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HKSOA Annual Analyst Luncheon - 2024 - Will the Dragon Roar?

On 20th February, HKSOA hosted its Annual Analyst Luncheon with Guest of Honour Mr. Tim Huxley.  He presented deep insight into what the future might look like for the shipping industry in these times of disruptions and geopolitical conflicts. His speech shows his clear Though Leadership and will undoubtedly benefit the industry.


Good afternoon, ladies and gentlemen. It’s a huge privilege to be asked to speak to you today at the annual HKSOA Analysts lunch. I would like to stress at the start that I am not a professional analyst in the same vein as some of the legends who have graced this podium in the past, such as Martin Stopford and Burak Cetinok, but hopefully, four decades in the shipping industry gives me some experience to fall back on for context and perspective, and we should always look to history to help form our vision of the future.

Our analyst’s lunch has certainly had its moments over the years. I think it was in 2005, when Martin Stopford was unable to come and speak, that he sent out a young analyst from Clarksons named Tom Cutler. Tom predicted that the shipping industry was set for a ‘perfect storm’ which would see earnings and values rise to an all-time high. Experienced hands muttered about ‘the impetuosity of youth,’ but time proved Cutler correct as we went into the pre-financial Crisis super cycle and the inevitable pain that followed.

I am not going to forecast an unprecedented boom, but neither am I a pessimist. I tend to agree with Dr.Martin Stopford, who, in his speech to the Association in 2007 on our 50th anniversary, sought to answer the question ‘Shipping: Will the next fifty years be as chaotic as the last ?’ His conclusion was that the next fifty years should bring ‘more chaos and confusion’, and it would seem that with the state of the world today, the good Doctor is proving to be correct. So perhaps we should follow the teachings of the respected New York Times journalist Bob Herbert, who once said, ‘If history tells us anything, it’s that we never learn from history’.

A few weeks ago, when I started to formulate this presentation, the Monday morning headline in one of the leading British newspapers cried out, ‘We are on the brink of World War Three’ Admittedly, it was a quote from Donald Trump, but it did rather reflect that from a geopolitical standpoint, you can rightly argue that there has rarely been a time in living memory when the world is so uncertain. With around sixty elections scheduled for this year, there will no doubt be changes of government in quite a few countries and territories, which will see pre-election rhetoric ramped up on issues such as foreign policy, defence spending, the environment, immigration and numerous other issues we do not presently seem to have an answer to.

These are indeed uncertain times, and shipping is already facing up to these challenges. I am not going to make any rash forecasts about how I see geopolitics evolving in the coming year as much wiser people than I have made plenty of wrong calls in recent times, but it is a truism that historically, times of global uncertainty and tension have generally been positive for shipping markets and this looks likely to remain the case in the Year of the Dragon.

Before we take a more in-depth look at the three major sectors of container shipping, bulk carriers and tankers, I think it is crucial to look at one factor which is already proving to be a key influence on markets in 2024: tonne miles.

Recent figures revealed that in 2023, tonne miles saw growth of around 5.0 per cent, which, with the exception of 2017, when the figure grew by 5.2 per cent, is the fastest growth since 2011, more than six times the average annual growth rate. This is a much better indicator of the health of the shipping market than simply the volume of cargo carried, as it reflects both the volume of trade moved and the distance involved.

Much of that growth in trade demand came as a result of the Ukraine war and the imposition of sanctions, leading to Russian crude exports finding vastly expanded seaborne markets to India and China, whilst seaborne gas and product imports also saw substantial growth as they were sourced from further afield, whilst Black Sea grain exports came to a virtual standstill and alternative sources have to be found.

In 2024, we are already seeing tonne mile increases due to the situation in the Red Sea. I said that I was not going to make any geopolitical predictions, and I am certainly no military strategist, but I do believe events of recent weeks suggest that the re-routing of ships around the Cape of Good Hope is likely to last longer than the short-term disruption we were originally expecting before Christmas. The current estimate of the impact of the Red Sea situation is an overall increase in tonne miles of around 2.4 per cent, which is quite a boost to shipping demand when combined with the other addition to tonne miles we are already seeing.

Let’s move on to looking at specific sectors and start with container shipping. I am not going to blind you with lots of graphs and statistics, but I want to lay out the key drivers as I see them.

After the undreamed of riches, the container shipping industry made during and in the immediate aftermath of the pandemic, 2023 saw the industry return to earth with a bump.

