Enter your stakes: ups and downs of freight market
Freight rates and bunker prices have been showing sharp and mixed changes recently. VLCC rates have shown negative records, VLSFO and HSFO prices at Singapore started showing mixed dynamics for the first time over a long period of time, long-term shipping rates exceeded spot rates. With this background, measures to subsidize acquisition and chartering of ships are being developed in Russia.
As of today, the key factors of uncertainty in the global trade are the geopolitics and the continuing pandemic. The former entails global changes in logistics, the latter – unpredicted lockdowns with the closure of the world’s largest manufactures and ports such as Shanghai.
In the container segment, long-term shipping rates exceeded spot rates amid that uncertainty. According to analytical agency Xeneta, long-term contracted ocean freight rates, as the cost of securing container shipments climbed by 10.1% in June 2022.
Xeneta CEO Patrik Berglund says the falling spot rates may increasingly tempt shippers away from traditional contracts – in addition to looming industrial action in ports (in Europe and, potentially, the US) that could further damage schedule reliability only just recovering from recent congestion and COVID-induced disruption. In addition, there’s the fact that the US has signed into law the Ocean Shipping Reform Act, designed to stop shipping companies from profiteering, and the looming shadow of widespread inflation that may impact consumer demand and slow economic activity.
“The carriers have had it all ‘their own way’ for the last 18 months or so,” Berglund comments, “but will they now be studying this wide array of factors with some concern?... “We’ve already seen some cargo owners looking to distance themselves from traditional carriers and, for example, charter their own vessels, and you have to ask what will happen next? Will shippers continue to pay sky-high contracted rates in an atmosphere of declining demand, inflation, geopolitical uncertainty, disruption and the ongoing threat of COVID restrictions?”
Indeed, container freight rates have stagnated recently. China Containerized Freight Index has decreased from about 5,800 in the beginning of the year to 5,000. Taking into account the energy crisis in Europe and new COVID cases, Chinese lockdowns and the current geopolitical conflict, the demand for container shipping can really decrease. Meanwhile some cargo shippers acquire their own fleets. This trend can entail long-term consequences for line operators.
Freight rates for VLCC showed a record low fall to -$16,000 (and once to -$19,000) per day and the companies had to work with no profit counting on the situation to improve. In June, the rates rose a little but they are still negative at about -$7,000 per day.
However, there is some good news for tanker fleet operators. According to analysts of Xclusiv, prerequisites for growth in the tanker segment have developed as new trading routes are created amid the sanctions: crude flows from Russia to Asia and from the Middle East and Africa to the Western countries. The shift towards other suppliers creates additional demand for tankers and adds more ton miles to the oil trading that significantly support the wetsector.
“The Suezmax and Aframax owners have seen their earnings following an upward trajectory during the past weeks, strongly supported by the routes redrawing which continues to be the main outlet for European energy demand while the price discounted Russian barrels kept alluring Asian buyers. VLCC demand seems that has yet to ride the wave, yet with last week’s T/C levels noting an increase albeit with most of the support coming from the bunkers' price decreases. We still expect that a revival of Chinese demand will lead to stronger VLCC enquires in the coming weeks,” reads the analytical report of Intermodal.
Freight rates for bulkers are on the average level of the two-year period. The rates have been decreasing slowly from May with no high demand in the Atlantic and in the Pacific basins. The Baltic Dry Index (BDI) was as high as 2,389 in the end of June 2022.
However, amid the situation in Ukraine and disruption of grain and fertilizers supply, their prices are going up globally and the demand for their shipping is to grow as well. The more so as Russia promises to export essential volumes of grain this season while shipment of Ukrainian grain is being resolved through talks.
The increase of bunker prices follows the growth of crude oil prices. However, ‘abnormal’ fluctuations of prices are registered in this segment. VLSFO and HSFO prices at Singapore, the largest bunkering hub in Asia, have been showing mixed dynamics for the first time over a long period of time. From March 2022, VLSFO price rose from about $800 to $1100 pmt, while HSFO fell from about $750 to $600. In January-May 2022, bunker sales in the port of Singapore fell by 9%, year-on-year, to 19.2 million tonnes. The price spread is record high at $500 per tonne. Perhaps, that is due to the situation in the refining market and to the shift of crude supplies from the Middle East and Russia.
Anyway, no essential fall of bunker prices is expected in the foreseeable future in view of the situation in the global oil market.
As of today, Russia desperately needs additional ships, especially for transportation of the dry bulk cargo and containers in the Far East basin. Meanwhile, FESCO says the cost of container ships have increased by 6-7 times in 2022. Besides, the fleet of containers needs to be increased after western container lines withdrew from Russia.
In this context, the Ministry of Transport of the Russian Federation has developed RF Government’s draft decree approving the rules for subsidizing acquisition of ships and containers as well as chartering of cargo ships. The document foresees ensuring preferential loan rates, at 4% versus actual 13%.
However, the draft document features some unclarity. It does not specify the details of the transaction (advance payment, seasonality etc.). Subsidies are to be limited by the budget, which can be not sufficient for all applicants.
Nevertheless, the very fact of developments towards such a measure is encouraging.
Besides, Russia is going to build large bulkers which used to be acquired mostly in S.Korea and China. United Shipbuilding Corporation (USC) plans the construction of a 80,000-tonne bulker for domestic customer although there are certain problems with the supplies of ship components.