• Large vessel delivery hit a record high in 40 years
The year 2020 may not be so rosy for the shipping sector, going by a new report by Fitch Ratings, which predicted that the ‘shipping outlook is negative”.
The rating agency noted that several factors would be responsible for the situation, listing the major ones as; slowing global economic growth, trade tensions and geopolitical risks that will lead to subdued demand growth in global shipping next year.
“The main sector risk is that protectionist measures may escalate into a protracted trade war and damage the prospects for global trade and GDP growth.
While some upside is possible if the trade tensions between the U.S. and China ease, the downside risks, including expected slower GDP growth in China, soft trade growth and Brexit uncertainty, will continue to weigh on demand,” Fitch said.
This comes as demand for Very Large Crude Carrier (VLCC) fleet grew at a staggering rate of eight per cent year-to-date in November.
The 65 VLCCs delivered in the first 11 months of 2019, will mark the highest number of deliveries since 1976.
Previous record in the last four decades was set in 2011, which saw the delivery of 62 VLCCs. With a month left of 2019, the record from 2011 is set to be broken by a fair margin with another four VLCCs scheduled for delivery in the final weeks of 2019.
The all-time record remains the 116 VLCCs delivered in 1974.
The Fitch Ratings report said further pressure on the global shipping sector is expected from rising costs related to the International Maritime Organisation (IMO) 2020 Sulphur Cap, which is likely to negatively affect shippers’ credit metrics.
Spikes are anticipated for operating costs (if shippers choose to use more expensive low-sulphur fuel) and/or CAPEX (if they install scrubbers that remove sulphur from the exhaust or purchase new LNG-fuelled vessels), it stated.
“We expect most shipping companies to use low-sulfur fuel,” Fitch added.
The rating agency believes shippers are unlikely to fully pass through all the associated costs to customers due to their limited bargaining power in the oversupplied market.
Fitch Ratings forecasts global container volumes to grow by about 2.5% in 2020. While this represents a small increase from 2019, it is well below the average growth rate of about 4.5% over the past eight years.
It expected dry-bulk trading volumes to grow by three per cent in 2020, up by more than 1.5% on 2019, due to higher iron ore and other commodities volumes. Global tankers’ supply and demand are likely to grow by 2.5% and 3.5%, respectively, in 2020, supporting a better supply-demand balance.
This will help freight rates to stay at levels comparable to annual averages in 2019, which represents a recovery from their troughs in the middle of 2018, the report says.
The impact of IMO 2020 on tanker shipping companies is likely to be mixed, as rising compliance costs may be mitigated by increased tanker demand to transport compliant fuel.
However, lingering trade and geopolitical tensions and political risk may depress long-term tanker demand.
However, a total of 19m DWT has been delivered in the total VLCC fleet, whereas only four ships, equal to 1m DWT, was demolished in the same period, setting the industry up for a hard supply and demand balance in the future.