OUTLOOK ’17: Europe shipping market facing uncertainty in 2017

By Melissa Bartlett and Sarah Trinder

LONDON (ICIS)–At the beginning of 2016 there was hope in the European shipping market that lower bunker fuel costs would translate into a positive year for ship owners.

However, despite comparatively lower and less volatile crude oil price movements versus recent years, shipping movement has slowed noticeably, with routes inside and outside of Europe proving sluggish and rates on the decline for a large part of the year.

For the most part chemical tanker shipping has been considered one of the more stable markets across the industry in 2016. Results in the 8th Maritime Employee Survey, conducted by maritime jobs specialist Halcyon Recruitment and online training provider Coracle, suggest that working conditions were best for tanker sector employees.

“Those in the tanker segments fared best with 56% receiving a bonus and 42% a pay increase,” the survey said.

However, this is not to say that the market has survived a long summer of discontent unscathed.

As Basil Karatzas, founder and CEO of Karatzas Marine Advisors & Co, highlighted recently: “The four major market segments (dry bulk, tankers, containerships and offshore) have not been moving in unison, but, for the most part, all four have been bleeding cash for the best part of the last five years.  When the whole industry is losing money (and not just a few ship owners or market segments), concerns naturally arise about structural problems within the whole shipping market.”

There are no significant signs on the horizon that the current situation will change in 2017.

A recent upswing in crude oil prices amid an OPEC deal to cut production in 2017 could result in firmer bunker fuel costs for shipowners, and some sources suggest that rates could increase as a consequence. There are some saying that higher rates could prove difficult to achieve though.

“If there are many ships around, rates will go down, even if bunker fuel prices are high,” one ship operator said.

“The contracts for 2017 that were renegotiated at the end of this year are already fixed with bunker escalation clauses in most of them. Owners will try to get higher rates but it will be difficult,” a shipbroker added.

A bunker escalation clause is a device in contracts which allows companies to cover their costs should bunker fuel costs increase at any point.

Not only are shipowners covering themselves against the prospect of rising fuel costs, they are also said to be locking themselves into contracts for longer in an attempt to keep vessels employed.

“Owners are locking in contracts for longer periods,” one broker said, adding that one player in particular was offering low rates and long contract terms in order to “lock in volumes.”

With rates and vessel employment having faced a tough year, it is not really surprising to see players being forced to be more competitive.

Throughout 2016 European ship-owners have been faced with deciding whether to accept continuing erosion of rates to keep vessels on the move or to keep vessels in port to wait for better offers, incurring significant costs which may not be possible to recover considering the weak market conditions. One source suggested that it costs about $8,000 a day to have a ship waiting in port in Europe.

Although newbuilding activity decreased in the first eight months of 2016, there are still new vessels due to enter the market in the coming months, and with no significant increase in enquiries on the horizon, the pressure is building on some players.

There were hints of consolidation in the market this year, with Stolt-Nielsen acquiring Jo Tankers in November.

The positives to this deal were that this meant Stolt-Nielsen acquired new vessels without ordering more into the market. However, a spokesperson at the company said at the time that this would in no way prompt Stolt-Nielsen to start recycling vessels.

Sources expect the trend for consolidation to continue in the coming years, with players thought to be racking up losses behind closed doors.

“There are a lot of deals being done – people are selling vessels. They’re losing assets and making cash for short-term expenses. Eventually they will struggle financially. You hear rumours about that – big owners are talking consolidation,” one source said.

Meanwhile players in the market expect demand for vessel space to be largely stable going into 2016.

“Volumes [shipped] next year will be a rollover or slight increase. Some new trade routes are going to appear. Trade routes which were coming into the market this year like methanol flows from the US Gulf to Asia. That should increase further, but I still think overall volumes will be more or less the same, within a half percent up or down,” one source said.

“We’re not going to see a big increase in volumes on the short as political change puts uncertainty into the market,” it added.

The whole industry has faced a summer of uncertainty, and it is yet unclear whether a recovery is imminent.

As Karatzas pointed out: “It is possible that the current pessimism is not fully justified. After all, the maritime industry has unconsciously become an integral part of our daily lives, with more and more people worldwide used to a middle-class lifestyle and accustomed to products (including food) from a global distribution list.

“Although there are no clear drivers for an imminent market recovery, one can discern trends that will shape the shipping industry in the next decade. Larger and better capitalised ship owners with cost efficient operations and a dependence on technology seem to have a comparative advantage,” he added.

“Save for some short term improvements, there is no evidence to suggest any notable change on the horizon in the next 12 months. Many industry experts expect it to be several years before any sustainable improvements materialise,” noted the Halcyon Recruitment and Coracle survey.

Among a market that has underperformed almost every expectation this year it seems the only thing players are confident of is is that still nothing is certain.

 “We are cautiously optimistic for year end and [the first quarter of 2017],” said a source.

“[It is] still hard to say if its sustainable, [the market has been] very volatile,” it added.