018

M-DW

T

FL/OB Ratio

Tanker Fleet Development (LHS) Fleet/OB Ratio (RHS)

0

2

4

6

8

10

12

14

1Q16

2Q16

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4Q16 1Q17

2Q17

3Q17

4Q17

1Q18

2Q18

3Q18

4Q18

Q1-2

019q

td

Mill

ion D

WT

PT COT

0%

1%

2%

3%

4%

5%

6%

7%

2017 2018

PT COT

15% 13% 15%

27%

13%18%

32%

20%14%

10%16%

47%

3% 4%

-9% -8%

8%12%

5% 3%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Resa

le

5-yr

old

10-y

r old

15-y

r old

Resa

le

5-yr

old

10-y

r old

15-y

r old

Resa

le

5-yr

old

10-y

r old

15-y

r old

Resa

le

5-yr

old

10-y

r old

15-y

r old

Resa

le

5-yr

old

10-y

r old

15-y

r old

VLCC Suezmax Aframax LR1 MR

0

0.5

1.0

1.5

2.0

2.5

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19qtd

MILL

ION D

WT

LR2LR1MRHandySmall


Chartbook

Turning to the chartbook, we can see a pictorial time-line of what

happened in the oil and tanker world in 2018, starting with crude oil price

fluctuations.

Lastyear,Brentpricesended30%higheryear-on-yearwhileWTIwasup27%.ThetwogradestrackedeachotherandenjoyedtheirstrongestquartersinQ2andQ3beforeplunginginQ4onfearsofUS-ledoversupplyatatimeofslowingglobaleconomicgrowth.InitsbestquarterBrentaveraged$75.80inQ3andinitsworst$67.30inQ1.ForWTI,itsbestquarterwas$69.50inQ3anditsworstwas$59.00inQ4.WTIwasatasignificantdiscounttoBrentallyear,afunctionofitbeingoversuppliedintheUSwherethereisinsufficientrefiningdemandforsuchlightergrades.Shaleoilproductionisrisingfasterthanpipelineandportinfrastructurecangetittomarket.ThiscausessuppliestobuildupatCushingandpricestofall.Fortunately,thereisexportdemandforWTIinEuropeandAsiabutChinesebuyershavebeenholdingbackfrombuyingUScrudewhilethetwocountriesareatloggerheadsovertradeissues.

ThecooperationagreementbetweenOpecandthenon-Opec11,ledbyRussia,tocutoutputinthefaceofrisingnon-Opecsupply,heldupwellin2018.Non-Opecproductionroseallyeargoingfrom59.3m-bpdatthestartto62.6m-bpdattheendof2018whileOpecoutputfellfrom32.0m-bpdto31.4-bpdoverthecourseoftheyear.ByendJanuary2019,non-Opecoutputhadrisensharplyto64.4m-bpdwhileOpecoutputhadfallenfurtherto30.9m-bpd.RenewaloftheOpec-Russiaagreementwillseethemtargetcombinedcutsof1.2m-bpdduring2019despitetheimpactofUS-ledsanctionsonIranandVenezuelathatarereducingtheiroutputandexports.In2018,Iraniancrudeoilexportsfellfromayearlypeakof2.6m-bpdattheendofMaytoanannuallowof0.7m-bpdbyendDecember,whileVenezuelancrudeoilexportsoscillatedintherangeof1.1to1.4m-bpdin2018,wellshortofthe1.9m-bpdthatitexportedinearly2017.VenezuelanoutputandexportswillcontinuetoreduceunderUSsanctions.Conversely,totalUSoilproductionrosetoanaverageof11.0m-bpdin2018,accordingtotheEIA,andisforecasttoriseto12.4m-bpdin2019andto13.2m-bpdin2020.

[By4Q18,globaloildemandhadhitapeakof100.9m-bpdwhileglobaloilsupplywasonemillionbarrelshigherat101.9m-bpd,accordingtotheIEA.By4Q19,worldoildemandisforecasttoriseto102.2m-bpdwhile

worldoilsupplyisestimatedtohit102.4m-bpd.Thus,a1.3m-bpdincreaseindemandwillbemetbyamuchsmaller0.5m-bpdincreaseinsupply,withanarrowingoverhangsuggestingthatoilpricesmayfindsupport.OECDcommercialinventorieshaddeclinedoverthecourseof2017,fromjustover3.0billionbarrelstojustabove2.8billionbarrels,takingthembackto5-yearaveragelevels.ThishelpedoilpricesrecoverinQ2andQ3beforereturningtoasmallsurplusinQ4andconsequentiallylowerprices.USstrategicoilreservesfellfrom696millionbarrelsinearly2017to691millionbarrelsinearly2019,whileUScommercialoilinventoriesfellfrom483millionbarrelsinearly2017to440millionbarrelsatthestartof2019.]

Inits15MarchOilMarketReport,theIEAnotedthatglobaloildemandgrowthslowedto0.95m-bpdinQ42018,a0.3m-bpdreductioncomparedwith4Q2017.ThiswasputdowntoslowerOECDdemand,withlargefallsinEuropeandAsiaandslowerdemandintheAmericas.Despitethis,itisstayingwithitspreviousestimatesandforecastsofglobaloildemandgrowthof1.3m-bpdin2018and1.4m-bpdin2019.Thisislargelypremisedonstrongerdemandgrowthinnon-OECDcountries,especiallypartsoftheMiddleEastandAsia.Globaloiloutputwasat99.7m-bpdinFebruary,up1.5m-bpdonayearago,ledbytheUSandothernon-Opecproducers.Itreckonsthatnon-Opecproductiongrowthwillslowfromarecord2.8m-bpdin2018to1.8m-bpdin2019.

TheIEAclaimsthatVenezuelanoutputstabilisedataround1.2m-bpdinrecentmonthsbeforedroppingoffinrecentweeks.AftertheOpec-plus1.2m-bpdcuts,itputsOpec’seffectivesparecapacityat2.8m-bpd.IranandVenezuelaareexcludedfromthecalculation.MuchofthissparecapacityiscrudeoilofsimilarqualitytoVenezuela’sexports,thusmajorsupplydisruptioncanbeavoidedevenifVenezuela’sproductionfallsfurther.Atpresent,supplyanddemandareseentobeinbalance.ThebiggamechangerfortheIEAisitsestimatethattheUSwillbecomeanetoilexporteronanannualaveragebasisby2021.AsCanadianoilproductionisalsorising,withmostofitgoingtoUSrefiners,UScrudewillbefreedupforexport.ThisyearUSseaborneoiltradewillmoveintosurplusandnetexportswillrisetonearly4m-bpdby2024.

25. …thanks to relatively low ordering.

26. The COT delivery schedule is slowing, except VLCC/Aframax...

27. …while 70% of the product tankers on order are MRs.

Crude oil and product tanker contractingSource: CRS, Hartland Shipping

Crude oil tanker delivery scheduleSource: CRS, Hartland Shipping

Oil product tanker delivery scheduleSource: CRS, Hartland Shipping

0

20

40

60

80

100

120

140

2019 2020 2021+

No of

Ship

s

LR2 LR1 MR Handy

-4%-2%0%2%4%6%8%

10%12%14%16%

2000 2001

2002

2003

2004

2005

2006

2007

2008

2009 2010 2011

2012

2013

2014

2015

2016

2017

2018

2019

f20

20f

Seaborne product trade growth (Tonne-mile)Product tanker fleet growth (M-dwt)

YOY%

0

20

40

60

80

100

120

140

2019 2020 2021+

No of

Ship

s

VLCCSuezmaxAframaxPanamax

-10%-8%-6%-4%-2%0%2%4%6%8%10%12%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010 2011

2012

2013

2014

2015

2016

2017

2018

2019

f20

20f

Seaborne crude trade growth (Tonne-mile)Crude tanker fleet growth (M-dwt)

YOY%

269

129154

427

227

424

86

286

193

100

50

100

150

200

250

300

350

400

450

2010 20112012 2013 2014 2015 2016 2017 2018

2019ytd

No of

Vess

els

Crude Oil TankerProduct Tanker

28. Overall we are at an inflection point in the crude sector… 29. …and so too in the product sector. Better times lie ahead!

Crude tanker supply and demand balanceSource: CRS, Hartland Shipping

Product tanker supply and demand balanceSource: CRS, Hartland Shipping


FebruaryorMarch,althougha2-millionbarrelVLCCshipmentofUScrudeissettoarriveinChinainmidApril.

