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Shipping Markets Outlook

2017 Edition

Contents

Introduction 6TheEconomicBackdrop 10TheDryBulkMarket 13TheTankerMarket 19TheContainershipMarket 27Conclusions 33ChartSeries 34 Global Macro Environment 38 The Dry Bulk Market 44 The Tanker Market 49 The Containership Market 53Appendices 55

Shipping Markets Outlook 2017Shipping Markets Outlook 20174 5

Foreword

OurrecentpastShippingMarketsOutlooktitlesillustratehowlongwehavebeenkeptwaitingforapostGlobalFinancialCrisisrecoveryinshipping.In2014,thetitlewas“SurvivaltoRevival”which,withthebenefitofhindsight,nowlooksprematurewhenappliedtothethreemainsectorsofbulkcarriers,tankersandcontainers.In2015,thetitlewas“StuckonAmber”whichworkedwellforbulkcarriersandcontainers,butlesswellfortankers.Theyhadaboomyearbasedaroundanextraordinaryconvergenceofslowerfleetgrowthandturbo-chargeddemandgrowth.In2016,thetitlewas“ChangingPlaces”whichprovedtoanaccuratethematicforecast.BulkcarriersembarkedonagrindingrecoveryaftertheBalticDryIndexsanktoarecordlowearlyintheyear.Tankerssawearningsandvaluescorrectfromtheir2015highswhilecontainerswerecharacterisedbymusicalchairsasconsolidationandchangingalliancesweretheindustry’sresponsetoachallengingsupply-demandbalance.

In2017,thetitleis“OpportunityKnocks”.Atthetimeofwriting,afterthefirstfewmonthsofthisyear,bulkcarriersarewitnessinganaccelerationofthehaltingrecoveryof2016,despitetheabsenceofsupportfromthefreightmarket.Manybargainshavealreadydisappearedandnowthereisanunseemlyrushtopickoverwhatisleft,pushingupvalues.Currentvaluesstillrepresentagreatopportunityastheyremainathistoricallylowlevelsaftertheworstofthefreightmarketwasleftbehindayearago.Continuedweaknessintankervalues,andlowandtemptingshipyardprices,arebeginningtocreatefairvaluebuyingopportunities.Thesamecouldbesaidofcontainerswheresub10,000-teuassetvaluescouldhardlybecheaper,takingtheirsteerfromscrapupratherthannewbuildingdown.Theopportunitiesarevisible,butsoarethepotentialknocks.Thedoorisplaintoseebutdoesitopenontoavistaorawall?Tofindoutwhichitiswemustknockonthedoor,openitandseewhatliesahead.

ThefilmproducerSamGoldwynwasquotedassaying“Nevermakeforecasts,especiallyaboutthefuture”.Shipping,withitsnumerousmovingparts,makesforecastingthemarketsadangerousgame,butaswithpreviousyearsourShippingMarketsOutlookwillhopefullyhelpsteeryouintherightdirection.MayItakethisopportunitytothankourcustomersaroundtheworldfortheircontinuedsupportandtoourstaffinLondon,ShanghaiandSingaporefortheirhardwork.Wearestilltoilingawayinadifficultoverallenvironmentandindifferentiatedsectors.Buttheopportunitiesareoutthere,thedealsarebeingdoneandtheprospectsaregettingbrighter.Welookforwardtoyourcontinuedsupportinjointlytakingadvantageoftheopportunities,aswellasminimisingtheknocks,thatarecoveringmarketwillofferupoverthecomingyears.

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• Bi-weeklynewbuildingmarketreport

Consultingandadvisoryworkscopeincludes:

• Commercialandstrategicadvice• Feasibilitystudyandbusinessriskassessment• Commercialduediligenceforinvestments• Vesselvaluationandfleetanalysis

TheConsultancydivisionofHartlandShippingServicesaimstoofferin-depthcoverageoftheinterfacebetweenshippingmarketsandtheglobaleconomy.

Team members

Welcome to Hartland

Shipping Services

Shipping Markets

Outlook 2017

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

MaartenVandenBroeck ResearchAnalyst E-mail:[email protected]

MorganeRosec ResearchAnalyst E-mail:[email protected]


“In 2016, we might wish to ignore the rise of populism, the wars, the

migrant crisis, the debt crisis, terrorism and the general sense of

political and economic uncertainty”

Introduction

2017: “Opportunity Knocks”

Insomanyways2016wasayeartododge.Themostnotablepoliticaldevelopmentsweretheadvanceoftheso-calledpopulistmovementsthatledtoanEUBrexitvoteintheUKandtoaTrumpvictoryintheUSpresidentialrace.Populismisseenasareactiontotheestablishedorder,arejectionofexpertsandelitismandabacklashagainstglobalisationthathasarguablyfavouredtheprivilegedfewattheexpenseoftheunprivilegedmasses.Thesurprising52:48voteinfavouroftheUKleavingtheEUexposedtheleaversashavingnoplan,havinghadnoexpectationofwinning.InthemonthsaftertheJunevotetherewasstillnopublicplanandthepoliticalwingriskedfallingoutwiththecivilserviceanddiplomaticcorpsthatwillbekeynegotiatorsofthedetailsoftheUK’spostBrexitrelationshipwithEurope.Intheearlymonthsof2017thegovernmenthassuggestedthat,inordertoachievethewishesofthemajorityvoters,itwillbenecessarytomakeacleanbreakfromthesinglemarketandthecustomsunionbeforenegotiatinganewdeal.IthasbecomeapparentthattheEU27hasnointentionofgrantinganyconcessionsthatmightencourageothermemberstofollowtheUK’sexample.SimilarpopularrightmovementsexistinothermajorEUmembercountriesincludingGermany,France,Italy,Holland

andSpainsotherearegoodgroundsforholdingtheline.BrexitwithallitsattendantuncertaintywillnowbeafactorineconomicgrowthacrosstheUKandEuropeforaslongasthedivorceproceedingstake.TriggeringArticle50,whichwillsettheclockrunningontwoyearsofnegotiations,isexpectedinMarch.Ifnodealhasbeensuccessfullynegotiatedwithintwoyears,andfailingtheunanimousEU27grantingofanextension,thentheUKwillleavetheEUwithoutadeal.

TheTrumpvictoryhasbeenseenasareactiontotheelitismofUSpoliticaldynastiesasembodiedbytheKennedys,BushesandClintons.DonaldTrumpmadepopularpromisesinhiselectioncampaignthatseemedtobebeyondrealisticimplementation.Sincehisinauguration,heisshapinguptodeliveronsomeofhiscampaignpromises,butthechecksandbalancesofgovernmentarelikelytoleadtowatereddownversionsofhismoreextremeplans.InhiscabinetchoicesTrumphasreplacedmembersofthepoliticalelitewithmembersofthefinancialandbusinesselite.Onemightquestionwhetherthisreallyqualifiesasdrainingtheswamp.Thestockandcommoditymarketshaveralliedontheexpectationofanewinvigoratedfiscalpolicythatwillabandonausterityinfavourofspending

onvitalinfrastructure,cuttingredtapeandrollingbackregulation.Taxesonbothdomesticandforeigncorporateearningsarelikelytobecuttoencouragetherepatriationofoverseascashpilesandstimulateinvestmentathome.OffshoredUSfactoriescouldfaceimporttariffsandthismayinfluencemanufacturerswhentheydecidewhethertolocateplantsintheUSor,forexample,inMexicoorEasternEurope.ObamacareisintheprocessofbeingunwoundandreplacedasitisregardedasanexcessiveburdenonUSbusinessesandhouseholds.WeanticipatethattraderelationswithChinamaycoolwhilepoliticalrelationswithRussiamaythaw.AtthetimeofwritingMichaelFlynn,thenewnationalsecurityadvisor,hasbeenforcedtoresignoverhisdealingswiththeRussianambassadorwhilethenewadministrationisbeinginvestigatedoveritspre-electionRussianties.Trumphadalsopromisedtore-imposesanctionsonIranwhichisconsideredtobeinvolvedinonewayoranotherinmostofthedestabilisingconflictsintheMiddleEastregion.

In2016theEUwasclearlyrattledbytheUK’sdecisiontoleaveinJune,butthereareplentyofotherthreatstotheintegrityoftheunion.WarsacrossNorthAfricaandtheMiddleEast,includinginSyria,YemenandLibya,haveprecipitatedamigrantcrisisfromsouthtonorthandeasttowest.Manyofthemigrantsarerefugeesescapingwarzones,othersareeconomicmigrantstakingadvantageofthechaosandstillothersareterroristsexploitingtheSchengenAgreementinseekingtoharmwesterncitizensandproperty.Openbordershaveeasedtheirpassageandastringofatrocitieshaveunderminedpeople’sfaithingovernmentsandthreatenedtheirsecurity.ThishasfedintoarightofcentrepopulistbacklashthatmayyetthrowupmorepoliticalsurprisesacrossEurope.Thentherearetheunfinishedconsequencesoftheglobalfinancialcrisisthatstartedbackin2007,sincewhichtimedebtburdenshaveriseninalowtonointerestrateenvironment.Asnon-performingloansareaddressed,andasinterestratesrise,morepressurewillbeloadedontotheperipheralEurozonecountriesthatwereinfocusbefore.ProblemsmayflareupinPortugalandGreecebutofgreaterconcernmaybeabankingcrisisinItalyorSpainthatcouldleadtoaeurocrisisandanalternativepathwaytoEUbreakup.NowonderBrexitisfeared,butthethreatstoEUintegrityaremuchgreaterthanBrexitalone,andthatiswhytheEU27considersthatitcannotaffordtograntanyconcessionstotheUK.

TheUS,UK,Europe,MiddleEastandcentralAsiacollectivelyaskmorequestionsthantheyanswerin2017,rampinguptheuncertainty.OutintheFarEast,ChinaisassertingitselfmilitarilywhichisprovokingJapantoreformitspostwarpacifistconstitutionsothatitcandefenditself.Lastly,NorthKoreacontinuestotestmissilesinpursuitofintercontinentalcapabilityinflagrantviolationofUnitedNationsresolutions.IranhasalsobeenrunningmissiletestsgivingrisetospeculationthatIranandNorthKoreaarecolludingonmissiletechnology.TheTrumpadministrationmaywellchoosetoratchetupsanctionsonbothcountriesinresponse.

Commoditypricessufferedfromaslumpinthefirsthalfof2016,onlytobefollowedbyastrongrallyinthesecondhalf,withcrudeoildoingbestinrisingfromalowof$27abarrelinlateJanuaryto$57byyearend.Naturalgaspricesalsodidwellinrallying60%fromstarttoend2016.Fromthebeginningtotheendof2016aluminium,nickelandcoppereachgained15-20%whilesoyabeansandsugaraveraged20%betweenthem.Thedominantdrybulkshippingcommoditiesofironandthermalcoaldoubledinpriceduring2016withironoregoingfrom$40to$80atonneandthermalcoalrisingfrom$55to$110atonne.ThisrewardedlowcostminersinAustralia,Brazil,Colombia,SouthAfricaandIndonesiathathadweatheredthestormoflowpricesbycuttingbackproductionandreducingoperatingcostsinamannerthatshouldbemuchadmired,andemulated,inshippingcircles.Currenciesmovedaccordingtoeconomicsandeventswiththepoundsterlingfalling16%from£1.47to£1.23againstthedollarin2016,largelyaccountedforbytheBrexitvoteattheendofJune,whiletheyen/dollarstrengthenedfrom¥120to¥100inthefirsthalfof2016beforeweakeningrapidlyintheQ4whenitfellfrom¥100to¥117byyearend.BoththeUKandJapansawtheirexportsbenefitfroma16-17%weakeninginthevalueoftheircurrenciestothedollarinthesecondhalfoftheyear.TheothercurrencythatsufferedanoutsizedslumpwastheMexicanpesowhichlostabout20%ofitsvalueagainstthedollarin2016asitfellfromaround17.5to21.0pesoswithmostofthedamagecausedbyDonaldTrump’shostilecampaignrhetoric.Ithasweakenedevenfurtherin2017.Finally,theChineseyuanhasdevaluedagainstthedollartothetuneofatotalof16.5%sincethestartof2014,goingfromCN¥6toCN¥7,witha6%dropachievedin2016alone.ImagecourtesyofMarineCapital


In2016,wemightwishtoignoretheriseofpopulism,thewars,themigrantcrisis,thedebtcrisis,terrorismandthegeneralsenseofpoliticalandeconomicuncertainty.Wemayalsowishtoeraseshippingmemoriesinalmostallsectorsin2016asitwassuchauniversallybadyear.Ayearago,inSMO2016,weadoptedthethemeof“ChangingPlaces”,anticipatingthatbulkcarrierswouldswapplaceswithtankers.Bulkcarriersdulyembarkeduponarecoverywhiletankersundertookacorrectionandcontainersindulgedinconsolidation,mergersandacquisitionsandareshufflingoftheoldalliances.Bulkcarrierearningsandvaluesstartedfromaverylowbaseandthenwentevenlower,astheBDIhitanall-timelowof290pointson10February.Fromthestarttotheendof2016theBDIwasstillup103%from473to961pointsbut,inabsoluteterms,neitherearningsnorvaluesgainedquiteasmuchasthepercentagegainsimplied.Infact,accordingtotheBalticSale&PurchaseAssessments,a5-yearold180,000-dwtcapesizebulkcarrierwasworth11%lessbyyearendhavinggonefrom$25.3matthestartto$22.5matthecloseof2016.A5-yearold74,000-dwtpanamaxbulkcarrierstartedandendedtheyearon$13.8mleavingonlythe5-yearold56,000-dwtsupramaxbulkcarriertoregisteragain,rising12%from$12.2mto$13.6m.Itwaslessofarecoverythantheturningofacorner,andwecanfeelconfidentthatthereislotmoretocome,butwemightbeadvisedtoprepareforgruellingprogress.Themaintakeawayinthedrybulksectoristhatvaluesbottomedoutinearly2016andarenowrecovering,puttingtheworstbehindus.Valueshaverisensignificantlyinpercentagetermsbutratherlessinabsoluteterms,withcurrentvaluesstillathistoricallylowlevels,suggestingthatinvestmentopportunitiesstillexistandthatitisfarfrombeingtoolate.

2016wasevenlesskindtotankerswhichhadenjoyedunexpectedgiftsin2015courtesyofincreasedshippingdemandfromlowoilpricesthatboostedbothfinalconsumptionandcommercialandstrategicstorage.Elevatedtradingandshippingopportunitiesgeneratedportcongestionatloadanddischargeportsandvoluntary(speculative)andinvoluntary(ondemurrage)storageplays.Allgoodthingscometoanend,andsotheydidin2016.TheBalticDirtyTankerIndex(BDTI)actuallyrosemarginallyin2016,firmingalmost5%from878to919points,whiletheBalticCleanTanker

index(BCTI)slippedmarginallyfrom688to678points.Bothfreightindicesbeliedasharpfallinassetvaluesasovercapacitybecamereality,aftersuchstrongutilisationin2015,withheftynewtankersupplyonthewayfrommid2016into2017andbeyond.AccordingtotheBalticSale&PurchaseAssessments,a5-yearold305,000-dwtVLCCfell25%frombeginningtoend2016decliningfrom$79.6mto$59.6m,whilea5-yearold105,000-dwtaframaxwentdown37%from$44.9mto$28.5manda5-yearoldMRproducttankerlost26%invalueslidingfrom$28.2mto$21.0m.Thelossesonthethreetankerclasseswerelargeatinexcessof25%suggestingabighittoownerequitybutstoppingjustshortofprovidinganothersectoralheadachefortheshippingbanks.Incontrast,thenetchangeinthethreebulkcarrierclasseswaseffectivelyzero.Thetankerfallfromgracein2016wasthussomewhatgreaterthanthebulkerrecovery,soitwasnotanexactchangingofplaces.However,thesteepcorrectionintankervaluesoverthecourseof2016hascreatedopportunitiesforadventurouscashbuyersaspricesmaynotbefarfromstabilising.

Thecontainersectorhadabadyearwithfallingfreightrates,GRIsthatdidnotstickandtimecharterearningsthatsanktolevelsofaroundoperatingcostsfortrampshipsalmostregardlessofshipsizebelow8,000-teu.Thesector’sproblemswereillustratedbythecollapseofHanjinShippingandtherestructuringofHyundaiMerchantMarine,SouthKorea’slargestcontainershippinglines.ConsolidationintheformofmergersandacquisitionssawCMACGMtakeoverNOL/APLfromtheSingaporeangovernment,HapagLloydandUASCmerge,CoscoandChinaShippingconsolidatetheircontainerlines,NYK-MOL-KKKannouncealong-awaitedmergerandMaerskLineagreetotakeoverHamburgSud.ThecombinationofcollapsesandM&Aactivitycausedashake-upandreconfigurationofthealliancesthatfacilitatedtheJ3move.Allofthesechangeshavebeenexecutedfromadefensivestandpointinafightforsurvival.Orderingconstrainthasrightlybecometheorderofthedaywhilescrappingremainsvigorous.TheclassicpanamaxsizehasbeenlargelywrittenoffleadingtoRickmersdemolishingthe7-yearoldIndiaRickmers(4,250-teuNewYZJ2009)inIndiaforjust$5.35minNovember2016onlyforDoehletoscraptheoneyearyoungersisterHammoniaGrenada(4,256-teuNewYZJ2010),alsoinIndia,for$5.55min

January2017.Noteveryonehasconsignedthesetypestotherubbishbin.InearlyDecember,Seaspanbought4x4,275-teuSamsungunits(threebuiltin2009andonein2008)fromHanjinforjust$5.2meach,theequivalentofscrapvalue,presumablyinthehopethattheywillatsomepointbereprievedandthattheirinvestmentatsuchlowlevelscouldatsomepointturntoprofit.ThiswasfollowedbyKMTCbuying4x4,275-teu2008-builtSamsungunits,alsofromHanjin,for$5.25meach.Thesebuysmayyetprovetobevisionarywithanydownsideriskslimitedtoidletimeandafallinscrapprices.

