Peter Sand, chief shipping analyst at BIMCO, suggests weaker prospects do not bode well for dry bulk or container sectors.
The market will likely witness a decline in economic growth, particularly in the advanced economies, leading up to 2022: that was one of the takeaways from a BIMCO webinar last week featuring the association’s chief shipping analyst, Peter Sand.
The prediction is based in part on downward revisions for world growth from the International Monetary Fund (IMF), predicting growth to be 3.5% and 3.6% in 2019 and 2020 respectively. Growth in 2018 is estimated to be 3.7%. The slowdown will impact both advanced and emerging economies, BIMCO comments.
Specifically on advanced economies, the projection for growth is expected to stay stable at 1.7%, however growth this year has been revised down to 2% due to lower-than-anticipated euro area growth and the expectation that US growth will decline. As for emerging economies, forecast growth in 2019 has been revised down to 4.5% from 4.7%. BIMCO also claims that trade tensions will hit China plus its neighbours, with lower growth as a result.
“The shipping industry feels the impact of this trade war, especially in the dry bulk market,” BIMCO states.
When you have indications like this, it’s more hardship that you should be preparing yourself for
During the webinar, Mr Sand said after looking at the Baltic Dry Index that “it’s more hardship that you should be preparing yourself for”. He added that emerging markets constitute “a better place to be if you focus only on headline figures of economic growth”. According to him, “that seems to be flat: around 4.5%, 4.4%”.
In the analyst’s eyes, the real escalation of trade tensions occurred when grain product was brought into the trade war, mainly impacting soybean exports from the US to China. For September and October, Brazil brought its normal soybean amount into China, but as November and December came around, Brazilian stocks were emptied, and China completely halted their imports from the US, leading to “an absolute lack of cargoes going into the market”.
“The most-recent update — still rumour-based — is that we have seen the Chinese back at the US ordering more soybeans … but rest assured, they will not be shipped tomorrow,” Mr Sand noted. “They will be shipped somewhere between now and the coming four to five months. So this is not a quick fix, but it is certainly positive. It delivers the long distance and at least provides some easing of the trade tensions.” BIMCO anticipates 2019 to be “on par” with last year when it comes to dry bulk, but Mr Sand advised stakeholders to “be aware of the downside risks, because there are many more to be found than on the upside”.
In terms of boxes
Turning to the container sector, BIMCO envisages “many pitfalls that will decide the fate of the year”, with Mr Sand noting that currently, everybody is talking about carriers’ ability to pass on the additional costs that are likely to be incurred from January 1, 2020, when the IMO’s sulphur limit enters into force. BIMCO, according to him, has been outspoken on the view that if the sector can’t pass on the extra cost, it will be “massively loss-making to the industry”, with bankruptcies likely to follow.
Mr Sand questioned whether there is now saturated demand for containerised products in the West, pointing out that in Europe, saturated consumer demand has restricted growth to “the very-low single-digit growth rates”. Transpacific and American consumers remain “in a better mood”, with the US enjoying record-low unemployment levels, and, despite the headwinds, higher economic GDP growth. But weakness in the West may well “knock on to” freight rates in the East. Additionally, swing factors of more idling or a reduction of idling will deliver short-term impacts where fleet growth may be higher or lower than average nominal terms.
With the Baltic Dry Index bouncing along at a sub-650 level, news of future pain on the horizon will not be music to anyone’s ears.
The Baltic Exchange will hold its next Shipping Economics & Investment course on June 10 and 11 in London in the UK. More information can be found here.