USsanctionsonVenezuelaareopeningupmoreexportopportunitiesforUScrudeasVenezuela’sproductionandexportsdecline.Itscrudeoilexportsfellfromanaverageof1.55m-bpdin2017to1.29m-bpdin2018andlatestfiguresshowthatitsexportstumbledtojust0.71m-bpdinFebruary2019.TotalUScrudeoilproductionhasrisenfrom9.2m-bpdinJanuary2016toanall-timerecordof12.0m-bpdinJanuary2019,a30%gaininthreeyears,afteraveraging11.0m-bpdin2018.ThishasledtoanincreaseinUSexportsandadownwardtrendinUSimports,particularlyofOpeccrude.ThisisgeopoliticallyhelpfulasitreducesAmericandependenceuponOpec.Instead,theUSfindsitselfcompetingwithOpecforcrudeoilsalesinglobalmarkets.UScrudeoilexportshaverisenaroundfive-foldfromJanuary2016whenitexportedonly0.49m-bpd.InQ42018,itexported2.33m-bpdinOctober,2.61m-bpdinNovemberand2.51m-bpdinDecember.SinceJanuary2016,UScrudeoilimportsarestillholdingataround8.0m-bpdasitneedstoimportheaviergradesofcrudeoilthanitproducesdomesticallyforitsrefiningcomplexintheGulfofMexico.However,USimportsofOpeccrudehavefallenfromanaverageof3.18m-bpdin2016,to3.12m-bpdin2017andto2.62m-bpdin2018.

UScrudeexportshavebeenhelpedbyoverseasdemandforlightsweetcrudeandbythefactthattransportandpipelinebottlenecksintheUShaveledtoaglutofWTIaroundCushing,Oklahoma,theWTIstorageandpricingpoint.ThishasmeantthatWTIhasbeentradingatawidediscounttoBrentwhichhasmadeitanattractivebuyintheFarEast,evenafteraddinginthecostsofpipelineandseabornetransportation.In4Q16,Brenttradedatabouta$2abarrelpremiumtoWTIbutsincethenithasbeenatadiscountasUScrudeoilproductionhassteadilyrampedup.In4Q18,thisdiscountwentoutasfaras$12abarrel.ThedrilledbutuncompletedrigcountinthePermianBasinstandsatover4,000unitsupfromaround1,200onlythreeyearsago.Thiscreatesthepotentialtoeasilyincreaseproductionshouldpricesjustifyit.

Oilmarketsupplyanddemandisprecariouslybalanced,whichmightexplainwhyhedgefundsareflippingbetweenbeinglongandshort.Risingproductionoflightersweetgrades,especiallyfromtheUSbutalsoBrazil,isinconflictwithfallingproductionofheaviersourgrades,fromthelikesofIranandVenezuela.ThissituationisbeingexacerbatedbythevoluntaryRussianandOpecoutputcutsofsimilarheaviergradesfromMiddleEasternproducerssuchasSaudiArabia,KuwaitandtheUAE.Urals,ahighsulphurRussiancrude,wouldnormallytradeatadiscounttolowsulphurBrentfromtheNorthSea.Typically,overrecentyears,thisdiscounthasbeenupto$3.5abarrelcomparedwithBrentbut,inearly2019,itis

tradingonaparitybasis.Changestooutputandpricingsuggestthatthereiscurrentlyasurplusofthelightercrudeoilgradesthateasilyconverttomiddledistillatessuchasgasoline,dieselandjet.Atthesametime,thereisarelativeshortageofthemediumtoheaviergradesthatareindemandfromcomplexrefineries,andoftheresidualfuelsthatareusedasHFOinshipenginesforpropulsionandbyutilitiesforpowergeneration.

IMO 2020

Fromashippingperspective,theimplicationisthatthereisplentyoffeedstockfor0.5%sulphurLSFObutlessfeedstockforupto3.5%sulphurHFO.Thissuggeststhatthepricespreadbetweenthetwomaynarrowifthecurrentmarketdynamicspersist,whichseemslikelyatpresent.Theshippingindustrywasexpectingapricedeltaof$250-300atonnebetweenHFOandLSFOby2020;thishasbeenregardedasanattractivemarginandmighteasilyjustifyfittingscrubberstocertainlargerships.However,attheendofFebruary,thefuturesmarketwasshowingalowerdiscountof$175-185atonneforcalendar2020.AsmorerefineriesupgradetheirHFOoutputtomorerefinedgrades,andasmoreshipsfitscrubbers,theavailabilityofHFOwillfallanditspricewillrise.Conversely,theabundanceoflightsweetcrudeinthemarketmakesitscheapertoproducemiddledistillates,demandforwhichmaybeunderpressureastheglobaleconomyslows.Hence,wehaveapincermovementthatwillmostlikelycompresstheHFO-LSFOspread.

Atthispointwereturntotankerearningstakingalonger5-yearperspectivefromthebeginningof2014.Averagecrudetankerearningshaveoutperformedaverageproducttankerearningsoverthisperiod.ThelargecrudetankerannualaverageearningsarederivedfromthecombinationoftheVLCC,suezmaxandaframaxsegments.In2014,theymanaged£27,393daily;in2015,$49,663perday;in2016,$30,503daily;in2017,$15,880perday;andin2018,$15,969daily.Theaverageearningsfortheselargecrudetankershavesettledataround$15,900perdayinthelasttwoyearsof2018and2017,abouthalfthelevelof2016and68%belowthelevelof2015.Stillpositivedemandgrowthandrestrainedsupplygrowthindicatethatweshouldbeinforacyclicalrecoveryinearningsin2019.ThelargeproducttankerannualaverageearningsarederivedfromthecombinationoftheLR2,LR1andMRsegments.In2014,theyachieved$16,016daily;in2015,$26,537perday;in2016,$14,584daily;in2017,$10,023perday;andin2018,$9,751daily.The$9,900perdayaverageofthelasttwoyearswas32%lowerthan2016and63%lowerthanthebestyearof2015.Likecrudetankers,thesupplyanddemanddatasuggeststhatwearedueforacyclicalrecoveryinearningsin2019.

Despitetheweakearningsof2018,investorshavebeenanticipatingbettertimesaheadandlastyeartheywere

TherisingprofileoftheUSinglobaloilmarketsprovidesgreaterchoicetoconsumersandgivesAmericasecurityofsupplyatatimeoftensegeopolitics.BeingabletogenerateextrataxrevenuesfromexportingoilisgoodfortheUSatatimeofexpandingannualbudgetdeficits.

Growthintheseabornetradeofcrudeoilandoilproductssloweddownin2018,partiallyexplainingthedismalearningsenvironmentinallbutthelastquarter.Afternegativeyear-on-yeargrowthin2014therewasabouncebackin2015whencrudeoiltraderose3.8%andproducttraderose7.3%.Thereaftergrowthslowed,to4.1%forcrudetradeand3.9%forproducttradein2016andto3.3%forcrudeand1.9%forproductin2017.Lastyear,in2018,bothcrudeandproducttradegrewbyjust1.3%eachto2,039milliontonnesforcrudeandto1,080mtforproduct.Globalcrudetradeisforecasttoriseinabsolutetermsby1.7%in2019and3.0%in2020whileglobalproducttradeisestimatedtorise3.0%in2019followedby4.0%in2020.Thesewouldbepositivedevelopmentsaftersuchlacklustredemandgrowthin2018,allthemoresoasfleetsupplygrowthshouldbeconstrainedinboth2019and2020.Putanotherandbetterway,intonnemileterms,thedemandoutlookisevenbetter.Crudetradegrewby6%in2016,6%in2017and3%in2018whileproducttraderoseby4%in2016,1%in2017and3%in2018.Intonnemileterms,crudetradeisforecasttoriseby4%in2019and5%in2020andproducttradeisforecasttoincreaseby3%in2019and5%in2020.