Wehavemovedonfrom“ChangingPlaces”in2016to“OpportunityKnocks”in2017,withmostoftheopportunitiesbeingintheshippingspaceandmostoftheknockssetintheworldofpoliticsandgeopolitics.Theshippingopportunitiesflowfromthebombed-outbulkcarrierandcontainersectorswhichhavedestroyedassetvalues.Whenthesemarketsturn,asbulkersarealreadyandascontainersbumpalongthebottom,thenrecoveringearningswillquicklyfeedintohigherassetvalues.Thisprocesshasalreadystartedandonelessonthatwehavelearntfromthepastisthatthemostelusiveelementismarkettiming,whenexactlytomakethemove.Timingthebottomofthemarketisnighonimpossiblesoinvestmentsneedtobewellfundedwithstrongworkingcapitaltocopewithaslowrecoveryandunpredictabletake-off.Theknockswepotentiallyfacefromevents,politicalandgeopolitical,arealmosttoomanytoimagine.Maybethatiswhytheworldhasadoptedacomplacent‘itmayneverhappen’approachasthedoom-mongershavebeenwrongformanyyears.Forthatreason,thereistheriskthattheymayactuallybegettingclosertobeingright.Inthemeantime,investorshavemadestaggeringreturnsfromstockandbondmarketsandfromthecommoditypricecyclerecovery.Interestrateshavebeenforecasttogoupforyears,andyettheyhavenot,butnowtheyareclosertorisingasdebtbuildsupandinflationscreepsup.Thefixedincomespecialistshavebeenplayingchickenwiththemarketforaverylongtimeandsomehavetakenafewknocksrecentlyasbondpriceshavefallenandyieldshaverisen.Trump,BrexitandEuropeanelectionsthisyeargeneratealotofbusinessuncertaintywithmuchofitrelatingtotaxes,spendingandtrade.Shipping,asalways,isatthejunctionwheretheopportunitiesmeettheknocks.OpportunityKnocks!

“Bulk carriers duly embarked

upon a recovery while tankers

undertook a correction

and containers indulged in

consolidation, mergers and

acquisitions and a reshuffling

of the old alliances”

ImagecourtesyofMarineCapital


inthe2011-2015periodbutitsnappedbacksharplyin2016.Newlystartedprojectsspikedmuchhigherinearly2016asgovernmentstimulusmeasurestoboostinfrastructureinvestmenttookeffect.ThelatestreadinginNovember2016ofinexcessof26%year-on-yeargrowthinprojectstartsisencouraging.Thesefactorsfedintoariseintheimportofleadingrawmaterialsin2016withthermalcoalupover25%year-on-year,crudeoilimportsup13.6%andironoreimportsup7.5%.Theincreasewaslargelydowntothreemainfactors:risingdomesticdemand,enhancedexportsofassociatedvalue-addedproductsandadeclineindomesticproductionoftheserawmaterials.Lastyear,Chinesedomesticproductionofcoalwasdown9.4%,crudeoilproductionwasdownalmost7%andironoreproductionwas5.4%lower.China’senormousinfluenceoverglobaldemandforrawmaterialshelpedraisethepriceofcommoditiesduringthecourseof2016,havingsufferedfromtheearlierslump,thuseasingtheknock-onnegativeimpactonoilcompaniesandminers.In2016,ironorepricesrose90%,Australiancoalpricesgained65%,Shanghaireinforcingbarsrecovered59%,nickelorerose50%andShanghaicopperpriceswereup26%.Thebroad-basedBloombergCommodityIndexwasup12%in2016withChinaplayingthestarroleinhelpingtorescuecommoditypricesacrosstheboard.Oilcompanyandminingshareshavesoared.

Therateofglobaleconomicgrowthisexpectedtoaccelerateinthecomingyearsbasedupongreaterfiscalspendingafteraprolongedperiodofausteritythathasnotgeneratedmuchinthewayofgrowthmomentum.Developedmarketsexpandedby1.6%in2016andareforecastbyHSBCtotickupto1.7%in2017followedby1.8%in2018.Emergingmarketscollectivelyrose3.6%in2016andareforecastbyHSBCtoexpandby4.1%in2017and4.5%in2018.Thissetsapositiveeconomiclandscapeforshippingintheyearsaheadwithgentlyrisingdemandgrowth.Thiscanonlybeundoneonshipping’ssupplysidesoshipownershaveonlythemselvestofear.TheIMFpredictsthataveragegrowthingovernmentfiscalspendingintheUS,UK,Germany,ItalyandFrancewillrisefrom1.5%in2017,to2.0%in2018,2.2%in2019and2.6%in2020.ThemainconstraintonglobalfiscalexpansionisthattheleadingeconomicgrowthdriversarealreadyheavilyindebtedwiththeG7groupofleadingeconomies(theabovefiveplusCanadaandJapan)havingageneraldebttoGDPratioofover120%in2016.ItisestimatedbytheIMFthattheG7countriesaregrowingat1.5%currentlyagainstthe1.8%neededtopayinterestonoutstandingdebt.So,asusualintheearlymonthsofanewyear,wearefacedwithuncertainprospectsfortheyearahead.AswitchfrommonetarytofiscalstimulusisimminentbutwedonotknowtheextenttowhichPresidentTrumpwillbeallowedtopushaheadwithhis

The Economic Backdrop

In our economic chart book at the back of this publication we follow the

timeline of economic events that have unfolded since the beginning of 2016.

Globalgrowthdisappointedin2016cominginat1.6%indevelopedmarkets,comparedwiththeyear-agoforecastof1.9%,andat3.6%inemergingmarkets,comparedwiththeyear-agoforecastof3.9%,accordingtoHSBCeconomists.Inthissense,theperformanceofthestockmarketprovedsomewhatsurprisingastheFTSE100roseover14%in2016toendtheyearon7,143points.ThereasonsforstrongUKcorporateperformancewerenumerous,andnotnecessarilyrelatedtoincreasedsales.Lowinterestratesspurredmergersandacquisitionsandsharebuybackswhichservetoboostsharepricesanddividends.ThepostJuneBrexitresultdevaluedsterlingagainstthedollarby15%boostingexportsandflatteringtheearningsoftheFTSE100constituentsthatgenerate70%oftheirsalesabroad.Addtothatthecollapseinoilandcommoditypricesinthefirsthalfoftheyearandtheirprolificrecoveryinthesecondhalf,thusboostinglargeoilcompaniesandminerssuchasShell,BP,RioTintoandBHP.Morerecently,asteepeninginthedollaryieldcurvehashelpedbankprofitabilityespeciallythosethathavesubstantialoverseasearningsthatbenefitfromFXtranslationeffects.TheFTSE’sriseonhelpfulbutunexpectedmetricssummedupayearofeconomicchangeandpoliticalsurprisethatwasdominatedbytheBrexitvoteandtheTrumpvictory.Nowthatthefactofrisingcommoditypricesandtheprospectofhigherinterestratesarerotatingdeflationintoinflation,istheenvironmentforUKcorporatesturninglessbenign?TheBankofEnglandthinksso,itseesUKgrowthfallingfrom2.2%in2016to1.4%in2017ashigherimportpricesandweakersterlingsqueezehouseholdfinancesandrisinginflationthrottlesbackspendingandinvestment.ButitwillnotbethesameeverywhereaswhiletheUKandUSfaceinflationarypressuresbothEuropeandJapanarestillinthethroesofdeflation.Sofar,theUSFederalReserveandtheBankofEnglandhavenotrespondedtoinflationrisingtowardstargetlevels.Thisbegsthequestionofwhethertheyarepreparedtoovershoottheirinflationtargetsasameansoffritteringawaytheexternaldebtobligationsofhouseholds,companiesandstate.OrmaybetheyconsiderthattheUSandUKarenotcapableofcopingwithmonetarypolicynormalisation.

Theleadingcentralbanks(theUSFederalReserve,EuropeanCentralBankandtheBankofJapan)continuedtoexpandtheirbalancesheetsin2016via

quantitativeeasing.But,in2016,monetarypolicyappearedthereachthelimitsofusefulnessandfrom2017weareexpectingfiscalpolicy(taxcutsandinfrastructurespending)totakeupthereinsofprovidingeconomicstimulusandgrowthsupport.However,presentelevateddebtlevelsinallleadingdevelopedeconomieswouldsuggestthatthescopeforsuchfiscalmeasuresislimited.InthecontextoffallingunemploymentratesintheUS,UKandEurozonethecentralbanksrealisethattheyshouldstartraisinginterestrates,aftertheFederalReservekickedoffproceedingslastDecemberwithitsfirstquarterpercentagepointriseinayear.Despitefallingunemployment,wagegrowthintheUS,UKandEurozonehasbeenmarginalatbestbut,aswemovetowardsfullemployment,whichishardtoassessinaworldofwidespreadpart-timeandhome-working,thiscouldquicklychange.AswiththeFTSE100,theS&P500benefitedfrombenignborrowingconditionsin2016thatpermitteddividendstoriseevenasearningsflat-lined.Thereisasensethatwehavealreadyreachedthepointatwhichweneedtonormalisemonetarypolicyandlettheeconomydoitsownwork,asthingshavebeentoosoftfortoolong.Bondmarketselloffs,evidencedbyfallingbondpricesandrisingbondyields,haveindicatedthatchangeisafootandthecostofborrowingisabouttorise.Conversely,intermittentbondmarketrecoveries,inswitchestorisk-offmode,indicatethatinterestratesmaystayputafterall.Overall,thereisanabsenceofconvictionbutthereistherealriskthatshouldratesrisefasterthanexpectedthenhighhouseholdandcorporatedebtburdensmaycurtailspendingandinvestmentandsnuffouttherecovery.Arecoverythathasafeelingofartificiality,pumpedupasithasbeenbyexternalsupport,mustatsomepointtransformitselfintoarecoverybaseduponfundamentalgrowthifwearetobreakawayfromcentralbankstewardship.

China,astheworld’ssecondlargesteconomy,isasimportanttotheglobaleconomyasitistoshippingandtrade.TheChineseeconomyexpanded6.9%in2015,itsweakestgrowthratein25years,whileofficialfiguresfor2016cameinat6.7%astheChina’seconomicslowdowncontinues.However,afterseveralyearsoffallingindustrialproductionfromtheendof2013,thismetricshowedsignsofstabilisinginthesecondhalfof2016basedonthelatestavailabledata.Electricityproductionhadalsobeentrendinglower


ambitiouseconomicplans.Equally,itisunclearwhenandtowhatextenttheUKmightsufferaneconomicslowdownfromtheprocessleadinguptodeparturefromtheEuropeanUnion.Theconsensusisthatthiswillleadtomanyyearsoflowergrowth,notthatleaverswerevotingforthis,butitmayyetturnoutotherwiseoncurrentform.Japanlookssetforgrowthofatleast1%thisyearastheBankofJapananchors10-yearyieldsatzero,windsbackdamagingconsumptiontaxesanddeliversexporterstheadvantageofaweakeryen.

Tosummarise,2017ispromisingtobeabumpyyearbuildingonthepoliticalsurprisesofBrexitandTrump,andhowdeliverableeachoftheseprovestobe.Itiscommonlyheldthatpoliticalturmoil,risinginflationandtighterfinancingconditionswillprovetobeadragonimprovingeconomicprospectsandrisingcorporateearnings.Higherbondyields,creepinginflation,elevateddebtlevels,astrongerdollar,Brexit,Trump,Europeanelectionsandashifttowardsprotectionismallposethreatstobothdevelopedandemergingmarkets.Astrongerdollarwillmakeemergingmarketdollardebtservicingmoreexpensive.Weawaitthepromisedpivotfrommonetarytofiscalstimulusand

hopethatjobcreationandeconomicgrowthcanbenurturedviataxcutsandinfrastructurespending.WeremainanxiousattheparadoxofalreadyelevateddebtlevelsbeingmetwithincreasedpublicsectorspendingjustasinterestratesandinflationintheUKandUSaresettoturnup.Certainly,thedesiretoescapedeflationandgenerateinflationmaybemet,andsurpassed,causinginterestratestorisefasterthanpresentlyanticipatedwithnegativeconsequences.Stockmarketsareracingaheadinearly2017andsomeobserversseearesemblancetotherun-upinlate1999thatprecededthecollapseintelecoms,mediaandtechnology.Equityvaluationshaveonlyjustsurpassedtheirlevelsofbackthenbutalltheupsideseemsalreadytobebackedintocurrentprices.Noteveryoneisconvincedthatthingsaregoingupwithsomeschoolsofthoughtseeingacontinuationoflowgrowth,lowinflationandlowrates.Butdespitealltheforegoing,China’sfallingGDPgrowthratenowappearstobebottomingoutandsomeprojectionsofdevelopedandemergingmarketgrowthoverthenextfewyearsarepositiveandrising.Foronce,orisitactuallyasusual,thereisnoconsensusapartfromgeneralagreementthat,if2016isanyguide,anythingcouldhappen.

Shipping Markets Outlook2017 Edition

The Dry Bulk Market

“2017 is promising to be a bumpy year building on the political

surprises of Brexit and Trump, and how deliverable each of these

proves to be”


The Dry Bulk Market

This section accompanies the narrative to the dry bulk sector chart book at

the back of this publication.

Mostpeoplewouldagreethat2016wasayeartoforgetindrybulkshipping.InthefirsthalfoftheyeartheBalticDryIndexfelltoitslowestlevelever:290pointson10February.Fortunately,fromtherethingscouldonlygetbetter,andtheydulydid.InthefirsthalfoftheyeartheBDIaveraged486pointsandinthesecondhalfitaveraged860points,a77%improvement.However,aftersuchapoorfirsthalf,theBDIendedupaveraging673pointsoverallin2016whichwasnotthatmuchworsethan2015whenitaveraged718points.Successivepooryearssince2008,premisedmainlyonchronicoversupplyratherthanonanylackofdemandgrowth,havewornshipownersdownandveryfew,ifany,havesurvivedwithoutgoingthroughsomeformofrestructuring.Drawingtotheendofthefirstquarterof2017,wecanbesurethattheworstispastbutourconfidenceisbeingsappedbythecurrentQ1slump,despitethefactthatitwaswidelypredicted.Nonetheless,theaverageoftheBDIintheyeartodate(to20February)is834pointswhichisstillwelluponthe2015and2016fullyearaverages.Overthecourseof2016averagebulkcarrierearningswentfrombelowdailyoperatingcoststoarisingpremiumoverthesedailyoperatingexpenses.Thisstimulatedthesaleandpurchasemarketinsecondhandshipsasbuyerscoulddeploycashatthebottomofthemarketcycleandatleastcovertheon-watercostswithouthavingtodipintotheirpocketstosubsidiseoperations.AssetvaluesinallbulkcarriersegmentsimprovedintheyearfromMarch(aftergettingovertheshockoftheFebruaryall-timerecordtroughintheBDI)withtheolder,moreaffordable,shipsdoingratherbetterinpercentagetermgainsthanthemostmodern.Accordingtonominalbenchmarks,a15-yearoldcapesizegained80%invalueintheyearfromMarchwhile15-yearoldpanamaxandsupramaxbulkcarriersbothrose83%,albeitthatallwerefromaverylowbase.Atthemodernendofthespectrum,Japanese-builtresalecapesizeandpanamaxwereup6%and7%whileJapanese-builtsupramaxandhandysizewereup19%and18%respectively.

Thelackofmovementinpricesforthemostmoderncapesin2016isillustratedbythereportedsalesfor180,000-dwt2016-deliveryresalesfromvariousAsianshipyards,notallconsideredequalinquality.InJanuary,twoHanjinunitswentforastrong$35.3meachbeforetheBDI’sslumpinFebruarywhenanImabariwas

reportedatamuchlower$33.0m.ByJune,sentimentwasimprovingandtheRedIvy181,162-dwtImabari2016wasreportedconcludedatabetter$35.6m.InJuly,aresalefromChina’sNewTimesShipbuildingwasreportedsoldfor$33.0mandinSeptemberaresalefromShanghaiWaigaoqiaoShipyardwaslinkedwitha$33.5mpricetag.Finally,inDecember,HNAgroup’sJinhaiShipyardwaslinkedwitharesaleatjust$28.0mtoGreece’sMarmaras.Whilethisshiphada2016deliverydateitisassumedthat,atthisprice,ithadbeenwaitingaroundforawhilebeforebeingactivated.Themovementinresalepricesover2016,whilenotdirectlycomparablegivendifferentshipyardandqualityperceptions,wasminimal.Butnowthatwearein2017atleastnominalpricesarefirmer,despitealackofhelpfromtheflounderingBDIandBCIindicesinQ1.A180,000-dwtJapaneseresaleisnowmarkeduptoaround$38.0malthoughnothingisknowntohavebeendoneatthiselevatedlevel,sotheimprovementismainlybasedonperceivedsentimentratherthanonhardevidence.

Coincidentally,arecoveryinwetanddrycommoditypricesbroadlyfollowedthepathoftheBDIin2016.Onthewetside,Brentcrudehitalowof$27abarrelon20Januarybutendedtheyearon$57,a111%improvement.Onthedryside,overthecourseof2016China-landed62%-Feironorepricesrose90%,NewcastleFOBcoalpricesgained65%,Shanghaireinforcingbarsputon59%,nickelorerose50%andShanghaicoppergained26%.Finally,thebroad-basedBloombergCommodityIndexwasup12%year-on-yearin2016.Surgingcrudeoilprices,metalinputpricesandfreightratesin2016hadalottodowithabouncebackfromcyclicallylowpricepointsthatsawproductivecapacityatthewell,mine,millandshipyardalltrimmedbackinresponse.Asisthenorm,lowpricesaretheirownbestcureandtheyeventuallygivewaytohigherpricesonceremedialmeasureshavebeentaken.Thismade2016ayearofsignificantchangeofdirectionaspricesdulyrespondedtofundamentalfactors.ThepricerecoveryinsteelmakingrawmaterialsfollowedminingcapacityreductionsbyVale,Rio,BHP,FortescueandGlencore.ThesteelpricerecoverywashelpedbyChinashuttingdownoutlier,pollutingandinefficientcapacityathomeandbystrongend-usersteeldemandbothathomeandabroad.Thenickelorepricereboundwashelped

byself-imposedexportrestrictionsbyIndonesiaandthePhilippines,insufficientreplacementcapacityinNewCaledoniaandstrongworld-widedemandfornickel-dependentstainlesssteel.IndonesiaeaseditsearlierdraconianexportbanwheninJanuarythisyearitintroducednewrulesthatwillallowexportsofnickeloreandbauxiteandconcentratesofothermineralsundercertainconditionsinasweepingpolicyshiftbythekeyglobalsupplier.Meanwhile,thePhilippinesisshuttingdownoverhalfofitsminestotacklepollutionandprotecttheenvironment.Theforegoingfactorswereallpositivefordrybulkshippinglastyear.RestrictionsonbauxiteshipmentsfromIndonesiaandthePhilippinesareplayingintothehandsofWestAfrica’sGuinea.Itplanstomorethantrebleitsbauxiteexportsto60mtperyearby2020asitinvestsheavilytomeetChinesealuminiumdemand.ItisexpectedthatmostofthisbauxitewillgotoChinaonsuperlong-haultradesfromtheportofKamsarfromwhencethekamsarmaxbulkcarriergetsitsname.Itshouldrejoiceatthisreconnectionwithitsroots.Thisturnaroundcanbebuiltonin2017aslongasself-imposedrestraintsonshippingtonnagecapacitycontinueintheformofminimalnewcontractingandmaximumoldershipscrappingthusallowingforecastdemand-sidegrowthtodoitsowngoodwork.