The benchmark Howe Robinson Container Index hit its all-time high at the end of March 2022, when it reached 5,822 points. By December 2023, it had slumped to around 900, marking one of the most precipitous declines seen in any shipping sector ever.

In truth, containers had been the greatest beneficiary of the COVID premium, and so it was no surprise to see a correction when you combined the unwinding of congestion brought about by COVID disruptions together with slowing consumer sentiment as the cost of living crisis took hold whilst with people being allowed to travel again, retail suffered.

As is so often the case, container shipping had reacted to the booming market with its usual response of massive over-ordering. The order book in October 2020 had been 8 per cent of the global fleet, but by 2023, it had shot up to 28 per cent, and those ships are now being delivered, with last month seeing 42 ships of almost 300,000teu capacity delivered, the highest monthly level of deliveries in sixteen years.  With a total of 830 ships on order, of which 451 are scheduled to be delivered this year, a massive increase in supply is indeed coming on stream.

If you combine that influx of tonnage with the estimates for global demand for container shipping dropping by anything up to four per cent, the omens do not look good for the medium-term outlook for the container industry. So, are there any bright spots on the horizon for the container sector?

While the new building order book is pretty terrifying, the age profile of the fleet sees around 800 ships built in 2000 or earlier, and these are clearly coming to the end of their working life.  As we saw in the boom market a few years ago, age is not necessarily the driving force behind scrapping, and we saw ships of thirty years old being put through their sixth special survey. But with lower earnings and increased emission regulations, the removal of these older ships now has to be a realistic prospect.

Scrapping has got off to a slow start to the year, and with the situation in the Red Sea evolving with an increasing number of vessels now being routed via the Cape of Good Hope, increased voyage length is seeing excess capacity absorbed, which will lead to a slow down in fleet removals.

Analysis by Clarksons recently said that the rerouting of the majority of containerships around Africa has led to a 9 per cent increase in average voyage length for containerships, claiming that if this trend is maintained, it has the potential to absorb all the newbuilds scheduled for delivery in 2024, which would be a game changer for the industry.

So far this year, the Container Index has seen a 30 per cent gain, driven by a scramble to secure ships in the under 10,000 size, with the availability of ships in the spot market down by 20 per cent in the past month, so it perhaps not all gloomy.

Another overlooked aspect of the container shipping industry is that compared to other sectors, it is a relatively tightly controlled market. The amount of tonnage controlled by the various alliances has at times reached around 75 per cent of the fleet, and the world’s largest operator, MSC, controls around 20 per cent of capacity. This gives a greater degree of control for the major lines on available capacity, and careful management of capacity through such things as blank sailings as opposed to just chasing market share could help prevent further significant drops in rates as the new buildings deliver.

The changed dynamics brought about by Red Sea developments and the possible advantages that a significantly consolidated market may bring have to be viewed in the context of stalling demand and the immovable object of that massive order book being delivered this year. Asset values fell by up to 23 pct in 2023. It was, however, older ships which bore the brunt of this decline with more modern ships suffering much lower declines in percentage terms, although there were very few sales actually concluded.

With a large number of non-liner company-owned ships coming off lucrative charters in the coming months, there will be pressure on rates and values, but the order book is very much focused on larger ships. It’s crucial at this point to separate the situation with the larger ships from the more regionally focused trades, which do not always need such large ships.

Fleet development for ships of under 10,000teu has been relatively flat and with the existing fleet ageing and EEXI regulations further limiting capacity, there could be some tightening in supply in some trades, for example the number of geared feeder ships of around 1800teu is beginning to look exceptionally tight in the coming months. No doubt many owners will try and ‘cascade’ vessels from longer haul routes into more regional trades as the bigger ships are delivered, but there is a limit to how much this can be done given port infrastructure restrictions.

The current uptick in earnings we have seen in the past few weeks is seen by some as a short-term blip, but even if it is sustainable, this is probably not looking to be a great year for the container industry, and one hopes that companies can continue to live off the fat generated in the boom times and that it was not all spent on new buildings.

Turning to the dry bulk market, compared to containers, a much smaller percentage of tonnage ever actually transits the Red Sea, so there is less drama on that front, but for many, dry bulk is considered the sleeping giant of shipping.