UnderpinningtheglobalgrowthincrudeoiltradingonthebuysidewereChinaandIndia.China’scrudeoilimportsrose14%year-on-yearin2016,followedby10%in2017and10%in2018whileIndia’scrudeoilimportsincreased9%in2016,followedby1%in2017and5%in

2018.China’scrudeoilimportsamountedto464milliontonnesin2018,upfrom420mtin2017,whileIndia’scrudeoilimportscameto227mtin2018,upfrom216mtin2017.Fortwofastgrowthcountrieseachwithpopulationsofcloseto1.4billionpeople,China’scrudeoilimportswererunningatdoublethatofIndia’slastyear.UnderpinningglobalgrowthincrudeoiltradingonthesellsidewastheUSwithitsenormousgainsinoutput.Sincetheliftingofthebanoncrudeexports,on18December2015,theUShasfoundoverseasexportmarketsforitsmostlylightsweetgradesofcrude.Beforethatdate,itcouldonlyexportcondensateandthatwasinverysmallvolumes.

InEurope,ithadawillingbuyerfortheselightergradesandso,fromvirtuallyzeroexportstoEuropein2014,itwentto4.12millionbarrels(11,288-bpd)in2015,to7.47mb(20,466-bpd)in2016,to10.61mb(29,068-bpd)in2017andto23.68mb(64,877-bpd)in2018.Wehaveseenspectacularyear-on-yeargrowthinUScrudeoilexportstoEuropebutthetotal2018figureisstillinsignificantwhencomparedwithChina.AccordingtoChinesecustomsdata,Chinaimportedanaverageof245,616-bpdofcrudeoilandoilproductsin2018,25%upon2017.ItimportedminimalvolumessinceJulyandnothinginDecember.TheEIAputsthe2018averageofcrudeoilimportsat219,340-bpd,thedifferencebeingtheproductimports.The2018totalwouldhavebeenhigherbutforzeroChineseimportsofUScrudeoilinAugust,SeptemberandOctoberandonly8,000-bpdinNovemberand97,000-bpdinDecember.Chinesebuyersheldback,probablyinsolidaritywithnationalinterest,despiteUScrudenotbeingonthetarifflist.Thisyear,weunderstandfromReutersthatnoUScrudewasimportedbyChinainJanuary.Noneisscheduledtoarriveineither



The Containership Market

preparedtopayuptosecuresecond-handtankersathistoricallydepressedvaluations.Thebestyear-on-yearassetvaluegainsineachsegmentin2018were:27%fora15-yearoldVLCC;32%fora10-yearoldsuezmax;47%fora15-yearoldaframax;4%fora5-yearoldLR1;and12%fora5-yearoldMR.Totaltankerdeliveriesremainedquiteelevatedin2018at281unitsof28.3m-dwtafter2017’s336unitsof38.0m-dwt.Halfwaythroughthefirstquarterof2019wehadalreadytakendeliveryofanother57unitsof7.3m-dwt.Indeadweightterms,crudetankerseasilyoutdidproducttankers,astobeexpected.Onegoodthingaboutthepoorearningsoflastyearisthattheyencouragedahigherrateofscrapping.Inthecrudesector,19.1m-dwtofcrudeoiltankersweredispatchedtothebreakersin2018after9.8m-dwtin2017.Inearly2019,littlehasbeenscrapped.Intheproductsector,6.9m-dwtwassentfordemolitionin2018after4.3m-dwtin2017.Thescrappingwasmarginalrelativetodeliveriesbutitallhelpstowardsachievingbettersupply-demandbalance.

Future fleet growth

Futuretankerfleetgrowth,crudeplusproducts,willbeslowerforthenextfewyearsasfewershipshavebeenordered.Atthebeginningof2017,78.4m-dwtwasonorderagainstafleetof555.2m-dwt,givinganOB/FLratioof14.1%.Atthestartof2018,74.2m-dwtwasonorderagainstafleetof581.8m-dwt,givinganOB/FLratioof12.7%.Attheoutsetof2019,67.8m-dwtwasonorderagainstafleetof587.7m-dwt,givinganOB/FLratioof11.5%.ThisisthelowestOB/FLratiosince1997whenitwasat7.9%.Withthelowestfleetgrowthinover20yearsthisyearweexpectthatdemandcanholdupsufficientlytodeliverstrongerearnings,leadingtohigherassetvalues.2018wasamorerestrainedyearoftankerorderingcomparedwith2017andthatshouldfeedthrough.Bysegment,VLCCsaw42ordersin2018after56in2017;suezmax23after27;aframax28after64;LR26following32andMR71following95.Thecrudetankerdeliveryschedulestandsat123unitsof25.7m-dwtin2019;88of17.7m-dwtin2020;and26of5.1m-dwtin2021andbeyond.VLCCandaframaxcrudetankersdominatedeliveriesoverthisyearandnext.Theproducttankerscheduleisat124unitsof7.0m-dwtin2019;66of3.8m-dwtin2020;and20of1.7m-dwtin2021andbeyond.ItisdominatedbyMRs.ThecrudetankerOB/FLratioisat12%whiletheproductOB/FLratioisat8%.


The Containership Market

The container market continues to suffer from top-down oversupply as all

carriers take delivery of large ships to achieve economies of scale.

Fleet growth

Therateofoverallcellularfleetcapacitygrowthisthankfullyslowing.Aftergrowthof5.6%infullyear2018thefleetisforecasttoexpandbyonly2.9%in2019and3.2%in2020.TheupcomingIMO2020rulesmightsubtractuptoanother1%fromeffectivefleetgrowthasmanyshipswillbetakenoutofservicetoretrofitscrubbersandthehighercostofcompliantfuelshouldencouragebothmorescrappingandmoreslow-steaming.SlowernetfleetgrowthatatimeofaweakeningglobaleconomyisapositivedevelopmentasfuturedemandgrowthisputatriskbyUS-Chinatradefrictionthatmayraisethepriceofgoodsandlowerpurchaseinterest.Themainreasonthatfleetgrowthismoderatingisthattherearefewershipsonorderaftermanyyearsofoversupplyingthemarket.Thismoderationinthesupplysideisaproductofmanyyearsofunexcitingfreightratesandtimecharterreturnsaswellasalesssupportivebankingsector.

Orderbook

Theorderbookforshipsof15,000-teuandlargerwasat66unitstotalling1.32m-teuattheendof2018,being53%bynumberand56%bycapacityofthetradingfleetinthissizeof125unitstotalling2.34m-teu.However,attheendof2018,thetotalcellularorderbookwasat2.86m-teuagainstatotalcellularfleetof22.01m-teu.Thisputsthetotalcontainershiporderbooktofleetratioatitslowestlevelinover20yearsatjust13%,butitisheavilyskewedtolargerships.Duringthecourseof2018,thefleetofshipsof15,000-teuandlargerexpandedby33.5%withamuchlower10.5%expansioninthenextsizedownof12,000to14,999-teu.Inthesizesbelow12,000-teutherewasnegligiblegrowthin2018,with3.6%growthinthe8,000to11,999-teusegmentand2.2%inthefeedersizesfrom100to2,999-teu.Intheintermediatecategoriesspanning3,000to7,999-teutherewasnonoticeablechange.Giventhesesupplysidedynamics,thereshouldbescopeforanimprovementintheearningsofsub8,000-teushipsoverthenextfewyears.

Supply and demand balance

2018sawsupplyanddemandcomeintobetterbalancewithglobalcontainertradegrowing4.3%year-on-yearto200.7m-teufrom192.4m-teuin2017.Meanwhile,onthesupplyside,thecellularfleetexpandedbyaslightlylarger

5.6%from20.85m-teuto22.01m-teu.Lastyear,tradegrowthwasfairlyevenlydistributedacrossthemaintradelanes.TheTranspacificbenefitedfromQ4frontloadingaheadofpossibletariffincreasesandAsia-Europeshowedsignsofweakness,aforetasteoftheweakerEuropeaneconomicdatathatisnowcomingthrough.Thebasecaseforecastfor2019isfortradegrowthof4.1%to209.0m-teuagainstfleetgrowthof2.9%to22.65m-teuand,for2020,tradegrowthof4.0%to217.4m-teuagainstfleetgrowthof3.2%to23.38m-teu.So,onaverage,weshouldseetradegrowthoutpacefleetgrowthby1%peryearin2019and2020.Thisshouldhaveapositiveeffectonfreightrates,earningsandvaluesalthoughmuchwilldependuponthemicrosupplyanddemandbalanceswithineachshipsegmentandthetradelanesuponwhichtheyoperate.