2016provedtobeararegoodyearfordrybulkshippingcapacitymanagement.Thereweresome47.2m-dwtofbulkcarrierdeliveriescombinedwith28.9m-dwtofdemolition,thusmanagingdownnetfleetgrowthto18.3m-dwtfromwhatmightotherwisehavebeenanalarminglyhighfigure.In2016,thedrybulkfleetsaw564deliveriesagainst400demolitions

nettingofftoagainof164units.Thiswasthelowestlevelin13yearssincepre-boom2003whenthenetdeliveryofbulkcarrierscameinatjust58units(166deliveriesversus108demolitions).Toputthisincontext,thepeakdeliveryyearthismillenniumwasin2010with1,045deliveriescoincidingwith144demolitionstogivenetfleetgrowthof901units.Thiswasfollowedbynetfleetgrowthof852unitsin2011and658in2012whichhelpstoexplainourpresentpredicamentofchronicoversupply,onlyslowlybeingworkedoffaswemoveinto2017.However,byJanuary2017,scrappinghadslowedanddeliverieswereboostedbythenormalspill-overfromtheendofthepreviousyearasownerswantedthisyear’sregistrationplates.Thissawthenetdeliveryof86bulkcarriersof8.8m-dwtinJanuary2017alone,alittleoverhalfbynumberofthenetfleetgrowthofthewholeof2016.

ThisJanuarysurgemaybepartlyexplainedbythefactthat2016wasalsotheyearwiththehighestslippageratesincethe2008globalfinancialcrisis.At42%itwaswellaheadofthenexthighestyearof2013when36%ofthedrybulkfleetfailedtodeliverasplanned.Wecanstillexpectahighpercentageoflastyear’s42%slippageratenottomaterialise,thuseventuallyassistingthegradualshifttobettersupply-demandbalance.Afterlowscrappinglevelsinthe2000to2008period,2016registeredelevateddemolitionwith385unitsexitingthemarket,maintainingthehighlevelsofscrappingthathaveprevailedsince2008.Inpre-crisis2000to2008wesawanaverageof88bulkcarriersbeingscrappedeachyear.Thisballoonedtoanaverageof371peryearinpost-crisis2009to2016whenmarketconditionsdeteriorated.Whiletherateofscrapping

“AotearoaChief”ImagecourtesyofCNCo


hasincreasedsotherateofnewshipcontractinghasdecreased,amuchneededpincermovementifoversupplyistobeaddressed.Onaverage,689bulkcarriersperyearwereorderedin2000to2008against655peryearin2009to2016.Thesurprisinglyhighlevelofcontractinginthelatterpost-crisisperiodcanbeputdowntoanumberoffactorsincludingtheperceptionofattractivepricesandanimminentmarketrecovery.Neitherperceptionwascorrectaspricesfellfurtherandthemarketonlygotworse.Afteranastonishing1,239bulkcarrierorderswereplacedin2013thiswastrimmedto763ordersin2014andto357ordersin2015.By2016thepennyhaddroppedandneworderswerecutbackhardtojust48units.

Inthismillennium,drybulkseabornetradegrowthhasbeensteadilyexpanding.Inonlyoneyearsincetheendof1999wasthereanannualcontractionindemandgrowth,thatbeingin2009intheimmediateaftermathoftheglobalfinancialcrisis,whenvolumesdipped3.7%or130mtto3,428mt.Worldseabornedrybulktradehasgrownbyanaverageof158mtperyearsincetheendof1999toreachatotalof4,873mtbytheendof2016,representingaveryrobustcompoundannualgrowthrateof4.8%perannum.Thiswasachievedinspiteofthegrowthinterruptionin2009whenatemporaryseizureintheinternationaltradingsystemnegativelyimpactedapparentdemand.2015wasanotherremarkableyearinthatitbrokethetrendandpostedzerogrowth,followedbyamodestreboundin2016whendrybulkseabornetradeexpandedbyjust60mtorby1.2%onthe2015totalof4,813mt.Ashasbecomecustomary,Chinaledthewayinunderwritingthe2016importrebound.China’stotalimportsofiron

oreroseby71.4mt(+7%)to1,024.7mt,itsthermalcoalimportswereup51.5mt(+25%)to255.7mt,itscokingcoalimportsgained11.3mt(+24%)to59.3mtanditslogimportswereup9.7mt(+14%)to80.9mt.Someothercommoditieswitnessedsmalldeclinessuchasgrainimportswhichweredown5.2mt(-6%)to85.0mt,bauxitedown3.7mt(-7%)to52.4mt,nickelorelowerby3.3mt(-9%)to31.9mtandfertilisersdown2.9mt(-26%)to8.3mt.Alltold,China’stotalimports*ofleadingdrybulkcommoditiesrosebyanet130mt,or8.7%,in2016to1,632mtfrom1,502mtinthepreviousyear.ThismeaningfulChinesecontributiontoglobaldemandwashelpedbystimulusmeasuresthatwereimplementedintheearlypartoflastyearleadingtoasurgeinfixedassetinvestmentprojects.ByendFebruary2016,thenumberofnewlystartedfixedassetinvestmentprojectspeakedat55%year-on-yeargrowthfollowingasurgeincapitalinvestmentatthebeginningofthecalendaryear.Thisarrestedthedownwardtrendindomesticsteeldemandthatstartedbackin2013.Steelproductiongrowth,whichhadturnedintonegativeterritoryinthe12monthsfromMarch2015,returnedtoapositivegrowthtrendinMarch2016.Thiswasmaintainedoverthebalanceof2016,endingwithastrongfinishinQ4.ThisinturnhelpedtomoderatesteelexportsbyQ4asmoresteelwasneededathome.Overall,thistranslatedintosteelexportsrunningatabout9.4mtpermonthin2015beforeeasingbacktoabout9.1mtpermonthin2016.

Chineseimportsofironorecontinuedtorisesupportedbyareviveddemandforsteelandareductionindomesticallyminedproduct.China’sdomesticironoreproductionhasbeenindeclinesincetheendof

2014aspricesslumpedbelowthecostofproductionandastheferrouscontentcontinuestofall.Ironoreisthemostimportantconstituentinthedrybulkcommodityspectrumanditiscentraltothefortunesofthecapesizesegmentwhichtendstohaveatrickledowneffectontheentirebulkcarriersector.In2015,China’sironoreimportsrosebyonly20.3mtor2.2%year-on-yearfrom933.1mtto953.4mt,holdingoutthegloomyprospectofslowingironoredemandinChina.Fortunately,thiswasnottobethecase.In2016,China’sironoreimports,almostallofwhichwereseaborne,reboundedandclimbed7.5%year-on-yearfrom953.4mtto1,024.7mtasdemandfordomesticsteelandsteelpricesrecoveredasinfrastructurespendingclimbed.China’stotalcoalimportsalsorosesharplyin2016havingbeenindeclineoverthepreviousyear.Partofthiscouldbeputdowntodecliningdomesticcoalproductionasthecentralgovernmentsoughttocrackdownonovercapacityandreininpollutingandinefficientmines.Ithadintroduceda276-dayworkingcapondomesticcoalmineslastyearthatmassivelyreduceditsoutputofthermalcoal;itwaseventuallyliftedinOctoberaspricessurged.Chinesedomesticcoalproductionpeakedat4billiontonnesin2013inwhichyearoutputrosebyonly29mt,comparedwithan181mtincreasetheyearbeforein2012.Itthenwentintodecline,fallingby100mtin2014andby124mtin2015withtheannualiseddropin2016cominginat98mtonlatestdata.TocompensateforfallingdomesticcoaloutputandincreaseddemandChinaraiseditsseabornecoalimportsto164mtin2015andto201mtin2016,analmost23%year-on-yearincrease.Thiswasbrokendownintofairlystaticseabornecokingcoalimportswhichremainedatthe36mtlevelin2016andasurgeinseabornethermalcoalimportswhichincreasedfrom128mtin2015to165mtin2016,providingsolidplanksofsupportforthelargerbulkcarriersectorwhichcontinuestosufferfromoversupply.

Theeffectsoftheearly2016Chinesestimuluspackagewerealsovisibleinsurgingelectricityconsumptiongrowthinthesecondhalfoftheyearwith6-monthmovingaveragehittinganannualpeakof8.4%year-on-yearinNovember.Overthepreviousfiveyearsto2016,China’selectricityconsumptiongrowthhadbeeninadecliningtrend.The2016combination

ofreducingdomesticthermalcoalsupplyandincreasingelectricitydemand,bothaproductofcentralgovernmentpolicy,iswhatlaybehindthepanickysurgeinthermalcoalimportslaterintheyear.Itwasgoodforshippingifnotgoodforthenation’sbalanceofpayments.Insharpcontrast,India’scoalimportshadbeenrisinginthefiveyearsto2016beforeturningdownlastyearasdomesticcoalproductionrose.Thiscoincidedwithmorelandbeingmadeavailableforminingthusgraduallyreducingimportrequirementswhichhadclimbedfromamonthlyaverageof7.7mtin2011toanaverageof16.8mtoverthefirstninemonthsof2016.India’scoalimportvolumesturneddowninthesecondhalfof2016justasdomesticproductionedgedupfrom630mtin2015toanestimatedannualisedtotalof653mtin2016.India’sriseindomesticcoalproductionattheexpenseofimportsputsmoreshippingmarketrelianceonChinatocontinuetheprogressiveimportsubstitutionofitsdomesticrawmaterialsoutput.Thishasbeenalongtermprocessandithasbeenvitaltothelargebulkcarriersectorwhichwouldhavesufferedevenmorefromtonnageoversupplywithoutit.Fortunately,importsubstitutionhasfurthertogoasmuchofChina’sironoreoutputisofpoorquality,withdecreasingferrouscontent,whileitisincreasinglyexpensivetomine.Thisisshipping’sownGoldilock’sscenario.

Theforegoingillustrateshowreliablegrowthinlong-termrawmaterialdemandhassupporteddrybulkshipping;sowhatofthefuture?LatestestimatessuggestthatChinawillraiseitsironoreimportsbyaround55mtor5.5%in2017andthattheglobalseabornetradeinironorewillrisebyaboutthesameamount,oralmost4%in2017,toreach1,465mt.ProvisionalfiguresforJanuary2017fromChinesecustomssuggestarecordJanuaryimportmonthof92mt,up12%year-on-year,whichbodeswellforthewholeyear.DomesticironoreproductioncontinuestobecutonacombinationofcostandenvironmentalgroundswhileinventoriesatmainChineseportsareupto116mt,24%higheryear-on-year.Globalironoresupplyhasbeencurtailedinrecentyearsandthishashelpedtorescueprices.However,thereisstillanabundanceofkeenlypricedsupplyfromAustraliaandBrazilthatcanbeatChineseproductiononbothquality

*Total imports which encompasses seaborne, rail and overland.

“China’s total imports of leading dry bulk commodities rose by a

net 130mt, or 8.7%, in 2016 to 1,632mt. This meaningful Chinese

contribution to global demand was helped by stimulus measures that

were implemented in the early part of last year leading to a surge in

fixed asset investment projects”

ImagecourtesyofMarineCapital



The Tanker Market

andpricepoints,thelatestbeingVale’sgiantS11DminewhichopenedforbusinessinJanuary2017,togetherwithaprogressiverampupinAustralia’sRoyHilloverthecourseof2017.Thisnewsupply,frombothnearandfarawaysuppliers,becomesavailabletoChinesesteelmillsshouldtherebethedemandforit.Ifitisthere,thentheshippingmarketwillbenefitifBrazilcangainagreatershareofincrementalChinesedemandattheexpenseofAustraliaandraisetonne-milegrowth.Thenthereisthequestionofwhethernewlong-haulshipmentsfromBrazilwillgooncaptivesurplusvalemaxtonnageorspilloverintothespotmarketandbenefittheindependentlyownedcapesizesector.ChinawillremaintheonlyrawmaterialimportercapableofmovingtheneedleasironoreimportsintotheEUareexpectedtoremainconstantyear-on-yearin2017ataround105mtwhileimportsintoJapanareexpectedtostayataround130mt,thesameasin2016.ThesteelindustrygloballyhasbeenundersiegefromrisingChinesesteelproductexportsandtheslowintroductionofremedialmeasures,asinprotectiveimporttariffs,meansthatmostofthedamagehasalreadybeendonetothesteelindustryex-China.

Onthecoalfront,Chinahasacontinuingneedtoimporthigherqualitygradeswithgreatercalorificvalueandlowersulphurcontenttoincreaseefficiencyandreducepollution.Whiletheseimportlevelswillonlyeverbeatafractionofdomesticcoalproduction,theyarestillmaterialtotheshippingmarket.Asidefromimportantefficiencyandenvironmentalconsiderations,event-drivenfactorscanalsoleadahelpinghand,althoughtheyarebeyondtherealmsofforecasting.AfterKimJongNam’sassassinationon13FebruaryinMalaysiaandNorthKorea’slong-rangeballisticmissiletestthedaybefore,incontraventionofU.N.SecurityCouncilResolution2321,whichChinahelpedpasslastNovember,theChinesegovernmentbannedallNorthKoreancoalimportsfrom20February2017fortherestoftheyear.Thiscoaltradeisalifelineforcash-strappedNorthKoreaas,lastyear,itamountedto22.5mtofhighqualityanthracite,a15%increaseon2015,whichistypicallyblendedwithcokingcoalinsteelblastfurnaces.In2014,NorthKoreageneratedjustoveronebillionUSdollarsfromthiscoaltradeinayearinwhich86%ofNorthKorea’stotalexportsweretoChinaand88%ofNorthKorea’stotalimportswerefromChina.ThusChina’sinterventioninavitalregionaltrade-relatedissuecanpotentiallyinfluenceNorthKorea’sbelligerentpursuitofnuclearweapons.

AsasubstituteforlostNorthKoreananthraciteimports,andgiventherelativelyhighcostandrelativelylowqualityofChinesedomesticcoal,Chinaisexpected

toneedtoimportsome20mtofequivalenthighqualitycoalbyseafromAustralia,SouthAfricaandothermuchmoredistantsources.Thiscouldpartiallyreversetheincreaseinoverlandsuppliesin2016whenMongoliasupplied23.6mt,up85%on2015,againstAustralia’s26.8mtofseabornesuppliestoChinain2016,upjust5%on2015.MongoliaprovedtobecheaperthanequivalentAustraliancokingcoalbenchmarks,whichhadsurgedfromabout$100toover$300atonneinthesecondhalfof2016inresponsetoChina’searly2016276-dayannualoutputcaponitsdomesticcoalmines.Priceshavesincehalvedbacktoaround$150afterChinarevokedtheseoutputrestrictionsinOctoberthathadcausedAustralianpricestosurgeinthefirstplace.However,uncertaintyreinsasinmidFebruaryitwasrumouredthattheChinesegovernmentmightreintroducethe276-daycapasearlyasMarch2017inpursuitofitsoriginalgoals.Ifthisdoesindeedhappenthentheprospectsforhigherseaborneimportsdoimprove.But,asthingsstand,China’scombinedthermalandcokingcoalimportsareexpectedtorisebyonlyalittleover2%year-on-year,orlessthan5mt,in2017to205mt.Evenifonecouldaccuratelyestimateannualchangesinabsolutevolumesofsupplyitbecomesnexttoimpossibletoforecastthemorecriticalchangesintonne-miledemandbaseduponcommoditypricearbitrageandevent-drivenalterationsintradingpatterns.

Afterzeronetgrowthinglobalseabornetradein2015weexpectgrowthtocomeinataround1.2%in2016,2.0%in2017and2.3%in2018.Bycomparison,drybulkfleetgrowthisexpectedtoexpandbyanet2.3%in2016andthenslowto0.9%growthin2017,0.6%growthin2018andfinallytoshrinkby0.7%in2019baseduponthecurrentorderbookandslippageprojections.Ofcourse,muchcanchangetotheorderbookasfaraheadas2019ifownerschoosetoinvestinnewships,otherthanstrictlyforfleetreplacementandrenewalreasons,atthefirstperceptionofasustainablerecovery.Theshipyardswillcertainlyfindittheirdutytotemptownerswithattractivenewregulatorycompliantecodesignsandalluringprices.Giventhatwehavebeenaddingfarmoreshipsthandemandgrowthhasneededsince2008,wewouldbenefitfromaperiodoforderingdisciplineintheyearsaheadtoclosethesupplyanddemandimbalanceandgivefreightratesandassetvaluesachancetomaintaintheirgrindinglyslowrecovery.Onlycollectivedisciplineinfleetcapacitymanagement,regardedasapipedreaminsuchafragmentedownershipmarket,combinewithascarcityofequityanddebtfinancetohastentherecoveryprocess.


The Tanker Market

This section accompanies the narrative to the tanker sector chart book at

the back of this publication.

Forthreeandahalfyearsinarowtomid2014Brentoilpricesaveragedaround$110abarrel.Prolongedhighpricesfindtheirowncureinincreasedproduction,reducedconsumptionandefficiencygains.ThepriceofBrentpeakedat$115inJune2014andthenembarkedonadownwardslidethatdidnothitrockbottomuntillateJanuary2016,at$27abarrel.ThislongperiodofhighpricesnotonlyenrichedMiddleEasternOPECproducers,whoembarkedonhugeinfrastructureandsubsidyprogrammes,butitalsobroughtmuchnonOPECcompetitionintotheworldofoilproduction.IncreasesinnonOPECproductionin2013and2014weremirroredbyanalmostequaldeclineinOPECproductionasitgavewaysoasnottofloodthemarketandcollapseoilprices.Afterabouttwoyearsfromtheendof2012,aperiodinwhichthecallonOPEChadstartedshrinking,theSaudisdecidedthattheyhadtakenenoughpunishment.GainsinunconventionaloiloutputinNorthAmerica,suchastightoilinTexasandDakotaandoilsandsinAlberta,werethreateningSaudiArabia’slivelihood.InNovember2014itdecidedtoturnonthetapsandfloodthemarket,aimingtocollapseoilpricesanddriveoutthesemarginalnewproducers.Thatwasthetheoryanyway.ItwasnotonlyaimedatNorthAmericanproducersbutalsoothernonOPECproducersinRussia,Brazil,theNorthSeaandthePacificthathadbeengettingafreerideonthecoat-tailsofsustainedhighprices.Thenormalorderhadtobere-establishedwherebyOPECcalledtheshotsandSaudiArabiaresumedtheroleofglobalswingproducer,managingpricesbyopeninguporreigninginitscontroloverthemajorityoftheworld’sspareoilcapacity.Itneededtoregaintheinitiative.