TC rate and earning indices

TheClarksonContainershipTimecharterRateIndexaveraged60pointsin2018,28%uponfullyear2017.Theimprovementinperformancedisguisedwhatwasavolatileyear,goodinthefirsthalfandpoorinthesecond.Itstartedtheyearat54.4inJanuaryandrosetoapeakof68.0inJuneonlytoslidebackto52.1byDecember.Intimecharterequivalentterms(TCE)thisrepresentedashiftupfrom$10,148dailyinJanuaryto$13,732perdayinJuneandthenbackto$11,260dailyinDecember.InJanuarythisrosemarginallymonth-on-monthto$11,273perday.TheTimecharterEarningsIndexsawaveragetimecharterratesrise36%from$9,035dailyin2017to$12,311perdayin2018.Thatisastepintherightdirectionandthisshouldcontinuein2019and2020asthesupply-demandbalanceimproves.Betterdemandgrowthinregionalandnonmain-lanetradesshouldsupportimprovingTCratesforsmallershipsof5,000-teuandunder,especiallythelargerfeedersizes.

Segmental TC rates

Despitethepoorendtolastyear,annualaveragetimecharterratesdidimproveyear-on-yearin2018inallofthetrampshipsegments.Thedatashowsthatageared1,000-teuunitwasearning21.6%morein2018comparedwith2017,upto$7,467from$6,412perday.Ageared1,700-teuvesselwasup33.6%to$9,675from$7,242daily.Agearless2,000-teuunitwasup32.9%to$9,508from$7,154perdaywhileagearless2,750-teuunitwas22.9%strongerto$10,813from$8,800daily.Aclassic32.2mnarrowbeampanamaxvesselof4,400-teuwasup44.3%to$11,096from$7,692

daily.Thishasbeenaremarkablerecoveryforasegmentthatwaslargelywrittenoffintherun-uptotheopeningofthenewsetoflocksinthePanamaCanalon26June2016.Averageannualearningshadslumpedtojust$4,979perdayin2016from$11,817dailyin2015.However,latestfixturesinearly2019suggestthata4,400-teuclassicpanamaxisnowearningabitunder$8,500perdaywhileawide-beam(37.0m)5,000-teuvesselisbeingpaidover$15,000daily.

Inthewide-beamintermediatesizeof6,800-teuearningsrose10.4%in2018to$14,542perdayfrom$13,171dailyin2017.In2019year-to-date,averageearningshavegotofftoapoorstartwithallsegmentstradingdownonthelevelsthattheyachievedlastyear.Afterthefirsttwomonthsof2019nominal6-12monthcharterratesarelanguishingatlowlevels.A1,000-teuunitisaveraging$6,039daily,a1,700-teuisat$6,994perday,a2,000-teuat$7,361daily,a2,750-teuat$8,639perday,a4,400-teuat$8,306dailyanda6,800-teuat$12,844perday.SomeofthecurrentweaknessmightbeattributedtotherushofactivityinthefinalmonthsoflastyearasshipperstriedtobeattheanticipatedriseinUS-Chinatariffsthatwerescheduledtobeappliedatthebeginningof2019.Thedeadlineforraisingtariffswasthen

extendedinearlyDecemberto1March2019and,morerecently,theyhavebeenputonindefiniteholdasthetwosidesareallowedmorebreathingspacetostrikeadeal.

Asset values and ship sales

Theweakearningsmarkethastemporarilyblownofftracktheassetvaluegainsofrecentyears.Takingnominalendyearvalues,a10-yearold1,700-teuunitrosefrom$5.5min2016to$9.0min2017andto$10.5min2018.Thishasnowslippedbackto$9.5m.A10-yearold2,750-teuvesselincreasedfrom$5.8min2016to$10.8min2017andto$13.5min2018.Thishasnowtrackedbackonemillionto$12.5m.A5-yearold4,500-teuclassicpanamaxrosefromalowly$7.0min2016to$12.5min2017andto$15.5min2018.Thishassincesoftenedto$15.0mbutitstillrepresentsamorethandoublinginvaluesincethelowpointofend2016.Severalbuyers,suchasSeaspanandKMTC,hadthevisiontobuyinthedipof2016andtheyhaveprofitedhandsomely,onpaper,frombuyingatatimewhenthisclassicpanamaxsegmentwasatitsmostdistressed.


Onthesalesside,aseriesof10,000-teuvesselsthatdeliveredfromDalianShipbuildingin2014weresoldinJanuarythisyearfor$267menbloc.TheCSCLSpring,CSCLSummer,CSCLWinterandCSCLBohaiSeaweresoldbyCoscoShippingDevelopmenttoJapan’sFinancialProductsGroupwithan8.5-yearbareboatcharterbackworth$248m,equatingtoabareboatrateofjustunder$20,000perday.Thecharter-freevaluewasestimatedat$228m.CSDhasanoptiontobuytheshipsfouryearsaftertheleasescommenceandagainaftersevenyearsandthreemonths.CSDwillcontinuetotimecharterthevesselsouttoCoscoShippingLinesunderseparatearrangements.

InOctoberlastyear,NYKwasreportedtohavesoldtheNYKAphrodite6,492-teuIHI2003toclientsofCyprusMaritimefor$13.0m.LastJune,NYKwasreportedtohavesoldtheNYKTerra6,500-teuHHI2008for$25.0mtoclientsofSeaConsortium.Afewweeksearlier,DianaContainershipswasreportedtohavesoldthesimilarPuelo6,541-teuHHI2006toclientsofNissenKaiunfor$20.5m.Ataroundthesametime,DianawasalsoreportedtohavesoldtheHamburg6,494-teuKoyo2009totheMPCGroupfor$21.0m.AndinApril2018,NautilusHoldingswaslinkedtothesaleofitsTexasandWashington6,969-teuHHI2009toclientsofMSCfor$27.5meach.

InlateOctoberlastyear,TechnomarwasassociatedwiththesaleoftheclassicpanamaxArgos4,250-teuNewYZJ2012toclientsofBorealisfor$14.7m.AlsoinOctober,PacificInternationalLines(PIL)wasreportedtohavesoldthreeclassicpanamaxshipsenbloctoclientsofMingshengFinancialLeasing.TheseweretheKotaKarim3,081-teuToyohashi2006,theKotaLawa4,253-teuDalian2008andtheKotaLihat4,335-teuDalian2013foratotalconsiderationof$88.9m.InJuly,DioryxMaritimewasreportedtohavesolditsPatraikos4,498-teuHyundaiSamho2010toundisclosedinterestsfor$15.0mand,inthesamemonth,NSCSchiffahrtwaslinkedtothesalesofthetwoclassicpanamaxsistershipsBahiaandBenito4,308-teuHHIC-Subic2009toclientsofMangrovePartnersfor$13.9meach.

BackinJunelastyear,Delphiswasrumouredtohavesoldfourwide-beam(37.3m)sistershipstoOceanYield.TheseweretheBarcelonaExpress,DetroitExpress,GenoaExpressandLivornoExpressall3,832-teuHHIC-Subic2014atanundisclosedprice.AlsoinJune,C-POffenwasreportedtohavesoldtheclassicpanamaxsistershipsANLWarraguiandCPOJacksonvilleboth4,225-teuHHI2009toclientsofBorealisforaround$14.4meach.Borealiswasalsolinkedtothepurchaseofthe

CircularQuay3,534-teuShanghaiShipyard2009fromtheSchultegroupfor$11.6m.InMay,DioryxMaritimewassaidtohavesolditsCorinthiakos4,498-teuHyundaiSamho2010toclientsofAsiaticLloydfor$15.0m.

InMarch2018,DianaContainershipswaslinkedwiththesaleoftheCentaurusandSagittaboth3,426-teuTKMSNordseewerke2010totheMPCGroupfor$12.3meach.LastJanuary,Dianawassaidtohavesoldthewide-beam(40.0m)sistershipsGreatandMarchboth5,576-teuKoyo2004toclientsofTechnomarfor$11.0meach.Therehasbeenalotofactivityinthefeedersizes.InFebruarythisyear,H.SchuldtwasreportedtohavesoldsistershipsIndependentAccordandIndependentConceptboth1,574-teuYangzijiang2007toclientsofContshipsfor$6.0meach.InJanuary,H.ScheperswaslinkedtothesaleoftheArianandTammoboth1,345-teuYangzijiang2011toclientsofContshipsfor$8.5meach.