Inthefiveyearsfrom2012to2016annualaverageglobaloilsupplyhadrisenfrom90.5m-bpdto96.2m-bpd,accordingtoEIAandHSBCestimates.Balancedsupplyanddemandfrom2012to2014gavewaytooverproductionfromlate2014asOPECopenedthespigots.Inthe12monthsfromJanuary2015toJanuary2016,globaloilsupplyconsiderablyexceededglobaloildemand,andOPECsucceededinbringingoilpricesallthewaydowntobelow$30abarrel.ThispricedeclinesawadramaticreductioninNorthAmericandrillingandapullbackinoilinvestmentprojectsaroundtheglobe.Thereductioninproductionin2016causedoilpricestomorethandoublefrom

theirJanuarylowtoexceed$55bytheendoftheyear.Overproductionin2014and2015hadallowedconsumercountriestobuilduptheircommercialandstrategicstocks,readytobedrawndownoncepricesroseagain.Thisisaprocessthatstartedin2016withtheoilpricerecoveryleadingtostockdrawdownattheexpenseofseaborneshipments.Forexample,theIEAestimatesthatOECDstocksofcrudeandproductsweredrawndownbyanaverageofalmost0.8mbpdin4Q16but,attheendof2016,OECDstockswerestillalmost0.3m-bpdabovethe5-yearaverage.Globalsparecapacity,asapercentageofglobaldemand,surgedtoapeakof3.1%in2015from2.7%in2014and1.5%in2013.Itisnowforecasttofalltojust1%laterin2017ason10December2016bothOPECandelevennonOPECproducers(Azerbaijan,Bahrain,Brunei,EquatorialGuinea,Kazakhstan,Malaysia,Mexico,Oman,Russia,SudanandSouthSudan)agreedtocutoutputtorescueprices,thefirstsuchjointproductionabatementagreementsince2001.AttheendoflastyearOPEC,ledbySaudiArabiawithplannedcutsof0.5m-bpd,agreedtoreduceproductionby1.2m-bpdifthiswasmatchedbyacutofaround0.6m-bpdbynonOPECsuppliers,ledbyRussiawith0.3m-bpd,towithdrawatotalof1.8m-bpdfromthemarket.Brentpricesgainedalmost$10abarrelsoonaftertheannouncementrisinguptothemid$50srange.MuchscepticismsurroundedtheannouncedcutsasOPEChasneverhadagoodrecordofquotaobservanceand,withoutasolidvettingregime,somememberswillalwayscheatthesystem.TheOPECcutsthatwereannouncedon10DecemberwerereferencedagainstoutputlevelsofOctoberatwhichtimeOPECwasproducing33.7m-bpd.Its1.2m-bpdcontributiontooverallcutswouldputitoncoursetoachieveanew32.5m-bpdtargetinthefirsthalfof2017.However,bylastDecemberOPEChadalreadyraiseditsproductiontoarecord34.2m-bpdasitattemptedtopre-emptanydealtorestrainsupply.

Muchtothesurpriseofmanyobservers,globaloilsupplyplungedby1.5m-bpdinJanuary2017toanaverageof96.4m-bpd,accordingtotheIEA,some730,000-bpdlowerthanayearagoinJanuary2016.OPEC,ledbySaudiArabia,allegedlyachieved90%compliancewhileRussiahadcut0.1m-bpdwiththeintentionofphasinginanother0.2m-bpdofcutsbymidyear.OPEC’soutputwasdown1.0m-bpdin

Januaryto32.1m-bpd,accordingtoIEAestimates,itsfirstyear-on-yeardeclineinproductionsinceearly2015.ThislevelofsuccessincuttingOPECandnonOPECoutputhassofarnotbeenmatchedbyhigherpriceswithBrentstilltradingateithersideof$56abarrelinlateFebruary.ThiscanpartlybeattributedtorisingUSfuelinventoriesandpartlytoincreasedflowsfromLibyaandNigeria,whichareexemptfromthecuts.Anyfurtherprogresstowardsthe1.8m-bpdtargetinthefirsthalfshould,intheory,pushupglobaloilpricesandacceleratethedrawdownofcheapercommercialstocks.Thiswouldnotbeagoodresultfortankersasthiswillbeattheexpenseofseabornecrudeoilandoilproductstrade.Inanycase,outputrestraintcouldstillbeupsetbycontinuingrecoveryinLibyanandNigerianoutputthathadpreviouslybeensufferingfromlocalproductiondifficultiesgivenwar,sabotageandtheft.Forexample,Libya’sNationalOilCorporationexpectsLibyanproductiontorisefrom700,000-bpdinmidFebruaryto1.2m-bpdbyAugust.

However,atthetimeofwritinginFebruary,BrentfuturessuggestthatthemarketwillenterintoanaccelerateddrawdownmodefromendJunewhenthe6-monthproductioncuttermcomestoanend.ThestructureoftheforwardpricecurvesuggeststhatthepricecontangodisappearsafterJuneatwhichpointtheeconomicsofstoragenolongerremainviable.Infact,BrentfuturespricesarerisingstronglycausingthecalendarspreadsfornearbymonthstotightensincemidFebruarysuggestingthattheeconomicsofstorageoutsidetheUSmayfadeassoonasthesecondquarter.Evenifthecrudeoilmarketdoesindeedgo

intodeficitinthefirsthalf,andsqueezeBrentpricesupabovecurrentlevelsinthemid$55sabarrel,itwillonlybeastemporaryasthe6-monthoutputcutitself.ItwouldbenecessarytoinvoketheoptiontoextendtheproductioncutagreementforanothersixmonthsfromendJuneifOPECandnonOPECproducerswishtosucceedinrebalancingthemarket.Italsoremainstobeseenatwhatleveloilpriceswillbecappedbythelikelihoodthatalotofshaleoilproductioncomesbackat$60andlargeonandoffshoreprojectsstartcomingbackabove$70.TheIEAestimatesthatnonOPECproductionfellby0.8m-bpdlastyearbutwillrecoverbyanet0.4m-bpdin2017drivenmainlybyNorthAmericabutalsobylonglead-timeprojectscomingonstreaminBrazilandCanada.Onecanthusseeapricetug-of-waremergingasOPECproductioncuts,aimedatleveringpricesup,aremetwithnonOPECproductionincreases,whichwillleverpricesdown,inthosenonOPECcountriesthatarenotpartofthedealandareinsteadcommittedtobringingnewoutputonline.TheUS,CanadaandBrazilareforecastbytheIEAtoraisetheircombinedoutputby0.75m-bpdin2017whichconsiderablyoffsetstheapproximately0.6m-bpdagreedproductioncutsoftheelevennonOPECoutputdealmemberswhichincludeRussia,OmanandKazakhstan.

ReutersandHSBCpeggedBrentasaveragingjustunder$47abarrelin2016andareforecastingittoaverage$60in2017and$75in2018.Duringtheperiodoffallingoilpricesfrommid2014toearly2016HSBCestimatesthatglobalcrudeoilinventoriesroseby0.4m-bpdin2014,1.7m-bpdin2015and0.5m-bpdin2016.Aspricesrecoveredduring2016,andnowlook


settohold,weareexpectedtotransitionincreasinglyintodrawdownmodewithcrudeinventoriesfalling0.1m-bpdin2017,0.3m-bpdin2018,0.7m-bpdin2019and1.1m-bpdin2020.AnecdotalevidencefromReutersandDatastreamsuggeststhatdevelopedworldstocksarealreadyfalling.USandEU16crudeoilstockspeakedat1,032mbarrelsinMay2016beforefallingto965mbarrelsbyend2016.Meanwhile,USandEU16productstockspeakedat1,558mbarrelsinSeptemberbeforeretreatingto1,503mbarrelsbyyearend.Asleadingwesternconsumercountrystocksprogressivelydwindle,sowillpricingpowerreturntotheoilproducers.Inanidealworld,theymightsettleina$60to$80perbarrelrangethatwouldbegoodformostproducerandmostconsumercountries.Wheretheyactuallysettlewilldependuponprice-costdynamics.ManyOPECproducershavelowproductioncostsbuthighbreakevencostsastheyhavesplurgedoninfrastructureprojects,welfarespendingandgeneroussubsidies.Incontrast,USshale(ortight)oildrillershavedramaticallyreducedtheircostsatthewellheadbyharnessingtechnologyandsqueezingthirdpartyserviceproviders.Theycandipinandoutaspricesfluctuateunlikedeep-seaandfrontierprojectsthatrequiremuchlargerlong-termcommitmentsofcapital.

TheflexibilityofshaleoiliswhatultimatelyfrustratedSaudiArabiaandOPECintoopeningthetapsattheendof2014todrivepricesdowninanattempttocurtailproductionbyhighercostUSdrillers.ItwaseventuallysuccessfulbutwithBrentnowbackuptothemid$50sabarrelsomedrillersareputtingrigs

backintoplay.USshaleoiloutputrosesteadilyfrom1.3m-bpdin2011,to2.3m-bpdin2012,to3.5m-bpdin2013,to4.3m-bpdin2014andto4.9m-bpdin2015beforedippingbackto4.3m-bpdin2016assomeproducerscutback.TheresilienceoftheUSshaleoiluniversehasbeenasurprisetomostobserversandatributetotheirabilitytotrimcostsandstayinthegame,muchtotheamazementofOPECandtheinternationaloilmajorswhotraditionallyfundmulti-yearandhigh-costfrontierprojects.Averagewell-headproductioncostintheBakkenshaleinNorthDakotacamedownfrom$68abarrelin2013,to$59in2014,to$41in2014andtosub$30in2016.AtthislatterpointtheyareamongthecheapestproducersanywhereoutsidetheArabianGulfwhereproductioncostsmaybeaslowas$5abarrelbutbudgetbreakevencouldeasilybenorthof$80abarrel.Shaleoilersdonothavelegacycostsnordotheyhavetofinanceinfrastructure,providesubsidiesorpayforpeopletobeindolent.Theycanquicklyadjustproductioninresponsetooilpricemovements.Nonetheless,thecollapseinoilpricesfrommid2014didcauseahugedeclineintheUSactiverigcount.Itfell79%fromacyclicalpeakof1,931rigsinSeptember2014toacyclicallowof404rigsinMay2016.Sincethen,therigcountrebounded63%to658unitsbytheendof2016astheoilpricemorethandoubledfromitsJanuary2016$27trough.ByearlyFebruary2017itwasupto741units.

LatestIEAestimatesarethatglobaloildemandroseby1.6m-bpdin2016,toanaverageof96.3m-bpd,andwillrisebyanother1.4m-bpdin2017,toanaverageof

97.7m-bpd,bothgrowthfiguresbeing0.1m-bpdhigherthanitspreviousJanuaryestimates.ThiscompareswithOPEC’slatestnumbers,whicharequitedifferent,asitputsworldoildemandgrowthat1.3m-bpdin2016,toanaverageof94.6m-bpd,andisforecastinggrowthof1.2m-bpdin2017,reachinganannualaverageof95.8m-bpd.Meanwhile,acombinationofReutersandHSBCnumbers,datingbacktoJanuary2017,putoildemandgrowthat1.3m-bpdin2016andforecastgrowthof1.0m-bpdin2017.Theysuggestthatglobaloildemandrosebyanaverageof1.5m-bpdinthe2010to2015periodandwillriseataslowerpaceof1.0m-bpdinthe2016to2020period.ThisisthecurrentdemandcontextandoutlookinwhichOPECandleadingnonOPECproducersagreedtoreducetheirproductionbyacombined1.8m-bpdinthefirsthalfof2017.Theironyisthatacutofthismagnitudecouldindeedraiseoilpricesoncethesupplycutsbiteinthesecondhalfof2017,subjecttotheexemptoutputstatusofLibyaandNigeria,andhigherpriceswillbringmoreNorthAmericanproductionbackintoplay.ThelowcostUSshaleoilproducersintheBakkenstandtobethegreatestbeneficiariesofthecuttoworldoilsupplies.

TheforegoingReuters/HSBCestimatethatoildemandgrowthissettoaverageamodest1.0m-bpdto2021isstillapositiveoutlook.Thekeytothatgrowthfromatankershippingperspectiveisthedistanceoverwhichtheoilwilltravel,themarketpreferringlongerjourneys,higherutilisationandtheensuingfirmerrates.However,tonne-milegrowthishardtopredictasvariablepricingofcrudeandproductsaroundtheworld,andfluctuatingoilsupplyanddemand,willpresentarbitrageopportunitiestotankersandtheirowners,butintheirowntime.Theother,andmorecontrollable,sideofthecoinistonnagesupply.2014and2015weregoodtoexcellentyearsandtheycoincidedwithrelativelylownewdeliveries.Incontrast,2016wasatoughyearoffallingrates,lowerearningsanddecliningassetvalues.Italsowitnessedmuchstrongerdeliveries.In2014,quarterlycrudeoiltankerdeliveriesaveraged2.5m-dwt,risingto2.6m-dwtin2015andto5.3m-dwtin2016.Ontheproductside,in2014quarterlyproducttankerdeliveriesaveraged1.6m-dwt,risingto2.2m-dwtinboth2015and2016.TakingIEAnumbersandprojections,globaloildemandgrowthcameoffa

cyclicalhighof1.9m-bpdin2015,thenfellto1.6m-bpdin2016andisscheduledtodropfurtherto1.4m-bpdin2017.Thisshort-termmoderationcomesatatimewhentankerdeliveriesareontherise,potentiallycreatingaclashbetweenfallingabsoluteoildemandgrowthandrisingabsolutetonnagesupplygrowth.Theactualoutcomeforearningswillrevolvearoundtherelationshipsbetweenactualtonne-milegrowth,asopposedtoabsoluteoildemandgrowth,andnetnewtonnagesupply,beingdeliverieslessscrapping,asopposedtonewdeliveriesinisolation.Botharequitehardtopredictinthecurrentenvironmentasfinancialstrainscausealterationstoorderbooksanddeliveryscheduleswhileoilpricedynamics,asdeterminedbyOPECandnonOPECintervention,willshapefuturetradingpatternsanddistancestravelled.

Tankerearningsalsoreflectthesechangingdynamics.Inthefiveyearstoend2016tankerratesroseto2015andthensufferedasharpcorrectionin2016.Crudetankersasaclass(VLCC,suezmaxandaframax)averaged$16,964dailyin2012,$16,127in2013,$27,393in2014,$49,663in2015and$29,729in2016.The40%fallinaverageearningsbetween2015and2016stilldidnottakeusallthewaybackto2014levels,illustratingjustwhatagoodyear2015was.Asisusualinsuchbumperyears,itwasanexceptionalconvergenceofpositivesupplyanddemandfundamentalsthatdeliveredsuchgoodresults.Tonnagecapacityhadbeennaturallymanageddownbyweakresultsinearlieryearsleadingtogreaterscrappingandlesscontracting.Fallingoilpricesin2015boostedfinalconsumptionaswellasencouragingstockbuildingasbothcommercialandstrategicstoragewasfilledwithtankersbeingtheseabornedeliverymechanism.Acombinationofspeculationandoilfuturespricecontangosawsometankersusedvoluntarilyforfloatingstoragewhileatloadanddischargemoretankerswereusedforinvoluntarystorageastheysatwaitingongenerallylowdemurragerates.Thesedevelopmentsweregoodfortonnageutilisationandratesandassetvaluesclimbed.Weallknewthatthesebenignconditionswouldnotlastandthispointdulyarrivedin2016.By2016landbasedstoragewasfullandrisingoilpricesturnedthemarketfromstockbuildingtostockdrawdown,notagoodresultfortankerdemand.Thestrongearningsofearlier

“2016 average earnings of just under $30,000 per day across the

crude tanker spectrum was still a good outcome; it was very far from

the sub-opex hardship that bulk carriers had to endure”


yearshadreducedscrappingandincreasedcontractingandthosenewtankersstartedtoarriveinsecondhalf2016andwillcontinuetodeliveroverthecourseof2017.

However,2016averageearningsofjustunder$30,000perdayacrossthecrudetankerspectrumwasstillagoodoutcome;itwasveryfarfromthesub-opexhardshipthatbulkcarriershadtoendure.Itwasasimilarstoryfortheproducttankerclass(LR2,LR1andMR)astheirbestyearinthelastfivewasalso2015.Theyaveraged$11,272dailyin2012,$12,850in2013,$15,614in2014,$26,118in2015andthefellbackto$14,722in2016.The2016correctionsawannualaverageearningsfall44%from2015levels,asimilardroptocrudeoiltankers.Aswithcrudetankersin2015,producttankersbenefitedfromrisingglobaldemandforfuelatatimeofslowerfleetgrowth.Thecrudeoiltankerswereactiveincarryingcrudeoilfromthewellheadtorefinerieswhiletheproducttankerswerekeptbusytransportingrefinedproductsfromrefineriestoendusersaroundtheworld.Theywereassistedbywidecrackspreadsandhighrefinerythroughputandbythesamevoluntaryandinvoluntarystoragesituationsthathelpedtouseuptankershippingcapacityandsqueezeupdailyrates.Thespikeinearningsin2015shouldbeviewedasexceptionalandasanunexpectedbonanzawhilethecorrectionin2016wasmerelyrevertingtothekindoflevelsthatweremorethenormin2014.2016wasnotabadyearfortankers;itjusthappenedtofollowaverygoodyear.Banksgenerallyhadlittletoworryaboutwiththeirtankerclientswhocouldstillgeneratepositivereturnsandservicetheinterest,andeventheprincipal,ontheirloans.Thatallowedthebankstofocustheirattentionontheirbulkcarrierandcontainerclientswhowereofteninsuchabadpositionthattheycoulddoneither.

Havingendureda40%-pluscorrectionintankerearningsin2016,thatbasicallytookusbacktoaroundthelevelofearningsof2014,therunupinassetvaluesover2015alsohadtounraveltosomeextent.Generallyspeaking,thebiggestlossinvalueoverthecourseof2016wasforolder15-yearoldcrudeoiltankers.Nominally,VLCCsofthisagelost38%,suezmaxweredown40%andaframaxdropped33%,although5-yearoldand10-yearoldaframaxfellahigher37%each.ThesmallestlosseswereforresaleswithVLCCslosing16%,suezmaxdown20%andaframaxoff25%.Thesemightbedeemedratherlargecorrectionsinvalueinreactiontoa40%declineinaverageearnings.Indeed,intheearlymonthsof2017manyownersseemtobeoftheopinionthatgoodvaluebuyingopportunitiesexistaftersuchasharpdeclineinprices.WenoteattheendofJanuarythatOlympicwerebeinglinkedtotwoMetrostar308,000-dwtHHI2017resaleVLCCsat$80.0meach.Backinmid2015,EuronavboughtfourMetrostar300,000-dwtHHI2016resaleVLCCs

foramuchhigher$98.0meach.Apartfromanythingthisshowshowdifficultitistotimethebottomofthemarket,butitdoeslookasifOlympicbenefitedfrombidingitstime.Turningtotheproducttankers,theselostlessinvalueoverthecourseof2016.A15-yearoldLR1wasdown32%whilethesameageMRwasoff23%.AtthenewerendofthescalethereductionsweremoremodestwithresaleLR1sfallingjust9%andresaleMRslosingonly12%oftheir2016startingvalue.