InDecemberlastyear,theNavigiagroupwasreportedtohavesoldfoursistershipstoclientsofJRShippingforanenbloctotalof$37.0m.TheseweretheAalderdijk,Akerdijk,AlsterdijkandAmerdijkall1,440-teuSainty2011.AlsoinDecember,theKalkavanGroupwasreportedastheselleroftheCaferDedeandIbrahimDedeboth1,878-teuSedefGemi2008toGreekbuyersfor$9.0meach.InNovember,Heung-AShippingwaslinkedtothesaleofitsHeung-ALaemChabang1,785-teuDaeSun2016toKotokuKaiunfor$20.0m.BackinOctober,HartmannwasreportedtohavesoldfoursistershipstoclientsofPacific&Atlanticfor$6.0meach.TheseweretheFrisiaAller,FrisiaAlster,FrisiaIllerandFrisiaInnall1,114-teuSPDayang2007excepttheFrisiaInn2008.

InJunelastyear,NSBNiederelbewasreportedtohavesolditsBuxharmony2,702-teuHowaldtswerkeWerft2007toclientsofSITCfor$14.25mwhile,inMay,ThomasSchultewasassociatedwiththesaleofitsVictoriaSchulte2,478-teuAkerOstsee2005toMPCContainersfor$11.8m.MPCwasalsoreportedinMarchasthebuyeroffive1,200to1,500-teuvesselsbeingtheSimaPerfect,SimaPrestige,SimaPride,SimaSadaiandSimaSapphireallbuiltatPeeneWerftanddeliveredbetween2004and2007.ThesellerwasSimatechShippingandtheenblocpricewasquotedas$41.9m.

InFebruary2018,MPCwasthereportedbuyerof12shipsfromtheAhrenkielfleetrangingfrom1,300to2,800-teuthatwerebuiltinChinaandKoreaanddeliveredbetween2006and2012foranenblocpriceof$139.5m.InJanuary,MPCwaslinkedwithatrioofsistershipsbeingtheCamellia,DahliaandVioletall2,824-teuHMD2006fromNautilusHoldingsatunitpricesrangingbetween$10.5mand$10.9m

each.Lastly,inearlyJanuarylastyear,ReedereiO.MartenwasreportedtohavesoldtwosistershipstoAtlanticaShippingfor$7.5meach.TheyweretheO.M.AgarumandO.M.Iridiumboth2,007-teuSPZhejiang2008.

Newbuilding ordering

LatestnewsisthatMaerskLinehassecuredleasefinancingfor13newfeedercontainershipsof2,200-teueach.FiveofthesewillbebuiltatJiangnanShipyardinChinaandownedbyICBCFinancialLeasing.Thereportedunitpriceis$20meachtobecharteredbyMaerskonunknownterms.AnotherfiveunitswillbebuiltatImabariinJapanandafurtherthreeunitswillbeconstructedbyZhoushanChanghonginChina.ThedeliveriesarescheduledfromQ42020toendQ22021.TheyareintendedforMaerskLine’sintra-Asiatradeandwillreplaceolderlessefficientcharteredandownedtonnagethatwillbephasedoutoverthenextfewyears.Assuch,thismoveisintendedasfleetreplacementandongoingoptimisationratherthanaddingnetnewcapacity.Maerskplansnonewordersoflargevesselsbefore2020anditaimstokeepitsoverallfleetsizeataroundthe4.0m-teumark.ThisorderwinforJiangnanfollowsfour2,400-teuunitsthatitsecuredinJanuary.ThesewereplacedbyAtlanticGenevaforchartertoSinokorMerchantMarineandarescheduledfordeliveryin2021.

Regional trade changes

MaerskBroker’sanalysisofyear-on-yeargrowthinregionalcontainervolumesbyimportregionshowsanoverallslowergrowthtrend.EuropeanandMediterraneanimportswereup4.5%in2017andbyasimilar4.3%in2018.NorthAmericanimportswereup5.2%in2017followedbyastronger6.5%in2018.EastandSouthEastAsianimportswereup4.5%in2017andbyaweaker2.6%in2018.SouthandWestAsianimportswere4.5%strongerin2017followedbyaweaker2.0%growthratein2018.SubSaharanAfricanimportswereup8.2%in2017followedby5.9%in2018.Oceaniaimportsweresteadyat3.3%inbothyearswhileCentralandSouthAmericanimportswereup6.8%in2017followedby4.0%in2018.Inaggregate,thisequatedto4.9%globalimportgrowthin2017followedbyaslower3.7%growthratein2018.Meanwhile,for2019,Clarksonprojectsmain-lanetradegrowthof1.9%andnonmain-lanetradegrowthof5.1%.ThisisallsubjecttochangewhileweawaittheoutcomeoftheongoingSino-UStradediscussions.

Top ten trades

MaerskBroker’sanalysisofyear-on-yeargrowthinthetoptentradesshowsasimilaroverallslowdown.EastandSouthEastAsiatoEastandSouthEastAsiawasup4.1%in2017followedbyafirmer4.8%in2018.EastandSouthEastAsiatoNorthAmericawasup4.8%in2017followedbyastronger6.4%in2018.EastandSouthEastAsiatoEuropewasup4.5%in2017followedbyaweaker2.2%in2018.NorthAmericatoEastandSouthEastAsiagrewby1.7%in2017onlytoshrink5.9%in2018.EuropetoEastandSouthEastAsiawasup5.7%in2017butcontractedby2.3%in2018.EastandSouthEastAsiatoSouthandWestAsiawasup4.2%in2017onlytoshrink3.3%in2018.EuropetoEuropewas4.0%upin2017followedbyafirmer6.5%in2018.EuropetoNorthAmericarose8.3%in2017and6.3%in2018.EuropetoSouthandWestAsiawasup1.3%in2017and2.2%in2018.Finally,EastandSouthEastAsiatoCentralandSouthAmericarose7.9%in2017followedby3.5%in2018.

Weaknesswasdetectedontheback-haultradesintoEastandSouthEastAsiafrombothNorthAmericaandEuropewhichweresignificantlyaffectedbyChina’simportbanonvarioustypesofwaste.Otherwise,importsintoIndiaandWestAsiafromtheFarEastwerealsonegativelyimpactedbyweakerdemand.IntraFarEasttraderemainedstrong,risingto4.8%in2018from4.1%in2017,andhead-haulFarEasttoNorthAmericaroseto6.4%in2018from4.8%in2017.TherewasamajorboosttoeastboundTranspacifictradesinthelastquarterof2018asUSimportersrampedupactivityaheadofanticipatedtariffhikesonaraftofChinesegoods.Head-haulFarEasttoEuropetradedisappointedin2018asithalvedto2.2%after4.5%in2017,aforwardindicatorofweakereconomicgrowthandlowerconsumerspendingacrossmostofEurope.Forinstance,Germangrowthfelltojust1.5%in2018whilstItalyslippedintotechnicalrecessioninthelasttwoquarters.

Consolidation and oversupply

Afterconsolidation,thetoptenrankingofcontaineroperatorshaschanged.StillinfirstplaceisMaerskLine,furtherenlargedhavingtakenoverHamburg-Süd,with4.04m-teudeployedofwhich2.41m-teuisowned.InsecondplaceisMSCwith3.26m-teudeployedofwhich1.29m-teuisowned.Thesetoptwocarriersarelinkedviathe2Malliance.InthirdplaceisChinaCoscowhichhasshotuptherankshavingtakenoverCSCLandOOCL.Ithas2.77m-teu

Despite depressed freight rates arising from the oversupply of

megaships there is still no cessation of orders for such units, just

a slowdown. It is made easier by the appetite of Chinese financial

leasing companies to own such ships against long-term leases.

In an uncertain demand environment, with protectionist trade wars

threatening to escalate, it is important to keep managing net new

supply down to a minimum. Consolidation amongst the mainline

container carriers should help this process.


deployedofwhich1.97m-teuisowned.InfourthplaceistheimaginativeFrenchcarrierCMACGMwith2.63m-teudeployedofwhich1.15m-teuisowned.GermancarrierHapag-Lloydisinfifthplacewith1.63m-teudeployedofwhich1.04m-teuareonitsownbooks.ThenextfiveplacesaretakenbyONE(thelongawaitedJapanesemergerofNYK,MOLandK-Line),thenTaiwan’sEvergreenandYangMing,nextSingapore’sPILandfinallySouthKorea’sHMM.HyundaiMerchantMarinetookoverthemantleofquasiSouthKoreanstatecarrierafterthedemiseofHanjin,butnotbeforeitnarrowlyavoidedbankruptcyitself.Nowitisbusyexpandingitsfleetwiththehelpofstatefinancing.Ithasthelargestorderbookofanycarrierat20shipsaggregating398,400-teu.Thisismorethantwicethesizeofitscurrentownedfleetcapacityof192,291-teu.

Intermsofshipsonorder,attheendofFebruaryandbeforethelatestannouncementsMaerskhadonlythreeshipsonordertotalling34,048-teu.Itplanstokeepitsfleetataroundthe4.0m-teumark.MSChas11shipsof242,000-teuonorderwhileCoscoalsohas11of159,382-teulinedup.CMACGMhas15unitstotalling214,500-teuwhilefifthplacedHapag-Lloydhasnothingatallonorder.ThetopfivecharterownersareSeaspanwith0.91m-teuunderownership,Costamarewith0.49m-teu,C-POffenwith0.47m-teu,ShoeiKisenwith0.40m-teu(and0.48m-teuonorder)andBoComLeasingwith0.36m-teu.Maerskowns2.6-timesthecapacityofthelargestcharterowner,Seaspan,provingthatthecarriersstillhavetocarryalotofassetsonthebalancesheet.TheriseoftheChineseleasingcompaniesseesBoComLeasingappearinfifthplaceintheranksofcharterownerswhilecompatriotMingshengBankisintwelfthplace.

Thematically,thecontainershipsectorcontinuestobeover-orderedandover-tonnageddespiterecentroundsofconsolidationthathaveseenMaersktakeoverHamburg-Süd,CMACGMtakeoverAPL,andCoscoabsorbOOCL.Itisacaseoftopdownoversupplywherebyeachcarrierattemptstoreduceunitcostsbyapplyingthelargestpossibleshipstoanygivenroute.Thiscascadesunsuitablylargeshipsontoothertradelanes,depressingratesonthoseroutes.Theprocessinevitablyinvolvesorderingnewandlargershipsandtheendresultislowerunitfreightonallthemaintradelanes.Despitedepressedfreightratesarisingfromtheoversupplyofmegashipsthereisstillnocessationofordersforsuchunits,justaslowdown.ItismadeeasierbytheappetiteofChinesefinancialleasingcompaniestoownsuchshipsagainstlong-termleases.Thisenablesthecarrierstomodernisetheirfleetswithoutputtingtoomuchstrainonthebalancesheet.However,theavailabilityofsuchfinancingiscontributingtooversupplyasitpanderstodemandforeverlargerships.

No.1Chineselessor,ICBCLeasing,isreportedtohaveadded$3.2billionofnewbusinessin2018whileNo.3,CMBLeasing,issaidtohaveadded$1.5billionofnewbusinesstoitsbooks.Itisnotclearwhethersuchlarge90%LTVloansareavailableintheconventionalbanksector,withoutwhichtheseshipsmaynotgetorderedinthefirstplace.Thus,

onecanseehowtheleasingcompanies,intheireffortstowinnewbusinessandsupportChineseshipyards,areperpetuatingovercapacityanddepressingfutureearnings.RecentordersgeneratedsomeconcernsattheMarineMoneyShanghaiconferenceinearlyMarch2019.MinshengFinancialLeasingsuggestedthatthelendingparametersbeingapplieddonotmatchtherealfundamentals,withthelessorsactuallyexceedingthelevelthattheircreditstatuscansupport.Themainlinecarriershaverecentlyenduredsometoughoperatingyearsoflowearningsandyettheystillhaveaddedcapitalexpenditure,increasingpressureontheirbalancesheets.MaerskLineistheonlycarrierwithaninvestmentgradeBBBratingfromS&P.

ItisreckonedthatChineseleasingcompanieshaveover$50billioninshippingassetshavingenteredtheshippingsectorasrecentlyas2007,althoughactivityhasreallysteppedupsince2013.Themarketleaders,ICBCLeasingandBocomLeasing,pushedtheirshippinginvestmentportfoliosabovethe$10billionmarkin2017and2018respectively.Aftermorethantenyearsofprolificgrowth,andtheentryofnonfinancialinstitutionssuchashedgefundsandprivateequity,traditionalbankfinanceisabouttoreturn.Lendingmarginshaverisentomorerespectableandcompetitivelevelswhilethemainshippingsectorsareatacyclicallowpoint.TraditionalshippingbanksarelikelytoincreasetheirlendingtoshippingatatimewhenChineselessorsreducetheiractivity.Manyearlyleasingdealskeptalltheriskswiththelessorsandalmostnonewiththelessees.TypicaloperatingleasesinvolvedhighLTVfinancing,flexiblecharterperiods,generouscalloptionsandanabsenceofputoptions.Theoptionalitywasallormainlyontheoperator’sside.Thisischangingastheleasingcompaniesgainexperience.Asfortraditionallenders,thecostandtermsofborrowingareexpectedtorisewhichwillactasawelcomedeterrenttoborrowersandhelptodiminishsupplysideexpansion.

Shift to LNG

CMACGMstartedtheshifttodualfuelLNGpropulsion,andisinvestingevenmorecapitalinleapfroggingIMO2020andlookingfurtherforwardtonewglobalcarbonrulessettotakeeffectfrom2050.CMACGMisfittingLNGmembranetankstoaseriesofnine22,000-teuships,withfivebeingbuiltatHudongandfouratSWSinChina.Eachwillhavean18,600-cbmGTTMarkIIImembraneLNGtankandwillbepoweredbyWinterthurlow-pressure,two-stoke12x92DFengineswhose12-cylindersareratedat63,840kWat80rpm.Totaliscontractedtosupply300,000tonnesperyearofLNGfuellingtothesenineshipsviaaspeciallybuiltbunkertankerthatcanbepositionedinNorthWestEuropeontheAsia-Europetradelaneonwhichtheywilloperate.TheLNGBVwillbe18,600-cbmandwillbeownedjointlybyTotalandMitsuiOSK,managedbyMOSKandbuiltatHudong.

Thelatestexampleofdual-fuelshipsalsoinvolvesCMACGM.ICBCFinancialLeaseandCMBFinancialLeasingarereportedtobefinalisingaseriesoften15,500-teuships,tobe

builtatCSSCshipyards,withfiveforeachbank.ReportssuggestthatfiveunitswillbebuiltbyHudongwithanLNGdual-fueloptionatmorethan$130meachandtheotherfivewillbebuiltbyJiangnanwithhybridscrubbersfittedataround$110meach.Theinexcessof$1.2billionorderwillbefinancedwithahigh90%leverageratio,meaningloansofover$1billionandequityaslowas$120million.FrenchcarrierCMACGMwillbethebareboatchartererforatermofovertenyearsatwhichpointitwillbeobligatedtobuytheshipsatapre-agreedstrikeprices.Suchafinancialleasestructureremovestheresidualvalueriskfromthelenderandleavesitexposedonlytoperformancerisk.

Coscoissaidtobelookingatevenlargershipsofupto25,000-teuthatwouldbedeployedoneast-westroutes.ThedesignsideisbeingdonebytheShanghaiShipandShippingResearchInstitute(SSSRI)anditisregardedtobeofstrategicimportanceasitwillsupportthemaritimeelementofChina’sBeltandRoadInitiative(BRI).Therearetworeasonswhythisupwardshiftmaynothappen.ThefirstisinCMACGM’sbackwardstepfrom22,000-teuto15,500-teushipsasperitslatestorders.Thismaybetacitrecognitionthatthereisstillaneedforshipsclosertothe15,000-teusizewhichcanoffermuchgreateroperationalflexibilityasthe22,000-teuunitsarecurrentlylimitedtoeast-westroutes.TheotheristhattheUS-ChinatradeconflicthaschangedthepublicperceptionofBRI.ChineseinvestmentinandfinancingofinfrastructurealongthemaritimerouteisgoodbothfortherecipientcountryandforChina,asitfacilitatesresourceextractionandexports.ButiftheborrowingnationfailstorepaytheloansfromChinesepolicybanksthendebtforequityswapscanseetheChinesestate

becometheownerofcriticalinfrastructure.Forexample,inDecember2017aChinesestate-ownedcompany,ChinaMerchants,tookcontroloftheSriLankanportofHambantotaplus15,000acresofsurroundingland.Itwassurrenderedundera99-yearleaseaftertheSriLankanstatewasunabletorepayextensiveloansfromChina.Theporthadbeenbuiltbystate-ownedChinaHarbor.