Onegoodthingtocomeofthe2016marketcorrectionwasasharpslowdownintankercontracting.Forcrudeoiltankerswehavereturnedtothemorenervouslevelsof2011and2012whenonly46and42tankerswereorderedrespectively.Theperceptionofbettertimesahead,andattractiveshipyardpricing,causedcrudetankerorderstosurgeto125in2013,104in2014and232in2015.Typically,agoodearningsyearsuchas2015elicitsastrongorderingresponseandtheytendtodeliversomeyearslateroftenintoaquitedifferentmarket.Mostofthe2015orderswilldeliverin2017and2018.Theshockofthe2016marketcorrection,despiteitbeingwidelypredicted,ledtorenewedorderingrestraintandonly37crudetankerorderswereplaced.Ifthiscanbemaintainedin2017thenitbodeswellforthemarketin2019andmaybebeyond.Itwasasimilarpatternforproducttankersalthough2011and2012attractedahighernumberofordersthancrudeat80and108respectively.Thissurgedto299in2013beforeretreatingto126in2014andreboundingto190in2015.Alltold,itamountstoalotofnewproducttankersand,quiterightly,theresponsewasvirtualabstentionin2016asearningscameoff.Only14producttankerswereorderedin2016.

Intermsoftheorderbookasapercentageofthefleet,bydeadweightcapacity,itstandsat14%forVLCCandaframax,17%forsuezmaxand5%forpanamax.Inaggregate,thecrudeoiltankerorderbooktofleetrationowstandsat14%bynumberand15%bycapacity.Innumericalterms,41VLCCsarescheduledtodeliveroverthebalanceof2017followedby46in2018.Forsuezmax,itis65in2017followedby16in2018and,foraframax,itis45in2017and38in2018.Thereislittleornothingyetbookedfor2019butplentyoftimetoput

thatright.Fromamarketperspectivewewouldhopethatnewordersareonlyplacedonareplacementbasisthusavoidinganetexpansionofthefleet.Acrossthecrudeoilsectorthereare155tankersof30.5m-dwtwithscheduleddeliveriesoverthebalanceof2017followedby100tankersof19.4m-dwtcurrentlyscheduledtodeliverin2018.Ontheproducttankerside,theorderbooktofleetratiobydeadweightcapacitystandsat15%forLR2,13%forLR1,9%forMRand3%forthesmallerhandytankersof30,000to39,999-dwt.Intotal,itworksoutat9%bynumberand11%bycapacity.Innumericalterms,32LR2saresettodeliverovertherestof2017followedbyjust9in2018.ThecorrespondingnumbersforLR1sare25and16andforMRsitis67and28andforthesmallerhandytankersthereare14onorderfor2017deliveryandnonefor2018.Inall,138producttankersof10.8m-dwtarescheduledtodeliverovertherestof2017followedby53of3.1m-dwtin2018.

Thehighrecentlevelofcontractinginthecrudeoiltankersectornowputsfleetsupplyintheascendancy,outpacingforecastcrudeoiltankerdemandgrowth.Ournumbersshowthatin2015demandgrowthwasat2.4%whilesupplygrowthwasatjust1%.ThismadeforagoodyearandanimalspiritstookownersofftotheshipyardsofAsiatoordernewtankers.In2016demandgrowthwasrobustat3.6%butsupplygrowthcameinatahigher6.0%.In2017demandgrowthisforecasttofalltojust0.7%whilesupplygrowthisexpectedtocomeinat5.3%and,in2018,demandgrowthfallsto0.5%whilesupplygrowthmoderatesto4.4%.Intheproducttankersectoritisasimilarstory.In2015growthinproducttankerdemandandsupplywerealmostneckandneckat5.8%and5.9%respectively.Themarketcorrectionin2016sawdemandgrowthfallto3.9%andsupplygrowthriseto6.1%.In2017bothdemandandsupplygrowthareforecasttofallto2.0%and4.8%respectivelyand,in2018,thesenumbersdropfurtherto1.5%and2.5%respectively.Boththesupplyanddemandgrowthnumberswillchangeaswemoveforwardwithplentyofadjustmentslikelytobemadetobothsetsoffigures.Supplygrowthmaymoderateiftankerratesremainatlowerlevelsin2017,asownerswillseektodelay,convertandcancelorders.Meanwhile,demandgrowthissubjecttounpredictable

“The shock of the 2016 market correction, despite it being widely

predicted, led to renewed ordering restraint and only 37 crude tanker

orders were placed. If this can be maintained in 2017, then it bodes

well for the market in 2019 and maybe beyond”



The Containership Market

shiftsinoiltradingpatternsthatapplytheall-importanttonne-milemultipliertoforecastsofabsoluteglobaloildemandgrowth.ThesemacronumbersfromthelikesoftheIEA,EIAandOPECareoftenwelladriftoftheactualresults.Thismeansthatthereistheriskofcompoundingerrorsinforecastingseabornedemand.Anyway,asthingsstandweareinfortwoyearsinwhichdemandgrowthisoutstrippedbysupplygrowthsothestrongmarketof2015risksfadingfromview.

However,thereiseverygoodreasontoquestionthedemandsideassumptions.OPECproductioncutsarereducingcrudeoilshipmentsfromtheMiddleEastGulfandpermittingsubstitutionfromsuppliersoutsidetheOPEC11thatareparticipatinginthecuts.Oneby-productofMEGcutsisthatithastendedtoraisethePlattsDubaicrudeoilbenchmarkpricerelativetoNorthSeaBrentandWestTexasIntermediate,openingupanarbitragewindowforAtlantic-basedsupplierstoseizemarketshareinAsia.LowerVLCCfreightrateshavegreatlyassistedinthisprocessaftersuchasignificantcorrectioninlargecrudeoiltankerearningslastyearandthis.AsianbuyersinChina,JapanandSouthKoreawillgravitatetothelowestcostsuppliersandtheyarefundamentallywaryofacartellikeOPECthataimstomakethempaymore.InlateFebruary,Reutersreportsthatoiltradersfromaroundtheworld,includingtheUS,UKandBrazil,havetripledtheirsalestoAsiaastheyexploitthesupplygapleftbytheOPEC-ledproductioncuts,especiallyofmediumandsourcrudegrades.InFebruary,withstillaweektogo,some30supertankershavebeenbookedtoshipcrudeoilfromtheAmericas(e.g.theUSandBrazil),theNorthSea(e.g.theUK)andtheMediterranean(e.g.Libya)torefineriesacrossAsia.ThecrudeexportsofAtlantic-basednonOPECsuppliershaveincreasedfrom10.4millionbarrels(336,000-bpd)inOctoberto35millionbarrels(1.26m-bpd)inFebruarywhileOPEC’sdeliverieshavefallenasithascededa5%marketshareinAsia.OPECwouldnormallysupply70%ofAsia’scrudeoilimportneeds.ReutersclaimsthatFebruaryloadingschedulesshowthatUScrudeexportstoAsiaincreasedtomorethan3.5mb,includingafirstaframaxcrudeshipmentandafirstsuezmaxfueloilshipmenttoIndia,fromjust1mbinOctober.Brazilianloadingsroseto16.7mbinFebruaryfrom6.9mbinOctober,whileUKshipmentsjumpedto10.5mbfrom1.6mbandLibyanliftingsdoubledto2mb.

Thistrendwouldbewelcometocontinueandexpandasthesearesuperlong-haultradesthathavetheabilitytoincreasetankerutilisationandconstrainavailabletankersupplyatthemargin.ThesetradeswillgainfurthersupportshouldOPECandthenonOPEC11extendtheir1.8m-bpdcutsintothesecondhalfof2017.Otherarbitrageopportunitieshaveopenedupin

Chinaasthesmallteapotrefineriescompetewiththegiantstate-ownedrefinerstoimportcrudeandsupplyrefinedproductstoboththedomesticandregionalmarkets.UnipechasbeenliftingVLCCcargoesfromtheGulfofMexicotoChina,takingadvantageofrisinginventoriesofUScrudeandfallingWTIprices.Meanwhile,theindependentrefiners(theteapots)havebeendiversifyingtheirpurchasesawayfromEastSiberiaPacificOcean(ESPOBlend)crudefromnearbyKozminotousinglargertankersfromAtlanticsources,includingNorthAmericanheavycrudeoil,generallyablendofCanadianandUSheavygradesshippedfromtheGulf.ESPOpricesarelinkedtoDubaipricessotheyhavelatelybeenlesscompetitive;also,theESPOpipelineentersplannedmaintenanceinFebruaryandMarchthusreducingoutput.Bythesametoken,Brent-linkedUralscrudehasgainedapriceadvantageinconjunctionwithlowerVLCCfreight.ChinesetradershavebeensourcingUralscrudefromtheBalticportsofPrimorskandUst-LugaandusingtheDanishdeep-waterportatSkawtotranshipontoVLCCsforthelongtriptoChina.UralscrudeisalsoshippedoutoftheBlackSeaportofNovorossiyskonsuezmaxtankers,furtheraddingtolong-haulsuppliestoAsiadespiteRussia’sinvolvementinthesupplycuts.

Underthecircumstances,forecastingtankerdemandishazardous.Onthefaceofit,agreedproductioncutscouldreducetheamountofcrudeoilonthewaterbyupto1.8m-bpd,buttheattendanthigherpricesaregettingUSdrillersbackintoplay,thuscounteractingthesesupplycuts.Furthermore,areductioninMiddleEastGulfcrudeexportsisgivingwaytosuperlong-haulshipmentsfromnonOPECAtlanticsuppliers,thusdeliveringatonne-milelifttolargecrudetankerowners.Itishardtofathom,butitseemstolookgood.Thebatonisthenpassedtothetankerownersandwhetherornottheycanresistthetemptationtoordernewshipsatveryattractivelylowandfallingprices.WeunderstandtodaythataprominentGreekownerhasjustorderedapairof320,000-dwtVLCCsfordeliveryin3Q18,togetherwithapairofoptions,atHyundaiHeavyIndustriesfor$79meach.AnotherprominentGreekisrumouredtobeinclosediscussionswithHanjinSubicBaytobuild2+2VLCCsfordeliveryin2H18at$75meach.SotheanswertothatquestionisprobablyNO.Forthemarket’ssake,onecanonlyhopethatthebanklendingmarketremainsshuttomostownersandthatprivateequityandtheChineseleasingcompaniesdonotpadoutshipyardorderbooksandprejudicefuturesupplyanddemandbalance.Ironically,thesheerscaleandspeedofregulatorychangemaypromoteawaveofnewcontractingthatwilloutpacetherateofobsolescenceandscrapping.Thetankershippingworldmaybecomesaferandcleaner,butnotnecessarilymoreprofitable.


The Containership Market

This section accompanies the narrative to the container sector chart book

at the back of this publication.

Thecontainermarkethasbeeninastateofcrisisformostofitsexistence,withmanymorepooryearsthangood.2016wasnoexceptionasitalsofelldecisivelyintothepoorcategory.TheaverageofthecomprehensiveShanghaiContainerisedFreightIndex,ahybridcontainerfreightindex,was1,072pointsin2014,fallingto728pointsin2015andthendivingevenlowerto653pointsin2016.ThedevastationthatthisvisiteduponthemarketwasbestillustratedbythecollapseofHanjinShippingand,unusually,theabsenceofthecustomarybailoutfollowedbyaphoenix-likeresurrection.Insteaditisbeingdismantledbitbybitastestimonytoitsfailure;evidently,thiswillbenoSankoorPanOcean,eachtwicebankruptedandtwicereprieved.Hanjin’sfailureshockedthemarketandleftmanyshipsandtheircrewsandcargoesstrandedatsea,keptoutofportsforfearthattheycouldnotpaytheirbills.Thehiatuscausedfreightratestoriseasothercarrierssteppedintoreplaceitsoperations.Thisyear,thingsgotofftoabetterstartas,inJanuary2017,theSCFIaveraged971points,49%uponthe2016annualaverage.ThewholesorryHanjinShippingsagamade2016aseminalyearforcontainershippingastheworld’sleadingcarriersrealisedthat‘therebutforthegraceofGodgoI’.HanjinShippingwasonlyformallydeclaredbankrupton17February2017,makingitthelargestcontainershippingbankruptcyinthe60-yearhistoryofcontainerisation,withliabilitiesinexcessof$6billionatendSeptember2016,accordingtoitslastpublishedfinancialreport.

Itisestimatedthattheoceancarrierscouldhavelostupto$10billionbetweenthemin2016andthereisstillanimbalancebetweenforecastfuturesupplyandforecastfuturedemand.Thisrealisationinjectedsomeurgencyintomuchneededdefensiveconsolidationasameanstosurvivalratherthanshiningalightonapathtofutureprosperity;firstthingsfirst.Consolidationin2016ledtotheprospectivecreationofthreeleadingalliancesfromAprilthisyear,replacingthefourthatcurrentlyexist(being2M,Ocean3,CKYHEandG6).Thenewgroupswillbe2M+HMMwhichisMaersk(soontoincludeHamburgSüd)andMSC,togetherwiththeadditionofarehabilitatedHMM.EvenwithoutHMM,itwillhavea29.3%shareoftheeast-westtradeaccordingtoAlphaliner.TheOcean

AlliancecomprisesthefollowingconsolidatednamesCMACGM/APL,Cosco/CSCL,EvergreenandOOCL;itshouldendupwitha35.6%shareoftheeast-westtrade.Finally,theAlliancewillbemadeupofHapagLloyd/UASC,MOL,NYK,KLineandYangMing;itshouldsnare27.6%oftheeast-westtrade.Theaforementionedcompaniesmakeup16oftheformertop20inthe1Q16rankings,theothersbeingthenowbankruptHanjinandtheapparentlyorphanedZIM,PILandWanHai.Maybetheselattertwoneighbourswillgetthemarriagebugasonewouldimaginethat,asfellowAsiancarriers,theymightidentifysomeculturalsimilarities.Greaterconsolidationthroughmergersandacquisitionsandlargeralliancesputspressureonthesmallerindependentsthatarelefttotheirowndevices.Theydonothavethescaletoundercutthebigalliancesandstillremaininbusiness.Thethreeenlargedallianceswillintheoryleadtoreducedcompetitionandbetterenablethemtoholdthelineonfreightrates,somethingthatisbadlyneededaftersuchadisastrous2016.Fromtheshipperandcargomoverperspective,whichareconstantlyrunningtotheregulatorsandanti-trustauthorities,itwouldbebettertoassertthatcompetitionwillactuallyincreaseandthatservicestandardswillimproveevenfurther.Muchofthelimitedfreightraterecoveryinsecondhalf2016wasputdowntothedemiseofHanjinShippingandtheeffectivestrandingofits96ships,halfofwhichwereovermax-panamax5,100-teucapacity.TheHanjinfleetusedtoaccountfor3%oftheglobalfleetbycapacityand7%ofthetranspacifictradebycapacity.

Thatwasthesituationfortheshippinglinesbutwhatofthenonoperatingowners,theinvestorsthatrelyuponcharteringtheirshipstothemainlinecarriersforemployment?Lastyearthecontainershiptimecharterindexsanktoitslowestlevelsince2010.In2010themonthlyTCindexaveraged51points;in2016itaveraged41points.TCratesforalmostalltrampshipsunder10,000-teuconvergedatarounddailyoperatingcostsputtingextremestressontheirownersandtheirbanks,especiallyinGermanywheretraditionallyabouthalfofthetrampshipfleethasresided.Theplungeinfreightratesandtimecharterratestookplaceatatimeofrecordscrappingandslowingnewshipdeliveries.In2014,1.49m-teudeliveredand0.37m-teu

werescrapped,givinganetgainof1.12m-teu.In2015,1.68m-teudeliveredagainstonly0.19m-teuthatwerescrapped,leadingtonetcapacitygrowthof1.49m-teu.In2016,only0.90m-teudeliveredagainstamuchhigher0.65m-teuthatwentfordemolition,anetgainofjust0.25m-teu,theslowestrateofnetfleetgrowthsince1999whenthefleetexpandedbyjust0.21m-teu.Itisastepintherightdirectionbutorderingrestraintandhighscrappinglevelsbothneedtobemaintainedtocurethemarketofalargecapacityoverhangonthewaytorebalancingsupplyanddemand.Oneindicatorofjustwhatachallengingyear2016hadbeenforcontainershippingwastheannualresultofthemarketleader:MaerskLine.Lastyearitpostedalossof$376millionaftera$1.3billionprofitin2015.Thelosswasattributedto“poormarketconditionsleadingtosustainedlowerfreightratespartlyoffsetbyhighervolumesandlowerunitcostsrelatedtolowerbunkerprices,higherutilisationandcostefficiencies.”Itdoesnotbodewellforthecompetition.

Theworsthitassetclassin2016wasthebeleagueredclassicpanamax,withits32.2mbeam,asthenewset

oflocksfinallyopenedinPanamalastJune,twoyearsbehindschedule.On26June2016,theCoscoShippingPanama(9,472-teu,HyundaiSamho,2016,Loa300m,Beam48m)enteredoneofthenewlocksonitstransitofthe48-milecanalfromthenorthernAtlanticOceanend.ThiswasatransformationalmomentforPanamaandforthecontainershippingindustry.Italso,intheopinionofmanyobservers,spelledtheendoftheroadforthepopularclassicpanamaxthatwouldnolongerbeabletocompeteagainstgiant14,000-teuvesselscarryingthreetimesasmanycontainers.Theearningsandvaluesoftheseshipshavebeenonadownwardslopesince2011.Theoneyeartimecharterratewasashighas$28,500dailyinearly2011foramodern4,400-teuvesselbut,bytheendoflastyear,itwascloserto$4,000perday,wellbelowtypicaldailyoperatingcosts.A5-yearoldshipofthissizewasworthasmuchas$55millioninearly2011but,bytheendof2016,ithadfallentojust$7million.Inearly2017,classicpanamaxvesselsasyoungas7yearsofagewerebeingsoldforscrapinIndiaforaslittleas$5.5million,onesuchexamplebeingthereportedscrappingoftheHammoniaGrenada(4,249-teuNew


YZJ201024L17,607LDT)for$315perLDT.Someimaginativeandadventurousplayers,suchasSeaspanandKMTC,havebeenbuyingblocksof7to8yearold4,275-teuSamsungbuiltunitsfromHanjinShippinganditscreditorsforscrappricesofaround$5.25m.Theywillbehopingthatonedaytheywilltradeagainandthattheirvalueswillrecoverfromrockbottomlevels.

Whiletheclassicpanamaxclassborethebruntofthedeclineinvalues,allothertrampclasses–generallybelow10,000-teu–wereaffectedtovaryingdegrees.Thelargershipsabove10,000-teuarenormallyprotectedbyhavingbeenfixedonto10-15yearcharterstothemainlinecarriergroupsatratesthatarelinkedtothedeliveredcostoftheshipswhennew.Theyarenotentirelysafe,asthecollapseofHanjinwillattestto,andwhentimesaretoughithasbecomeconventionaltorenegotiatetermsand,insomeinstances,paycompensationforearlyterminationor,intheworstcase,justhandthekeysbackandheadforarbitrationorcourt.Atleast,afterayearsuchas2016,themarketlooksalittleclosertobottomingoutandturningaround,especiallyasdemolitionisrisingandcontractingisdeclining.Since2009,containership

contractinghasbeenvolatilewithnotmuchin2010,2012and2016buttoomuchin2011,2013and2015.In2015,some2.29m-teuwasorderednotsomuchonthebasisofananticipatedrequirementformorecapacitybutbasedontheneedtoreduceunitcostsandgetcompetitive,i.e.forallthewrongreasons.Theseverityofthecrisisin2016,thatsawHanjingounderandaswitchtodefensiveconsolidation,causedcontractingtofalltojust0.20m-teu.Asinanysector,orderingmorenewshipsfornogoodreasonisnothelpfultoanyoneintheshorttermotherthantheshippers,themoversofcargo,whobenefitfromcheaperfreightonnewer,fasterandmoreefficientships.

Therearestilltoomanyshipsdeliveringwithabout1.7m-teuscheduledfor2017.In2017,77shipsof10,000-teuandabovearesettodeliver,25ofwhichare18,000-teuandabove.In2018andbeyond,84shipsof10,000-teuandabovearescheduled,37ofwhichareof18,000-teuandlarger.Theover-provisionofultralargeshipsoneast-westroutes,particularlyAsia-Europe,hascascadedlargeshipsintoallothertradelanesincludingintra-Asiaandnorth-south.Thishasservedtocreateovercapacityacrosstheglobal

networkanddeployshipsthataresub-optimalfortheirintendedtrades.Beneficially,ithassqueezedolderandinefficientshipsintoidleness,lay-upanddemolition.Thefocusonultralargeshipswasforalongtimeattheexpenseofsmallersizesandfeedersbelow5,000-teu.Suchadevelopmentisrarelylostontheinvestorcommunityanditdidnottakelongfororderstobeplacedinrecentyearsandthegapdulyplugged.107shipsinthe1,000to2,999-teusizebracketaresettodeliverin2017followedbyanother89in2018andbeyond.Suchegregiousorderingmightwellsnuffoutwhatlookedtobeagoodprospectforawhileforthesesmallerandpreviouslyignoredsizes.

Onamorepositivenote,MaerskLineexpectsa$1billionboosttoprofitsthisyearafternegotiatinghigherfreightratesforlong-termcontractsontheeast-westtradesinDecemberandJanuary.Furthermore,itexpectshigherratestobeachievedforlong-termcontractsonthetranspacificthatwillbeconcludedinMay.Animprovementover2016intheeast-westtradesmaynotbematchedinthenorth-southtradestoAfricaandLatinAmericathathavebeennegativelyimpactedbythecascadingprocessthathaspushedlargershipsontothesetradelanesandcreatedovercapacityandincreasedcompetition.Lowerfreightratesin2017sawrevenuesfall13%to$20.7billionbaseduponanalmost19%dropinaveragefreightratesto$1,795perfeu.Thiswaspartiallyoffsetbyanover9%increaseinvolumesto10.4m-teu.MaerskLineseesthelinerbusinessataninflectionpointthisyearas,fromthe4thquarterof2016,thenetadditionofnominalcapacitywentdownconsiderablyasfewernewdeliveriesmetelevatedscrapping.Thisprocessofdemandgrowthbeginningtooutstripsupplygrowthiswhatisneededtoburnoffaccumulatedovercapacity.ItquotesContainerTradesStatisticsthatshowAsia-Europevolumesincreased1.2%in2016toover15m-teu,reversinga3.1%dropin2015,whileAsia-UStraderose4.3%in2016to14.2m-teu.

Alphalinersupplyanddemandgrowthfiguressuggestthattheimbalancecontinuestohaveadetrimentalimpactonfreightrates,butthesituationisimproving.In2016,tradegrewby1.1%year-on-yearwhilethefleetgrewbyonly1.5%year-on-year,to20.3m-teu,thelowestannualfleetgrowthrateintheindustry’shistory.Thequarterlybreakdowninvesseldemandgrowthversusvesselsupplygrowthin2016wasQ1:1.6%v.7.9%,Q2:1.7%v.6.3%,Q3:1.5%v.4.3%andQ4:0.6%v.2.2%.Thisshowsthatbothdemandgrowthandsupplygrowtharefallingintandem.Thiscausedtheidlefleettorisetoanaverageof1.48m-teuin4Q16.Thingshaveimprovedthisyearasdemandgrowthhasreboundedto1.0%andsupplygrowthhasdroppedto1.2%,narrowingthesupply-demandgapandreducingtheidlefleetto1.34m-teuinthefirstfiveweeksof2017.Lookingforward,Alphalinerforecaststradetoriseby1.6%in2017whilethefleetisexpectedtoexpandby4.8%and,in2018,tradeisforecasttoexpandby2.0%againstfleetgrowthof4.7%.Theimbalanceisnarrowingbutthesenumberssuggestthatwearestillchasingourtailswithmoreshipsbeingorderedandaddedtothefleetthandemandcanpossiblysupport.Aswiththeothermainsectorsofdrybulkandtankers,weneedaprolongedperiodofminimalcontractingandheavyscrappingtorebalancethemarket.Despitetheclashingsupplyanddemandforecastsmuchoftheworstisprobablybehindusbutwemaybebumpingalongthebottomforanother18-24monthsbeforeachievingbetterbalance.Togettothatpoint,weallknowwhatisneeded,butaretheleadingmarketplayersdisciplinedenoughtodeliverit?

“Supply and demand growth figures suggest that the imbalance

continues to have a detrimental impact on freight rates, but the

situation is improving. In 2016, trade grew by a 1.1% year-on-year

while the fleet grew by only 1.5% year-on-year, to 20.3m-teu, the

lowest annual fleet growth rate in the industry’s history”

Image courtesy of Marine Capital


Conclusion

Opportunity Knocks. The title encourages us to believe that there are

present good opportunities in shipping, and they are knocking on our door,

but there is still a need to exercise a degree of caution.

Wemightwanttoseparateandevaluatethe‘opportunity’fromthe‘knocks’ascurrentopportunitiesarenotwithoutrisk.Anyopportunityhastobetakenintheexpectationofafewknocksalongtheway.Bulkcarrierandcontainershipvaluesareathistoricallylowlevelswiththeformeralreadyembarkedonanappreciatingpathandthelattertakingtheirleadfromscrapvalues.Itcanhardlygetmuchworse,sothedownsiderisksareverymuchoutweighedbytheupsidepotential.However,wehavelearntfromtheoccasionalfalsedawnssincetheglobalfinancialcrisispoppeduptenyearsagothatmarkettimingremainsoneofourgreatestchallenges.Thatneverchanges.Astutepurchasescanbemadetodaybutearningsmaytakeawhiletorecoverso,inanidealworld,littleornofinancialgearingshouldbedeployed.Thebankswillalmostcertainlyencouragealowtonogearingapproach…Currentearningsaresufficienttocoverdailyoperatingcostsbutareunlikelytothrowoffsignificantfreecashflowtoservicedebtand

principalrepayments.Whentheearningsrecoverydulyarrives,itwillfeedintohigherassetvalues,deliveringamuchsoughtaftercombinationofyieldandcapitalappreciation.Tankersaredancingtoadifferentbeat.Earningsandassetvaluesenjoyedastrong2015withbenignsupplyanddemandconditions.Thisallchangedin2016astankersupplyincreasedwhiletankerdemandmoderated.Thesupplyoutlookoverthenextfewyearsappearsalittletopheavy,butthedemandoutlookisfundamentallysoundandtheall-importanttonne-milemultiplierisanyone’sguess,anditisquitecapableofdeliveringapleasantsurprise,ratherasitisrightnow.Whatissignificantthoughisthatthepoormarketof2016tookasledgehammertoassetvaluesandalltankerclasseswereleft25%lowerorworse.Atsuchadjustedlevelsmanypotentialbuyersperceivecurrentsecondhandvaluestorepresentgoodvalue.Acrossallthreemainsectors,opportunityknocks,butaswetakeadvantageoftheseopportunitieswehadbeststeelourselvesforafewknocksalongtheway.


Chart Series

“Amorgos“ image courtesy of OMT

Shipping Markets Outlook 2017: Global Macro EnvironmentShipping Markets Outlook 2017: Global Macro Environment34 35

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1. Growth disappointed again in 2016…

3. The rapid expansion of central bank balance sheets…

2. …and inflation remained low

4. …inflated financial assets further

Global GDP growth YoY% Source: HSBC, Hartland Shipping

FED ECB BOJ Balance Sheet Source: Federal Reserve, European Central Bank, Thomson Reuters,

Hartland Shipping

Consumer price index YoY%Source: Thompson Reuters, Hartland Shipping

S&P 500 composite index Source: Yale School of Management Robert Shiller data series, Hartland Shipping

Global Macro Environment

Growth in developing and emerging markets disappointed in 2016 while inflation remained low

Global GDP growth forecasts are more promising with greater focus on fiscal spending and less focus on austerity

This should support global seaborne trade in all sectors, however, this will be constrained as economies are already heavily indebted

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5. Corporates continued to pay higher dividends despite lower earnings…

6. ...although unemployment dropped…

S&P 500 Dividends vs Earnings indices Source: Yale School of Management Robert Shiller data series, Hartland Shipping

Unemployment Rates Source: Thompson Reuters, Hartland Shipping

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7. …wages grew marginally if at all

9. …and energy consumption rising

8. Activity improved in China as IP stabilised …

10. The stimulus introduced earlier in the year…

Wages growth YoY% Source: HSBC, Hartland Shipping

Chinese electricity consumption, YoY % (6mma) Source: Thomson Reuters, Hartland Shipping

Chinese industrial production, YoY % (3mma)Source: Thompson Reuters, Hartland Shipping

No. of newly started fixed asset projects in China cumulative, YoY % Source: Thompson Reuters, Hartland Shipping

Shipping Markets Outlook 2017: Global Macro EnvironmentShipping Markets Outlook 2017: Global Macro Environment36 37

65% 59%

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Iron ore 62%Fe Newcstle FOB Shanghai rebar Nickel ore Shanghai copper Bloomberg Commodity Index

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16. Despite weak correlation, fiscal spending should support seaborne trade11. ...led to a surge in commodity imports 12. Falling domestic production also helped

Seaborne trade vs Government spending Source: IMF, CRS, Hartland Shipping

Change in Chinese imports (Jan-Dec 15 vs Jan-Dec 16) Source: Thompson Reuters, Hartland Shipping

Change in Chinese domestic production (Jan-16 to Dec-16) Source: China National Bureau of Statistics, Hartland Shipping

65% 59%

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90%

60%

70%

80%

90%

100%

110%

120%

130%

2002 2004 2006 2008 2010 2012 2014 2016

1.8%

1.5%

1.4%

1.5%

1.6%

1.7%

1.8%

1.9%

Growth required to pay off interest Expected growth

60%

70%

80%

90%

100%

110%

120%

130%

2002 2004 2006 2008 2010 2012 2014 2016

1.8%

1.5%

1.4%

1.5%

1.6%

1.7%

1.8%

1.9%

Growth required to pay off interest Expected growth

65% 59%

50%

26%

12%

0%

20%

40%

60%

80%

100%


1.6%

3.6%

1.7%

4.1%

1.8%

4.5%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%


2016 2017f 2018f

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

34

36

38

40

42

44

46

-6 -4 -2 0 2 4 6 8

10 12

2002 2004 2006 2008 2010 2012 2014 2016

% OF G

DP

YoY %

GRO

WTH


90%

65% 59%

50%

26%

12%

0%

20%

40%

60%

80%

100%


1.6%

3.6%

1.7%

4.1%

1.8%

4.5%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%


2016 2017f 2018f

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

34

36

38

40

42

44

46

-6 -4 -2 0 2 4 6 8

10 12

2002 2004 2006 2008 2010 2012 2014 2016

% OF G

DP

YoY %

GRO

WTH


90%

17. However, fiscal expansion will be limited as economies are heavily indebted…

18. …and they are not going fast enough even to cover the interest on their debt

13. Rising Chinese demand pushed commodityprices higher across the board

14. Economic activity is expected to pickup going forward…

15. ...with more focus on fiscal spending

G7 general government gross debt as % of GDP Source: IMF, Hartland Shipping estimates

G7 required growth rate to pay interest on debt Source: IMF, Thomson Reuters, Hartland Shipping estimates

Change in commodity prices (Jan-16 to Dec-16) Source: Thompson Reuters, Hartland Shipping

Global GDP growth forecast Source: HSBC, Hartland Shipping

Average growth in government spending Source: IMF, Hartland Shipping

Shipping Markets Outlook 2017: Dry Bulk MarketShipping Markets Outlook 2017: Dry Bulk Market38 39

Dry Bulk Market

2016 was a year of two distinct halves with the BDI rising from an all-time record low of 290 in February to a 24-month record high of 1,257 in November

2017 is already shaping up as the year of the long awaited recovery with a continuous decrease in net fleet additions playing a rising demand growth outlook

The chronic oversupply of so many previous years can be defeated through minimal new bulk carrier contracting and maximum old bulk carrier demolition

0 100 200 300 400 500 600 700 800 900

1000

1H16 2H16 0

200

400

600

800

1000

1200

1400

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2015 2016

90%

65% 59%

50%

26%

12%

0%

20%

40%

60%

80%

100%

Iron ore 62%Fe Newcastle FOB Shanghai rebar Nickel ore Shanghai copper Bloomberg Commodity

Index

12% 6% -1%

22%

80%

15% 7% 25% 31%

83%

19% 19%

54% 70%

83%

29% 18%

33%

67%

33%

-5% 15% 35%

55% 75%

95%

China resale

Japan resale

5-yr old

10-yr old

15-yr old

China resale

Japan resale

5-yr old

10-yr old

15-yr old

China resale

Japan resale

5-yr old

10-yr old

15-yr old

China resale

Japan resale

5-yr old

10-yr old

15-yr old

Capesize Panamax Supramax Handysize

inde

x

inde

x

0 100 200 300 400 500 600 700 800 900

1000

1H16 2H16 0

200

400

600

800

1000

1200

1400


2015 2016

90%

65% 59%

50%

26%

12%

0%

20%

40%

60%

80%

100%


Index

12% 6% -1%

22%

80%

15% 7% 25% 31%

83%

19% 19%

54% 70%

83%

29% 18%

33%

67%

33%

-5% 15%

35% 55%

75% 95%

China resale

Japan resale

5-yr old

10-yr old

15-yr old

China resale

Japan resale

5-yr old

10-yr old

15-yr old

China resale

Japan resale

5-yr old

10-yr old

15-yr old

China resale

Japan resale

5-yr old

10-yr old

15-yr old


inde

x

inde

x 0 100 200 300 400 500 600 700 800 900

1000

1H16 2H16 0

200

400

600

800

1000

1200

1400


2015 2016

90%

65% 59%

50%

26%

12%

0%

20%

40%

60%

80%

100%


Index

12% 6% -1%

22%

80%

15% 7% 25% 31%

83%

19% 19%

54% 70%

83%

29% 18%

33%

67%

33%

-5%

15% 35% 55%

75% 95%

China resale

Japan resale

5-yr old

10-yr old

15-yr old

China resale

Japan resale

5-yr old

10-yr old

15-yr old

China resale

Japan resale

5-yr old

10-yr old

15-yr old

China resale

Japan resale

5-yr old

10-yr old

15-yr old


inde

x

inde

x

1. 2016 was a year of two halves…

3. Sentiment improved as commodity prices recovered

2. …as BDI dropped to its lowest level in February before recovering to a 24 month high in November

Baltic Dry Index average Source: Baltic Exchange, Hartland Shipping

Change in commodity prices (Jan-Dec ‘16) Source: Thomson Reuters, Hartland Shipping

BDI – 2015 vs 2016Source: Baltic Exchange, Hartland Shipping

0 100 200 300 400 500 600 700 800 900

1000

1H16 2H16 0

200

400

600

800

1000

1200

1400


2015 2016

90%

65% 59%

50%

26%

12%

0%

20%

40%

60%

80%

100%


Index

12% 6% -1%

22%

80%

15% 7% 25% 31%

83%

19% 19%

54% 70%

83%

29% 18%

33%

67%

33%

-5%

15%

35%

55%

75%

95%

China resale

Japan resale

5-yr old

10-yr old

15-yr old

China resale

Japan resale

5-yr old

10-yr old

15-yr old

China resale

Japan resale

5-yr old

10-yr old

15-yr old

China resale

Japan resale

5-yr old

10-yr old

15-yr old


inde

x

inde

x

4. Asset values also surged, although from a very low base

Change in asset values by segment & age (March-16 to Dec-16) Source: Hartland Shipping