Analternativetodebtfinancingisequityfinancingintheformofforeigndirectinvestment(FDI).AgoodexampleisSriLanka’sColomboPortCityprojectthatwasstartedinlate2014.ThisisoneofmanyexamplesofChineseforeigndirectinvestmentflowingintoSriLankanseaports,airportsandhighwaysusingChineseconstructioncompaniesbackedbystatefinance.ChineseFDIhasalsobeenflowingintoPakistan,theMaldivesandBangladeshwhicheffectivelyencirclesIndiawithChineseinfluence.ForChina,dominanceoftheIndianOceanisakeypartofits21stCenturyMaritimeSilkRoadinitiative.Whenfinished,itsColomboPortCitywillrivalDubaitothewestandSingaporetotheeastasaregionalhubforfinance,tradeandtourismanditwillenableChinatoaccessandworkthemarketsofthevastIndianSubcontinent.ThelatestnewsisthatItalyhasnowendorsedtheBRIandthisprovidesChinawithagatewayintoEurope.ThisisaverysensitiveissueastheUSisthreateningEuropeancountriesthatuseHuawei5Gtechnologyofbeingcutofffromintelligencesharing.TheUSisconcernedaboutthesecurityrisksofworkingwithaChinesetechnologyprovider,evenonethatistoallappearancesaprivatecompany.Globaltradeisintheprocessofbeingheavilypoliticised.


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The Containership Market The container market is still suffering from top-down oversupply despite consolidation. The carriers are still ordering ever-larger ships to reduce unit costs and gain market share.

The Chinese financial leasing companies have deployed major capital to the container sector while state carrier Cosco seems determined to expand in support of its Belt and Road Initiative.

The tramp sector looks more promising from a supply perspective, implying rising time charter rates. Overall, supply and demand balance is improving, but better on some routes than others.

1. SCFI Comprehensive freight index : a poor five years…

3. NB prices have become expensive relative to SH values.

2. …TC rates, however, have been increasing.

4. Last year, there were fewer SH deals compared with 2017…

SCFI Comprehensive indexSource: CRS, Hartland Shipping

Containership NB vs SH pricesSource: CRS, Hartland Shipping

Clarksons containership earnings indexSource: CRS, Hartland Shipping

Containership secondhand salesSource: CRS, Hartland Shipping

5. …and NB contracting has been on the rise.

6. However, the orderbook has been in gradual decline…

7. …resulting in the lowest OB/Fleet ratio since records began.

Containership contractingSource: CRS, Hartland Shipping

Containership orderbookSource: CRS, Hartland Shipping

The containership orderbook/fleet ratioSource: CRS, Hartland Shipping

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8. Demolition levels disappointed in 2018 with higher net deliveries compared with the last 2 years.

9. Most deliveries are the smaller feeder up to ULCV… 10. …with demolition almost entirely below 6,000-teu.

11. The supply and demand outlook is in balance, but the challenge remains embedded historic oversupply.

Containership deliveries vs demolitionsSource: CRS, Hartland Shipping

Containership deliveries by sizeSource: CRS, Hartland Shipping

Containership demolitions by sizeSource: CRS, Hartland Shipping

Containership supply and demand balanceSource: Alphaliner, Hartland Shipping

Chartbook

Our chartbook sets out a graphic illustration of how the container market

has evolved in recent years.

TheShanghaiContainerisedFreightIndex(SCFI),ameasureofChinaexportfreightratesacrossacomprehensivebasketofroutes,hashadaturbulenttenyears.Forthefirstsixyearsfrom2009theindextradedmostlyabove1,000pointsandthenforthefouryearssince2014ithastradedalmostentirelybelowthe1,000pointline.Itisagoodreflectionofthesupply-demandbalanceandinrecentyearssupply,especiallyofthelargestships,hastendedtoexceeddemand.Averagetimecharterrates,asmeasuredbyabasketoftypicalsmallertrampships,haveimprovedsteadilyoverthepastthreeyearsrising27%from$7,131dailyin2016to$9,035perdayin2017andthenupanother37%to$12,311dailyin2018.TheSecondhandPriceIndexhaslooselyfollowedtheSCFIinaweakeningtrendfrom2012.However,theNewbuildingPriceIndexpartedcompanywiththeSecondhandPriceIndexfromaround2010whenrisinginputcostswerereflectedinhighernewbuildingpricesdespitetheweaknessinsecondhandearningsandvalues.

Thenumberofconcludedsecondhandcontainershipsalesdealshasdeclinedinrecentyearsfromapeakof309transactionsin2017to185in2018.Conversely,thetighteningregulatoryenvironment(IMO2020,ballastwatermanagementandemissionscontrols)hasencouragedinvestmentinnewshipsthatcanincorporatecompliantsystemsratherthanaddressthecomplexityofretrofitting.Thenumberofnewcontainershipordershasincreasedfrom99in2016,to141in2017andto204in2018.Theaverageunitsizeoftheseordersrosefrom2,984-teuin2016,to6,060-teuin2017andto6,092-teuin2018.Inspiteofthispatternofincreasedordering,thetotalorderbookitselfhasbeeningradualdeclinesince2016asthepaceofdeliverieshasexceededtherateofnewordering.Thetotalorderbookofcellularcontainershipshasdeclinedfrom4.06m-teuin2016,to3.30m-teuin2017,to3.00m-teuin2018andto2.76m-teubyendFebruary2019.Theannualaveragecontainershiporderbooktofleetratio,at12.8%today,isthelowestsincerecordsbeganin1996,andiswelldownontheall-timepeakof60.8%in2008.

Since2015,deliverieshavebeenrisingwhiledemolitionhasbeenfalling.Atotalof1.66m-teuofcellularcapacitydeliveredin2015,followedby0.91m-teuin2016,1.17m-teuin2017and1.29m-teuin2018.Meanwhile,demolitionfellfrom0.65m-teuin2016,to0.40m-teuin2017andto0.12m-teuin2018.Giventhemoremodernprofileoflargerships,demolitionhasbeenlimitedinrecentyearstoshipsgenerallyunder6,000-teu.Inearly2019,70%oftheorderbook(2.01m-teuoutof2.89m-teu)comprisedshipsof12,000-teuandlargerwhileinthepastthreeyearsthefeedersizesupto3,000-teuhaveseenthehighestnumberofshipdeliveriesofanysegment:67in2016,78in2017and92in2018.Incapacitytermsthisamountedto96,180-teuin2016,126,784-teuin2017and159,479-teuin2018.Thiscapacityincreaseinthesmallerfeedersizeswasdwarfedbythelowernumber,butmuchhighercapacity,ofshipsof12,000-teuandover:29unitsof475,640-teuin2016,43unitsof732,013-teuin2017and52unitsof895,705-teuin2018.

Thecontainermarketcollapsedin2009,onlytobouncebackverysharplyin2010,sincewhenithasbeenaconstantlychallengingmarket.Supplygrowthhastendedtoexceeddemandgrowthinmostyearsapartfrom2016and2017.In2019and2020weshouldseedemandgrowthnarrowlyexceedingsupplygrowth.However,wemustbearinmindthatsomestructuralovercapacityexiststhatneedstobeburntoffbeforeearningsandvaluescanreallymoveupstronglyfromwherewearetoday.Inanuncertaindemandenvironment,withprotectionisttradewarsthreateningtoescalate,itisimportanttokeepmanagingnetnewsupplydowntoaminimum.Consolidationamongstthemainlinecontainercarriersshouldhelpthisprocess.Thereisprobablynotmuchscopeforfurtherconsolidationafterrecentmergers,sotheemphasisshouldnowshifttoimprovingservicelevelsandraisingreturns.Inwhatisstillafragmentedindustry,whatisrequiredandwhatisdoneareoftentwoquitedifferentthings.

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Shipping Markets Outlook 2019: Containership Market 69 Shipping Markets Outlook 201968 Shipping Markets Outlook 2018: The Newbuilding Market


Appendices

Conclusion

All three main sectors face relatively benign supply growth over the next

two years. This delivers a perfect opportunity for supply and demand to

achieve better balance and for earnings and values to rise.