35%

30% 26%

29%

36%

30%

35%

42%

10%

15%

20%

25%

30%

35%

40%

45%

2009 2010 2011 2012 2013 2014 2015 2016

0

500

1,000

1,500

2,000

2,500

2000 2002 2004 2006 2008 2010 2012 2014 2016

0

100

200

300

400

500

600

700

2000 2002 2004 2006 2008 2010 2012 2014 2016

47.2

28.9

0

10

20

30

40

50

Deliveries Demolitions

0

200

400

600

800

1000

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

20

13

2014

20

15

2016

M-DW

T

no o

f shi

ps

no o

f shi

psno

of s

hips

35%

30% 26%

29%

36%

30%

35%

42%

10%

15%

20%

25%

30%

35%

40%

45%

2009 2010 2011 2012 2013 2014 2015 2016

0

500

1,000

1,500

2,000

2,500

2000 2002 2004 2006 2008 2010 2012 2014 2016

0

100

200

300

400

500

600

700

2000 2002 2004 2006 2008 2010 2012 2014 2016

47.2

28.9

0

10

20

30

40

50


0

200

400

600

800

1000

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

20

13

2014

20

15

2016

M-DW

T

no o

f shi

ps

no o

f shi

psno

of s

hips

35%

30% 26%

29%

36%

30%

35%

42%

10%

15%

20%

25%

30%

35%

40%

45%

2009 2010 2011 2012 2013 2014 2015 2016

0

500

1,000

1,500

2,000

2,500

2000 2002 2004 2006 2008 2010 2012 2014 2016

0

100

200

300

400

500

600

700

2000 2002 2004 2006 2008 2010 2012 2014 2016

47.2

28.9

0

10

20

30

40

50


0

200

400

600

800

1000

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

20

13

2014

20

15

2016

M-DW

T

no o

f shi

ps

no o

f shi

psno

of s

hips

5. Recovery was partly due to slowing supply growth…

7. High slippage…

6. ….which was the lowest in 13 years

2016 total drybulk deliveries & demolitions Source: CRS, Hartland Shipping

Historical slippage Source: CRS, Hartland Shipping

Historical net fleet additionsSource: CRS, Hartland Shipping


35%

30% 26%

29%

36%

30%

35%

42%

10%

15%

20%

25%

30%

35%

40%

45%

2009 2010 2011 2012 2013 2014 2015 2016

0

500

1,000

1,500

2,000

2,500

2000 2002 2004 2006 2008 2010 2012 2014 2016

0

100

200

300

400

500

600

700

2000 2002 2004 2006 2008 2010 2012 2014 2016

47.2

28.9

0

10

20

30

40

50


0

200

400

600

800

1000

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

20

13

2014

20

15

2016

M-DW

T

no o

f shi

ps

no o

f shi

psno

of s

hips

8. …and heavy scrapping helped

Historical scrapping Source: CRS, Hartland Shipping

-5

5

15

25

35

45

55

65

75

Iron ore Thermal Coal Coking Coal

Jan-Dec 2015 vs Jan-Dec 2016

Logs Copper Scrap Bauxite Fertilisers Agribulks Nickel ore Grains

0%

10%

20%

30%

40%

50%

60%

2013 2014 2015 2016 -10%

-5%

0%

5%

10%

15%

2013 2014 2015 2016

2013 2014 2015 2016

Steel exports 6 per. Mov. Avg. (Steel exports)

-200

-100

0

100

200

300

400

500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

mill

ion to

nnes

mill

ion to

nnes

mill

ion to

nnes

mill

ion to

nnes

mill

ion to

nnes

0

2

4

6

8

10

12

60 65 70 75 80 85 90 95 100

600

700

800

900

1,000

1,100

Jan-

14

Apr-

14

Jul-1

4

Oct-1

4

Jan-

15

Apr-

15

Jul-1

5

Oct-1

5

Jan-

16

Apr-

16

Jul-1

6

Oct-1

6

Jan-

17

Monthly imports (RHS) Annual cummulative imports (LHS)

35%

30% 26%

29%

36%

30%

35%

42%

10%

15%

20%

25%

30%

35%

40%

45%

2009 2010 2011 2012 2013 2014 2015 2016

0

500

1,000

1,500

2,000

2,500

2000 2002 2004 2006 2008 2010 2012 2014 2016

0

100

200

300

400

500

600

700

2000 2002 2004 2006 2008 2010 2012 2014 2016

47.2

28.9

0

10

20

30

40

50


0

200

400

600

800

1000

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

20

13

2014

20

15

2016

M-DW

T

no o

f shi

ps

no o

f shi

psno

of s

hips

9. A collapse in contracting is also good for limiting future supply

10. Demand recovered too…

Historical contracting Source: CRS, Hartland Shipping

Incremental seaborne trade growth, annual Source: CRS, Hartland Shipping

-5

5

15

25

35

45

55

65

75




0%

10%

20%

30%

40%

50%

60%

2013 2014 2015 2016 -10%

-5%

0%

5%

10%

15%

2013 2014 2015 2016

2013 2014 2015 2016


-200

-100

0

100

200

300

400

500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

mill

ion to

nnes

mill

ion to

nnes

mill

ion to

nnes

mill

ion to

nnes

mill

ion to

nnes

0

2

4

6

8

10

12

60 65 70 75 80 85 90 95 100

600

700

800

900

1,000

1,100

Jan-

14

Apr-

14

Jul-1

4

Oct-1

4

Jan-

15

Apr-

15

Jul-1

5

Oct-1

5

Jan-

16

Apr-

16

Jul-1

6

Oct-1

6

Jan-

17


11. …led by China

China incremental growth in imports Source: Thomson Reuters, Hartland Shipping

-5

5

15

25

35

45

55

65

75




0%

10%

20%

30%

40%

50%

60%

2013 2014 2015 2016 -10%

-5%

0%

5%

10%

15%

2013 2014 2015 2016

2013 2014 2015 2016


-200

-100

0

100

200

300

400

500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

mill

ion to

nnes

mill

ion to

nnes

mill

ion to

nnes

mill

ion to

nnes

mill

ion to

nnes

0

2

4

6

8

10

12

60 65 70 75 80 85 90 95 100

600

700

800

900

1,000

1,100

Jan-

14

Apr-

14

Jul-1

4

Oct-1

4

Jan-

15

Apr-

15

Jul-1

5

Oct-1

5

Jan-

16

Apr-

16

Jul-1

6

Oct-1

6

Jan-

17


-5

5

15

25

35

45

55

65

75




0%

10%

20%

30%

40%

50%

60%

2013 2014 2015 2016 -10%

-5%

0%

5%

10%

15%

2013 2014 2015 2016

2013 2014 2015 2016


-200

-100

0

100

200

300

400

500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

mill

ion to

nnes

mill

ion to

nnes

mill

ion to

nnes

mill

ion to

nnes

mill

ion to

nnes

0

2

4

6

8

10

12

60 65 70 75 80 85 90 95 100

600

700

800

900

1,000

1,100 Ja

n-14

Apr-

14

Jul-1

4

Oct-1

4

Jan-

15

Apr-

15

Jul-1

5

Oct-1

5

Jan-

16

Apr-

16

Jul-1

6

Oct-1

6

Jan-

17


12. The stimulus introduced by the government in March…

13. …led to an improvement in steel demand…

No. of newly started fixed asset projects in China cumulative, YoY % Source: Thomson Reuters, Hartland Shipping

China steel production growth, YoY %Source: Thompson Reuters, Hartland Shipping

-5

5

15

25

35

45

55

65

75




0%

10%

20%

30%

40%

50%

60%

2013 2014 2015 2016 -10%

-5%

0%

5%

10%

15%

2013 2014 2015 2016

2013 2014 2015 2016


-200

-100

0

100

200

300

400

500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

mill

ion to

nnes

mill

ion to

nnes

mill

ion to

nnes

mill

ion to

nnes

mill

ion to

nnes

0

2

4

6

8

10

12

60 65 70 75 80 85 90 95 100

600

700

800

900

1,000

1,100

Jan-

14

Apr-

14

Jul-1

4

Oct-1

4

Jan-

15

Apr-

15

Jul-1

5

Oct-1

5

Jan-

16

Apr-

16

Jul-1

6

Oct-1

6

Jan-

17


14. …at a time when steel exports remained high

China steel exports Source: Thomson Reuters, Hartland Shipping


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

10% 12% 14%

2011 2012 2013 2014 2015 2016

0

5

10

15

20

25

2011 2012 2013 2014 2015 2016

400

450

500

550

600

650

700

2011 2012 2013 2014 2015 2016 estimate

1.25%

2%

2.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2016e 2017f 2018f

-20%

-10%

0%

10%

20%

30%

40%

2011 2012 2013 2014 2015 2016 -40%

0%

60%

110%

160%

2011 2012 2013 2014 2015 2016

mill

ion to

nnes

mill

ion to

nnes

mill

ion to

nnes

Y-O-

Y % ch

ange

y-o-

y % ch

ange

y-o-

y % ch

ange

y-o-

y % ch

ange

Inclusive of overland deliveries

-150 -100

-50 0

50 100 150 200 250 300 350

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

10% 12% 14%

2011 2012 2013 2014 2015 2016

0

5

10

15

20

25

2011 2012 2013 2014 2015 2016

400

450

500

550

600

650

700

2011 2012 2013 2014 2015 2016 estimate

1.25%

2%

2.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2016e 2017f 2018f

-20%

-10%

0%

10%

20%

30%

40%

2011 2012 2013 2014 2015 2016 -40%

0%

60%

110%

160%

2011 2012 2013 2014 2015 2016

mill

ion to

nnes

mill

ion to

nnes

mill

ion to

nnes

Y-O-

Y % ch

ange

y-o-

y % ch

ange

y-o-

y % ch

ange

y-o-

y % ch

ange


-150 -100

-50 0

50 100 150 200 250 300 350

16. …as domestic production dropped 17. Coal volumes also recovered...

China domestic iron ore production Source: Thompson Reuters, Hartland Shipping

China coal imports (3mma) Source: Thompson Reuters, Hartland Shipping

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

10% 12% 14%

2011 2012 2013 2014 2015 2016

0

5

10

15

20

25

2011 2012 2013 2014 2015 2016

400

450

500

550

600

650

700

2011 2012 2013 2014 2015 2016 estimate

1.25%

2%

2.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2016e 2017f 2018f

-20%

-10%

0%

10%

20%

30%

40%

2011 2012 2013 2014 2015 2016 -40%

0%

60%

110%

160%

2011 2012 2013 2014 2015 2016

mill

ion to

nnes

mill

ion to

nnes

mill

ion to

nnes

Y-O-

Y % ch

ange

y-o-

y % ch

ange

y-o-

y % ch

ange

y-o-

y % ch

ange


-150 -100

-50 0

50 100 150 200 250 300 350

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

10% 12% 14%

2011 2012 2013 2014 2015 2016

0

5

10

15

20

25

2011 2012 2013 2014 2015 2016

400

450

500

550

600

650

700

2011 2012 2013 2014 2015 2016 estimate

1.25%

2%

2.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2016e 2017f 2018f

-20%

-10%

0%

10%

20%

30%

40%

2011 2012 2013 2014 2015 2016 -40%

0%

60%

110%

160%

2011 2012 2013 2014 2015 2016

mill

ion to

nnes

mill

ion to

nnes

mill

ion to

nnes

Y-O-

Y % ch

ange

y-o-

y % ch

ange

y-o-

y % ch

ange

y-o-

y % ch

ange


-150 -100

-50 0

50 100 150 200 250 300 350

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

10% 12% 14%

2011 2012 2013 2014 2015 2016

0

5

10

15

20

25

2011 2012 2013 2014 2015 2016

400

450

500

550

600

650

700

2011 2012 2013 2014 2015 2016 estimate

1.25%

2%

2.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2016e 2017f 2018f

-20%

-10%

0%

10%

20%

30%

40%

2011 2012 2013 2014 2015 2016 -40%

0%

60%

110%

160%

2011 2012 2013 2014 2015 2016

mill

ion to

nnes

mill

ion to

nnes

mill

ion to

nnes

Y-O-

Y % ch

ange

y-o-

y % ch

ange

y-o-

y % ch

ange

y-o-

y % ch

ange


-150 -100

-50 0

50 100 150 200 250 300 350

18. …partly due to rising demand…

19. …partly due to declining domestic production 20. But Indian coal imports are falling…

China electricity consumption growth Source: Thompson Reuters, Hartland Shipping

China domestic coal production Source: Thompson Reuters, Hartland Shipping

India historical coal imports Source: Com trade, Hartland Shipping

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

10% 12% 14%

2011 2012 2013 2014 2015 2016

0

5

10

15

20

25

2011 2012 2013 2014 2015 2016

400

450

500

550

600

650

700

2011 2012 2013 2014 2015 2016 estimate

1.25%

2%

2.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2016e 2017f 2018f

-20%

-10%

0%

10%

20%

30%

40%

2011 2012 2013 2014 2015 2016 -40%

0%

60%

110%

160%

2011 2012 2013 2014 2015 2016

mill

ion to

nnes

mill

ion to

nnes

mill

ion to

nnes

Y-O-

Y % ch

ange

y-o-

y % ch

ange

y-o-

y % ch

ange

y-o-

y % ch

ange


-150 -100

-50 0

50 100 150 200 250 300 350

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

10% 12% 14%

2011 2012 2013 2014 2015 2016

0

5

10

15

20

25

2011 2012 2013 2014 2015 2016

400

450

500

550

600

650

700

2011 2012 2013 2014 2015 2016 estimate

1.25%

2%

2.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2016e 2017f 2018f

-20%

-10%

0%

10%

20%

30%

40%

2011 2012 2013 2014 2015 2016 -40%

0%

60%

110%

160%

2011 2012 2013 2014 2015 2016

mill

ion to

nnes

mill

ion to

nnes

mill

ion to

nnes

Y-O-

Y % ch

ange

y-o-

y % ch

ange

y-o-

y % ch

ange

y-o-

y % ch

ange


-150 -100

-50 0

50 100 150 200 250 300 350

21. …as domestic production is rising 22. Overall, we expect seaborne trade to rise…

India domestic coal production Source: Thomson Reuters, Hartland Shipping

Seaborne trade growth projections Source: CRS, Hartland shipping

2.3%

0.9% 0.6%

-0.7% 2016 2017f 2018f 2019f

100

150

200

250

300

Drybulk seaborne trade Drybulk fleet growth

2001

20

02

2003

20

04

2005

20

06

2007

20

08

2009

20

10

2011

20

12

2013

20

14

2015

20

16

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Y-O-

Y % ch

ange

inde

x

2.3%

0.9% 0.6%

-0.7% 2016 2017f 2018f 2019f

100

150

200

250

300

Drybulk seaborne trade Drybulk fleet growth

2001

20

02

2003

20

04

2005

20

06

2007

20

08

2009

20

10

2011

20

12

2013

20

14

2015

20

16

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Y-O-

Y % ch

ange

inde

x

23. …and fleet growth to slow down 24. But the recovery will be nervous as the market remains over-supplied

Fleet growth forecast Source: CRS, Hartland shipping

Drybulk seaborne trade vs fleet growthSource: CRS, Hartland shipping

-5

5

15

25

35

45

55

65

75




0%

10%

20%

30%

40%

50%

60%

2013 2014 2015 2016 -10%

-5%

0%

5%

10%

15%

2013 2014 2015 2016

2013 2014 2015 2016


-200

-100

0

100

200

300

400

500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

mill

ion to

nnes

mill

ion to

nnes

mill

ion to

nnes

mill

ion to

nnes

mill

ion to

nnes

0

2

4

6

8

10

12

60 65 70 75 80 85 90 95 100

600

700

800

900

1,000

1,100 Ja

n-14

Apr-

14

Jul-1

4

Oct-1

4

Jan-

15

Apr-

15

Jul-1

5

Oct-1

5

Jan-

16

Apr-

16

Jul-1

6

Oct-1

6

Jan-

17


15. Iron ore imports surged…

China iron ore imports Source: Thompson Reuters, Hartland Shipping

Shipping Markets Outlook 2017: Tanker MarketShipping Markets Outlook 2017: Tanker Market44 45

MBPD

MBPD

MBPD

MBPD

us$p

d

86

88

90

92

94

96

98

2011 2012 2013 2014 2015 2016 2017f

World demand World supply 0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2013 2014 2015 2016 2017f

0

20

40

60

80

100

120

2011 2012 2013 2014 2015 2016e 2017f 2018f

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2013 2014 2015 2016 2017 2018 2019 2020

Change in OPEC Production (LHS) Change in Non-OPEC Production (LHS) Total Supply (RHS)

93

94

95

96

97

98

99

-1.5

-1

-0.5

0

0.5

1

1.5

Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17

MBPD

MBPD

MBPD

MBPD

us$p

d

86

88

90

92

94

96

98

2011 2012 2013 2014 2015 2016 2017f


0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2013 2014 2015 2016 2017f

0

20

40

60

80

100

120

2011 2012 2013 2014 2015 2016e 2017f 2018f

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2013 2014 2015 2016 2017 2018 2019 2020


93

94

95

96

97

98

99

-1.5

-1

-0.5

0

0.5

1

1.5


MBPD

MBPD

MBPD

MBPD

us$p

d

86

88

90

92

94

96

98

2011 2012 2013 2014 2015 2016 2017f


0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2013 2014 2015 2016 2017f

0

20

40

60

80

100

120

2011 2012 2013 2014 2015 2016e 2017f 2018f

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2013 2014 2015 2016 2017 2018 2019 2020


93

94

95

96

97

98

99

-1.5

-1

-0.5

0

0.5

1

1.5


1. Global oil production was close to record high…

2. …but demand is catching up 3. Spare capacity is in decline…

Global oil supply by producer Source: Thomson Reuters, Datastream, Hartland Shipping

Global crude oil supply & demand balance Source: EIA, HSBC Estimates, Hartland Shipping

Global crude oil spare capacity at call as % of demand Source: HSBC, Hartland Shipping

Tanker Market

Global oil production was close to record highs in 2016 but, from last December, OPEC announced its first production cuts in eight years to rescue oil prices

Both crude and product stocks are declining while the US oil rig count is rising. This is hardening oil prices even as it brings back more US shale production

Elevated deliveries in 2017 will keep exerting downward pressure on vessel earnings and asset values, while lower contracting in 2016 points to a better 2019

MBPD

MBPD

MBPD

MBPD

us$p

d

86

88

90

92

94

96

98

2011 2012 2013 2014 2015 2016 2017f


0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2013 2014 2015 2016 2017f

0

20

40

60

80

100

120

2011 2012 2013 2014 2015 2016e 2017f 2018f

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2013 2014 2015 2016 2017 2018 2019 2020


93

94

95

96

97

98

99

-1.5

-1

-0.5

0

0.5

1

1.5


MBPD

MBPD

MBPD

MBPD

us$p

d

86

88

90

92

94

96

98

2011 2012 2013 2014 2015 2016 2017f


0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2013 2014 2015 2016 2017f

0

20

40

60

80

100

120

2011 2012 2013 2014 2015 2016e 2017f 2018f

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2013 2014 2015 2016 2017 2018 2019 2020


93

94

95

96

97

98

99

-1.5

-1

-0.5

0

0.5

1

1.5


4. …suggesting that prices are likely to rise soon 5. With higher prices there will be stock draw-down…

Average Brent crude price forecasts Source: Thomson Reuters, HSBC Estimates, Hartland Shipping

Implied crude oil inventory build-up Source: HSBC Estimates, Hartland Shipping

MBPD

MBPD

us$p

dmi

llion

barr

els

mill

ion ba

rrel

sno

. of r

igs

1,200

1,250

1,300

1,350

1,400

1,450

1,500

1,550

1,600

2013 2014 2015 2016

0

1

2

3

4

5

6

2011 2012 2013 2014 2015 2016e 0

10

20

30

40

50

60

70

80

2013 2014 2015 2016

0

500

1,000

1,500

2,000

2,500

2011 2012 2013 2014 2015 2016

20

22

24

26

28

30

32

34

36

2001 2004 2007 2010 2013 2016

Official production target Actual production

750

800

850

900

950

1000

1050

2013 2014 2015 2016

MBPD

MBPD

us$p

dmi

llion

barr

els

mill

ion ba

rrel

sno

. of r

igs

1,200

1,250

1,300

1,350

1,400

1,450

1,500

1,550

1,600

2013 2014 2015 2016

0

1

2

3

4

5

6

2011 2012 2013 2014 2015 2016e 0

10

20

30

40

50

60

70

80

2013 2014 2015 2016

0

500

1,000

1,500

2,000

2,500

2011 2012 2013 2014 2015 2016

20

22

24

26

28

30

32

34

36

2001 2004 2007 2010 2013 2016


750

800

850

900

950

1000

1050

2013 2014 2015 2016

MBPD

MBPD

us$p

dmi

llion

barr

els

mill

ion ba

rrel

sno

. of r

igs

1,200

1,250

1,300

1,350

1,400

1,450

1,500

1,550

1,600

2013 2014 2015 2016

0

1

2

3

4

5

6

2011 2012 2013 2014 2015 2016e 0

10

20

30

40

50

60

70

80

2013 2014 2015 2016

0

500

1,000

1,500

2,000

2,500

2011 2012 2013 2014 2015 2016

20

22

24

26

28

30

32

34

36

2001 2004 2007 2010 2013 2016


750

800

850

900

950

1000

1050

2013 2014 2015 2016

MBPD

MBPD

us$p

dmi

llion

barr

els

mill

ion ba

rrel

sno

. of r

igs

1,200

1,250

1,300

1,350

1,400

1,450

1,500

1,550

1,600

2013 2014 2015 2016

0

1

2

3

4

5

6

2011 2012 2013 2014 2015 2016e 0

10

20

30

40

50

60

70

80

2013 2014 2015 2016

0

500

1,000

1,500

2,000

2,500

2011 2012 2013 2014 2015 2016

20

22

24

26

28

30

32

34

36

2001 2004 2007 2010 2013 2016


750

800

850

900

950

1000

1050

2013 2014 2015 2016

6. Crude oil stocks are already declining…

8. US shale oil production held up well despite persistently low prices…

7. …so are product stocks

9. …as average production costs declined sharply

US & EU-16 crude oil inventories Source: Thomson Reuters, Datastream, Hartland Shipping

US tight oil productionSource: EIA, Hartland Shipping

US & EU-16 oil product inventoriesSource: Thomson Reuters, Datastream, Hartland Shipping

Average cost production in Bakken, North Dakota Source: Thomson Reuters, NASWellCube, Hartland Shipping

Shipping Markets Outlook 2017: Tanker MarketShipping Markets Outlook 2017: Tanker Market46 47

MBPD

us$P

D

MBPD

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5 1.53

1.0

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8

2010-15 2016-20

Average Crude oil tanker earnings* Average Product tanker earnings†

* Includes VLCC, Suezmax and Aframax † Includes LR2, LR1 and MR

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

mill

ion d

wt

COT deliveries PT deliveries

0

20,000

40,000

60,000

80,000

2012-Jan 2013-Jan 2014-Jan 2015-Jan 2016-Jan 2017-Jan

MBPD

MBPD

us$p

dmi

llion

barr

els

mill

ion ba

rrel

sno

. of r

igs

1,200

1,250

1,300

1,350

1,400

1,450

1,500

1,550

1,600

2013 2014 2015 2016

0

1

2

3

4

5

6

2011 2012 2013 2014 2015 2016e 0

10

20

30

40

50

60

70

80

2013 2014 2015 2016

0

500

1,000

1,500

2,000

2,500

2011 2012 2013 2014 2015 2016

20

22

24

26

28

30

32

34

36

2001 2004 2007 2010 2013 2016


750

800

850

900

950

1000

1050

2013 2014 2015 2016

MBPD

MBPD

us$p

dmi

llion

barr

els

mill

ion ba

rrel

sno

. of r

igs

1,200

1,250

1,300

1,350

1,400

1,450

1,500

1,550

1,600

2013 2014 2015 2016

0

1

2

3

4

5

6

2011 2012 2013 2014 2015 2016e 0

10

20

30

40

50

60

70

80

2013 2014 2015 2016

0

500

1,000

1,500

2,000

2,500

2011 2012 2013 2014 2015 2016

20

22

24

26

28

30

32

34

36

2001 2004 2007 2010 2013 2016


750

800

850

900

950

1000

1050

2013 2014 2015 2016

15. …putting pressure on vessel earnings…10. US rig count is already on the rise… 11. …whereas OPEC is to cut production for the first time in 8 years

Average crude oil and product tanker earnings Source: CRS, Hartland Shipping

US active oil rig count Source: Thompson Reuters, Hartland Shipping

OPEC official production “targets” vs actual production Source: Thompson Reuters, Hartland Shipping

VLCC SuezmAX AframAX LR1 MR

110

266

126 150

424

230

422

51

0

100

200

300

400

500

2009 2010 2011 2012 2013 2014 2015 2016 Crude oil tanker Product tanker

0

50

100

150

200

2017 2018 2019+

VLCC Suezmax Aframax Panamax

0

50

100

150

200

155

100

8

138

5333

2017 2018 2019+ LR2 LR1 MR Handy

Resale

5-y old

10-y old

15-y old

Resale

5-y old

10-y old

15-y old

Resale

5-y old

10-y old

15-y old

Resale

5-y old

10-y old

15-y old

Resale

5-y old

10-y old

15-y old

no o

f shi

psno

of s

hips

no o

f shi

ps

-16% -20% -28%

-38%

-20%

-36% -32% -40%

-25%

-37% -37% -33%

-9% -13%

-35% -32%

-12%

-22% -18%

-23%

-50%

-40%

-30%

-20%

-10%

0%

MBPD

us$P

D

MBPD

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5 1.53

1.0

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8

2010-15 2016-20



1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

mill

ion d

wt


0

20,000

40,000

60,000

80,000



110

266

126 150

424

230

422

51

0

100

200

300

400

500


0

50

100

150

200

2017 2018 2019+


0

50

100

150

200

155

100

8

138

5333

2017 2018 2019+ LR2 LR1 MR Handy

Resale

5-y old

10-y old

15-y old

Resale

5-y old

10-y old

15-y old

Resale

5-y old

10-y old

15-y old

Resale

5-y old

10-y old

15-y old

Resale

5-y old

10-y old

15-y old

no o

f shi

psno

of s

hips

no o

f shi

ps

-16% -20% -28%

-38%

-20%

-36% -32% -40%

-25%

-37% -37% -33%

-9% -13%

-35% -32%

-12%

-22% -18%

-23%

-50%

-40%

-30%

-20%

-10%

0%

MBPD

us$P

D

MBPD

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5 1.53

1.0

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8

2010-15 2016-20



1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

mill

ion d

wt


0

20,000

40,000

60,000

80,000


MBPD

us$P

D

MBPD

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5 1.53

1.0

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8

2010-15 2016-20



1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

mill

ion d

wt


0

20,000

40,000

60,000

80,000


16. …and asset values12. Overall oil demand is expected to grow…

17. At least contracting declined…14. In the meantime deliveries have been rising…

13. …though at a lower pace

Change in asset values by segment and age group (Jan-16 to Dec-16) Source: Hartland Shipping

Global oil demand incremental growth Source: Thomson Reuters, HSBC, Hartland Shipping

Annual tanker contractingSource: CRS, Hartland Shipping

Quarterly vessel deliveriesSource: CRS, Hartland Shipping

Average global oil demand growth historical vs projectionsSource: Thomson Reuters, HSBC, Hartland Shipping

Shipping Markets Outlook 2017: Containership Market 49 Shipping Markets Outlook 2017: Tanker Market48


110

266

126 150

424

230

422

51

0

100

200

300

400

500


0

50

100

150

200

2017 2018 2019+


0

50

100

150

200

155

100

8

138

5333

2017 2018 2019+ LR2 LR1 MR Handy

Resale

5-y old

10-y old

15-y old

Resale

5-y old

10-y old

15-y old

Resale

5-y old

10-y old

15-y old

Resale

5-y old

10-y old

15-y old

Resale

5-y old

10-y old

15-y old

no o

f shi

psno

of s

hips

no o

f shi

ps

-16% -20% -28%

-38%

-20%

-36% -32% -40%

-25%

-37% -37% -33%

-9% -13%

-35% -32%

-12%

-22% -18%

-23%

-50%

-40%

-30%

-20%

-10%

0%


110

266

126 150

424

230

422

51

0

100

200

300

400

500


0

50

100

150

200

2017 2018 2019+


0

50

100

150

200

155

100

8

138

5333

2017 2018 2019+ LR2 LR1 MR Handy

Resale

5-y old

10-y old

15-y old

Resale

5-y old

10-y old

15-y old

Resale

5-y old

10-y old

15-y old

Resale

5-y old

10-y old

15-y old

Resale

5-y old

10-y old

15-y old

no o

f shi

psno

of s

hips

no o

f shi

ps

-16% -20% -28%

-38%

-20%

-36% -32% -40%

-25%

-37% -37% -33%

-9% -13%

-35% -32%

-12%

-22% -18%

-23%

-50%

-40%

-30%

-20%

-10%

0%

18. …but there are many crude oil tankers… 19. …and product carriers still to deliver

Crude oil tanker delivery schedule Source:CRS, Hartland Shipping

Product tanker delivery schedule Source: CRS, Hartland Shipping

0%

1%

2%

3%

4%

5%

6%

7%

2015 2016 2017f 2018f 0%

1%

2%

3%

4%

5%

6%

7%

2015 2016 2017f 2018f Demand Fleet Demand Fleet

0%

1%

2%

3%

4%

5%

6%

7%

2015 2016 2017f 2018f 0%

1%

2%

3%

4%

5%

6%

7%

2015 2016 2017f 2018f Demand Fleet Demand Fleet

20. With an accelerating fleet… 21. …and slowing demand growth, the tanker market will remain under short-term pressure

Crude oil tanker supply & demand forecast Source: CRS, Hartland Shipping

Product tanker supply & demand forecastSource: CRS, Hartland Shipping

200

400

600

800

1,000

1,200

1,400

2014 2015 2016 2017

13

37

12

19 19

0

5

10

15

20

25

30

35

40

45

100-1,999 2,000-5,099 5,100-7,499 7,500-9,999 10,000-13,300

6.8%

4.9% 4.0%

1.7% 1.7% 0.8%

0.4% 0.2% 0.0% 0%

1%

2%

3%

4%

5%

6%

7%

8%

FE-N.Am FE-Eur ME/ISC related

Intra-FE Oceania related EU-N.Am Africa related Latam related Intra Eur

no of

ships

INDE

X%

shar

e

200

400

600

800

1,000

1,200

1,400

2014 2015 2016 2017

13

37

12

19 19

0

5

10

15

20

25

30

35

40

45

100-1,999 2,000-5,099 5,100-7,499 7,500-9,999 10,000-13,300

6.8%

4.9% 4.0%

1.7% 1.7% 0.8%

0.4% 0.2% 0.0% 0%

1%

2%

3%

4%

5%

6%

7%

8%



no of

ships

INDE

X%

shar

e

1. Container freight rates improved in 2016

2. But it was mainly due to the collapse of Hanjin Shipping…

SCFI Comprehensive index Source: CRS, Hartland Shipping

Number of ships operated by Hanjin as of Aug-16 Source: Alphaliner, Hartland Shipping

Containership Market

Although freight rates improved slightly in 2016, the container market had another difficult year, resulting in the collapse of Hanjin Shipping and accelerated consolidation

Vessel earnings and asset values remain at low levels and Panamax vessels are suffering from the opening of the new Panama locks, triggering unusually young demolitions

Contracting dropped sharply in 2016, nevertheless continuous deliveries and marginal demand growth are keeping recovery at bay, but the dynamics are slowly improving

Shipping Markets Outlook 2017: Containership MarketShipping Markets Outlook 2017: Containership Market50 51

200

400

600

800

1,000

1,200

1,400

2014 2015 2016 2017

13

37

12

19 19

0

5

10

15

20

25

30

35

40

45

100-1,999 2,000-5,099 5,100-7,499 7,500-9,999 10,000-13,300

6.8%

4.9% 4.0%

1.7% 1.7% 0.8%

0.4% 0.2% 0.0% 0%

1%

2%

3%

4%

5%

6%

7%

8%



no of

ships

INDE

X%

shar

e3. …which accounted for 3% of the global fleet and 7% of the Transpacific trade

Hanjin Shipping share of major container trade routes Source: Alphaliner, Hartland Shipping

0

20

40

60

80

100

120

140

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Demolition Deliveries

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

0

10

20

30

40

50

60

2010 2011 2012 2013 2014 2015 2016

18.6 17.0

7.0

0 2 4 6 8

10 12 14 16 18 20

Total containership fleet old Panamax fleet Youngest panamax scrapped

INDE

X

THOU

SAND

TEU

US$P

D

US$M

year

s

0

500

1,000

1,500

2,000

250

750

1,250

1,750

0

20

40

60

80

100

120

140

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016


0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

0

10

20

30

40

50

60

2010 2011 2012 2013 2014 2015 2016

18.6 17.0

7.0

0 2 4 6 8

10 12 14 16 18 20


INDE

X

THOU

SAND

TEU

US$P

D

US$M

year

s

0

500

1,000

1,500

2,000

250

750

1,250

1,750

0

20

40

60

80

100

120

140

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016


0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

0

10

20

30

40

50

60

2010 2011 2012 2013 2014 2015 2016

18.6 17.0

7.0

0 2 4 6 8

10 12 14 16 18 20


INDE

X

THOU

SAND

TEU

US$P

D

US$M

year

s

0

500

1,000

1,500

2,000

250

750

1,250

1,750

0

20

40

60

80

100

120

140

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016


0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

0

10

20

30

40

50

60

2010 2011 2012 2013 2014 2015 2016

18.6 17.0

7.0

0 2 4 6 8

10 12 14 16 18 20


INDE

X

THOU

SAND

TEU

US$P

D

US$M

year

s

0

500

1,000

1,500

2,000

250

750

1,250

1,750

4. Vessel earnings dropped to their lowest since 2010…

6. With the opening of the new Panama Canal, demand for classic Panamax vessels collapsed…

5. ... despite record scrapping and slowing deliveries

7. …so did asset values!

Containership timecharter index Source: CRS, Hartland Shipping

1-yr TC rate – 4,400 teu Source: CRS, Hartland Shipping

Historical containership demolition - deliveriesSource: CRS, Hartland Shipping

5-yr old – 4,500 teu values Source: CRS, Hartland Shipping

0

20

40

60

80

100

120

140

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016


0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

0

10

20

30

40

50

60

2010 2011 2012 2013 2014 2015 2016

18.6 17.0

7.0

0 2 4 6 8

10 12 14 16 18 20


INDE

X

THOU

SAND

TEU

US$P

D

US$M

year

s

0

500

1,000

1,500

2,000

250

750

1,250

1,750

8. …even 7 year old ships have been scrapped!

Average containership demolition age Source: CRS, Hartland Shipping

588

1,838

431

2,161

1,120

2,289

178

0

500

1,000

1,500

2,000

2,500

2010 2011 2012 2013 2014 2015 2016

115

21 19

57

25

86

10 1

43 37

0

20

40

60

80

100

120 140

1-2,999

3-5,099

5.1-9,999

10-17,999

18,000+

1-2,999

3-5,099

5.1-9,999

10-17,999

18,000+

-10%

-5%

0%

5%

10%

15%

20%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017f 2018f

Trade growth Fleet growth

2017 2018+

no of

ships

thou

sand

teu

588

1,838

431

2,161

1,120

2,289

178

0

500

1,000

1,500

2,000

2,500

2010 2011 2012 2013 2014 2015 2016

115

21 19

57

25

86

10 1

43 37

0

20

40

60

80

100

120 140

1-2,999

3-5,099

5.1-9,999

10-17,999

18,000+

1-2,999

3-5,099

5.1-9,999

10-17,999

18,000+

-10%

-5%

0%

5%

10%

15%

20%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017f 2018f


2017 2018+

no of

ships

thou

sand

teu

9. Contracting dropped sharply…

10. …but there are still many ships to deliver

Containership contracting Source: CRS, Hartland Shipping

Containership delivery schedule by size range Source: CRS, Hartland Shipping

Shipping Markets Outlook 2017: Containership MarketShipping Markets Outlook 2017: Containership Market52 53

588

1,838

431

2,161

1,120

2,289

178

0

500

1,000

1,500

2,000

2,500

2010 2011 2012 2013 2014 2015 2016

115

21 19

57

25

86

10 1

43 37

0

20

40

60

80

100

120 140

1-2,999

3-5,099

5.1-9,999

10-17,999

18,000+

1-2,999

3-5,099

5.1-9,999

10-17,999

18,000+

-10%

-5%

0%

5%

10%

15%

20%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017f 2018f


2017 2018+

no of

ships

thou

sand

teu

11. And demand growth is likely to be marginal

Containership supply – demand growth forecast Source: Alphaliner, Hartland Shipping


Appendices


AppendicesThisdocumenthasbeenpreparedbyHartlandShippingServicesLimitedandisbeingmadeavailabletoalimitednumberofrecipientsforgeneralinformationpurposesonly.

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.

Informationinthisdocumentwaspreparedasof24February2017.

A Note on Sources

Thisreportnecessarilydrawsonawiderangeofsources,includingourownresearchandnetworkofcontactsandcorrespondentsworld-wide.Anumberofthirdpartysourceshavealsobeenused,includingAXSAlphaliner,theBalticExchange,ChinaIronandSteelAssociation(CISA),CIAFactbook,ClarksonResearchServicesLtd,ContainerisationInternational,E.A.GibsonWeeklyTankerReport,theEconomist,Equasis,Eurostat,Fearnley’sWeekly,theFinancialTimes,FISIronOre

SwapsReport,HSBCBankplc,HSBCGlobalResearch,theInternationalEnergyAgency,theInternationalGrainsCouncil,InternationalMonetaryFund(IMF),Lloyd’sList,Lloyd’sShippingEconomist,Lloyd’sRegister-Fairplay,MaerskBrokerContainerCharterMarketMonthly,MoneyWeek,MorganStanley,NationalBureauofStatisticsofChina,OrganisationofPetroleumExportingCountries(OPEC),PetroleumEconomist,ThomsonReutersDatastream,ThomsonReutersEikon,UnitedNationsConferenceonTradeandDevelopment(UNCTAD),USDepartmentofEnergy(EnergyInformationAdministration),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.


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