Thekeyfeatureisthatorderbooksareathistoricallylowpercentagesofthetradingfleets.Regulatorychangeshouldfurtherrestrictfleetgrowthasshipsaretakenoutofservicetoretrofitscrubbersandballastwatertreatmentsystems.Thecostofsuchretrofittingwillbetoomuchforcertainsizesofgenerallysmallershipsandthatshouldincreasetherateofdemolition.TheIMO2020rulesonlimitingthesulphurcontentinmarinefuelareprobablyoneofthebiggestgamechangersinthehistoryofshipping,althoughwearenotyetentirelyclearontheintendedenforcementproceduresoronthedegreeofflexibilitythatmightbepermittedintheearlyimplementationstages.Thehighercostoffuelwillalmostcertainlyextendandenhanceslowsteamingwhichwillreduceeffectivetonnagesupply.

ThedemandsideisatpresentcloudedbyUSinitiatedtradewarswithitsneighbours,EuropeandAsia–and,

inparticular,China.Apartialortotalresolutionwillgiveaboosttotheglobaleconomyandtoseabornetrade.Regardlessofthisbigissue,wearestillexpectingpositivedemandgrowthinallthreesectorswiththeextentofthatgrowthlargelyconditionedbyUSgovernmentpolicy.Thecurrentadministrationprefersplayingtothecrowdovergettingthingsdone.PlayingtocrowdsbringsusbacktoPaulMcCartney.AsweproceedalonganduptheLongandWindingRoadwehopetoreach,nothisHighParkFarm,butthefabledsunlituplandsofabettermarket.Wehopetolingerthereforawhile,andenjoythewarmththatthiswillbring,beforewegooverthebrowofthehillanddowntheotherside.Boththesupplyanddemandsidesoftheequationfaceadoseofuncertaintybut,ifallworksoutinourfavour,thenweshouldhavesomegoodtimesaheadofus.


AppendicesThis document has been prepared by Hartland Shipping Services Limited

and is being made available to a limited number of recipients for general

information purposes only.

TheinformationcontainedinthisdocumenthasbeenprovidedbythesourcesreferencedhereinandhasnotbeenindependentlyverifiedbyHartlandShippingServicesLimited.Exceptinthecaseoffraudulentmisrepresentation,noresponsibilityorliabilityisacceptedforitsaccuracyorsufficiency.Norepresentationsorwarrantiesaregivenastotheachievementorreasonablenessof,andnorelianceshouldbeplacedon,anyprojections,estimatesforecastsortargetscontainedherein.Any projections, estimates, forecasts and targets are not a reliable indicator of future performance.HartlandShippingServicesLimiteddoesnotundertaketoprovideanyadditionalinformationortoremedyanyomissionsinorfromthisdocument.

Thisdocumentisconfidentialandmayonlybeusedforthepurposesdescribedabove.ThisdocumentmaynotbedistributedwithouttheexpresswrittenagreementofHartlandShippingServicesLimited.AllcontactandanyquestionsrelatingtothisdocumentmustbedirectedthroughthefollowingpersonatHartlandShippingServicesLimited:

NigelBPrentis Director/HeadofShippingConsultancy HartlandShippingServicesLondon E-mail:[email protected]

Byacceptingthisdocument,recipientsagreetobe boundbytheforegoinglimitations.

Informationinthisdocumentwaspreparedasof15March2019.

A Note on Sources

Thisreportnecessarilydrawsonawiderangeofsources,includingourownresearchandnetworkofcontactsandcorrespondentsworld-wide.Anumberofthirdpartysourceshavealsobeenused,includingArgusFundamentals,AXSAlphaliner,theBalticExchange,ChinaIronandSteelAssociation(CISA),CIAFactbook,ClarksonResearchServicesLtd,ContainerisationInternational,theEconomist,Equasis,theFinancialTimes,FISIronOreSwapsReport,HSBCBankplc,HSBCGlobalResearch,theInternationalEnergyAgency,theInternationalGrainsCouncil,InternationalMonetaryFund(IMF),Lloyd’sList,Lloyd’sShipping

Economist,Lloyd’sRegister-Fairplay,MaerskBrokerContainerCharterMarketMonthly,MoneyWeek,MorganStanley,NationalBureauofStatisticsofChina,OrganisationofPetroleumExportingCountries(OPEC),PetroleumEconomist,ThomsonReutersDatastream,ThomsonReutersEikon,UnitedNationsConferenceonTradeandDevelopment(UNCTAD),USDepartmentofAgriculture(USDA),USDepartmentofEnergy(EnergyInformationAdministration),WorldBankGlobalEconomicProspects,WorldSteelAssociation.Wegratefullyacknowledgeallofthese.

A Note from Clarkson Research Services Ltd

ClarksonResearchServicesLimited(CRSL)havenotreviewedthecontextofanyofthestatisticsorinformationcontainedinthecommentariesandallstatisticsandinformationwereobtainedbyHartlandShippingServicesLimitedfromstandardCRSLpublishedsources.Furthermore,CRSLhavenotcarriedoutanyformofduediligenceexerciseontheinformation,aswouldbethecasewithfinanceraisingdocumentationsuchasInitialPublicOffering(IPOs)orBondPlacements.ThereforerelianceonthestatisticsandinformationcontainedwithinthecommentarieswillbefortheriskofthepartyrelyingontheinformationandCRSLdoesnotacceptanyliabilitywhatsoeverforrelyingonthestatisticsorinformation.

InsofarasthestatisticalandgraphicalmarketinformationcomesfromCRSL,CRSLpointsoutthatsuchinformationisdrawnfromtheCRSLdatabaseandothersources.CRSLhasadvisedthat:(i)someinformationinCRSL’sdatabaseisderivedfromestimatesorsubjectivejudgements;and(ii)theinformationinthedatabasesofothermaritimedatacollectionagenciesmaydifferfromtheinformationinCRSL’sdatabase;and(iii)whilstCRSLhastakenreasonablecareinthecompilationofthestatisticalandgraphicalinformationandbelievesittobeaccurateandcorrect,datacompilationissubjecttolimitedauditandvalidationproceduresandmayaccordinglycontainerrors;and(iv)CRSL,itsagents,officersandemployeesdonotacceptliabilityforanylosssufferedinconsequenceofrelianceonsuchinformationorinanyothermanner;and(v)theprovisionofsuchinformationdoesnotobviateanyneedtomakeappropriatefurtherenquiries;(vi)theprovisionofsuchinformationisnotanendorsementofanycommercialpoliciesand/oranyconclusionsbyCRSL.

Shipping Markets Outlook 2019 Edition

About us


About us

WeareHartlandShippingServicesLimited.WebeganinHongKongin1981asWardleyShippingServices,awhollyownedsubsidiaryofWardleyLimited,themerchantbankingarmoftheHongKongandShanghaiBankingCorporation.In2001webecameHSBCShippingServices,awhollyownedsubsidiaryofHSBCBank,oneoftheworld’sleadingfinancialservicescompanies.InAugust2012anagreementwasreachedwithHSBCforthebusinesstobesoldtomembersoftheseniormanagementteam,andthecompanywasrenamedHartlandShippingServicesLimited.AspartofthesaleHartlandhasbeenretainedtoprovideshippingconsultancyservicestotheHSBCGroupworldwide.

Our services

Ourshipbrokingservicesinclude:

• Newbuildingcontracting• Second-handsaleandpurchase• Drycargochartering• Tankerperiodchartering

Ourresearchandconsultingservicesinclude:

• Marketresearch• Vesselvaluationandfleetanalysis• Commercialduediligence,corporateand assetrestructuring

• Feasibilitystudiesandbusinessriskassessment• Bespokeconsultancyprojects

Wewelcomeyoutocontactuswithregardtoanyoftheservicesweoffer.

Contact usLondonOffice 28BedfordStreet CoventGarden London WC2E9ED

Telephone:+442030771600 Fax:+442072409603 E-mail:[email protected] [email protected] [email protected] [email protected]

ShanghaiOffice Suite2113,HSBCBuilding 8CenturyAvenue Shanghai, 200120

Telephone:+862120280618 Fax:+862150120694 [email protected]

SingaporeOffice 85ACircularRoad Singapore049437

Telephone:+6567020400

www.hartlandshipping.com


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