Last year was not a great year for dry bulk, but it also wasn’t too bad a year. The unwinding of COVID-related congestion and too much hope being placed on a quick bounce back from the Chinese economy meant that just as in the case of container shipping, the early optimism proved unfounded, but despite this, dry bulk imports to China were healthy, with a particularly strong performance coming from coal imports which were at an all-time high of 474 million tons, whilst iron ore also recorded a strong performance. Even though the first quarter can usually be weak, this year has got off to a strong start-but in 2014 we also had the best first quarter for years, but it all went downhill from there, so nothing is certain. As one shipowner said to me last night: “Do you think there is too much optimism?”

There are fears that steel demand in China could stagnate in 2024 as the Chinese property sector continues to weaken, but this could be offset in part by continuing strong demand from the automobile sector. Globally, improved steel demand should see iron ore shipments grow 3.0 per cent over the next two years.

Whilst coal was very much the star turn of the dry bulk market last year, this is expected to tail off and could have a negative effect on Panamax and supramax earnings. Last year’s booming imports to China were in part driven by lower-than-expected hydroelectric power generation and lower demand for domestically produced coal.

The outlook for coal demand going forward is not as rosy, with BIMCO predicting coal shipments will drop by 6.9 pct between now and 2025 as the increased shift to renewables and more hydro capacity comes on stream. Stronger exports of iron ore from Brazil and the continued development of bauxite exports from Guinea to China will lend further support, particularly to the capesize market, which we have seen so far this year enjoying a surge in transactions and asset values whilst a strong forward curve, indicates a degree of optimism from participants.

Whilst the growth rate in China has markedly slowed, the world’s biggest market is still growing. We might not see the stratospheric growth rates we saw in the first few years of this century, but growth there will continue to be, so discount China at your peril.

The volatility we saw in 2023, particularly in the last few months, reflected how finely balanced the dry bulk sector is, particularly in the Capesize market.  Fleet positioning is likely to play a major role in how this year develops, and hence, watching the number of ships ballasting towards the Atlantic will give a real insight into incoming spikes in the market.

When combined with the disruptions caused by low water levels in the Panama Canal and the ongoing situation in the Red Sea, there is every reason to be reasonably bullish for the dry bulk market this year, but whilst we may get to the end of this year and reflect on a better market than last year, there is going to be a lot of volatility along the way.

As we have seen in the container trades, what truly kills a market is the supply of ships. Newbuilding contracting in the dry cargo sector has been relatively restrained, and this could be the biggest support to the market this year. The current order book represents around 9.5 per cent of the global fleet, and the percentage of the dry bulk fleet over twenty-five years old is now at just over 7.0 per cent.

Whist the order book for supramax up to the end of 2027 now totals over 430 ships, that represents around 10pct of that particular sub-sector and with over 14 per cent now twenty years old, even the sub-sector with the largest order book does not give too much cause for concern.

I am sure quite a few of us remember the frenzied shipping markets before the global financial crisis and the shipping recession we were subsequently plunged into. That ordering boom prior to 2009 laid the foundations for the years of pain that followed as the market tried to absorb the armada of ships, which were contracted at inflated new building prices, and we have not seen since.

Those ships are now approaching fifteen years old and coming to the later stages of their life in a much more challenging regulatory environment. What happens to those ships as they are forced to trade at reduced speeds and have increased off-hire as they retrofit energy-saving devices will be another deciding factor as we certainly do not have the capacity available should those ships be either phased out or have their trading scope severely restricted.

Current secondhand prices reflect the optimism that exists in the bulk carrier market. In recent weeks, we have seen four-year-old supramaxes sold for around 29 million, not that far off the current new building price of around US$ 33 million. The level of competition for the limited number of modern secondhand capsize vessels on the market has been exceptional, with four modern Newcastlemax bulkers last week being sold at well above previous valuations; the fact that owners seem to be willing to splash out on modern tonnage with relatively prompt delivery suggests a desire to cash in on the potential earnings of the next couple of years whilst the various regulatory and environmental changes come into play.

A reasonable question to ask is will this lack of modern secondhand bulkcarrier tonnage prompt investors to rush to the shipyards? With the massive containership order book gradually unwinding, shipyards will want to fill their capacity with something and surely, the bulk carrier market is worth looking at. Not necessarily, as confidence in the longer term is not that high for a consistent economic rebound to justify ordering three years forward, whilst what propulsion systems are the way forward still seems to be up in the air.

Owners may, however, be tempted to give new buildings a second look due to the lack of available secondhand ships from the Japanese market in particular, which always helps set the benchmark prices in the secondhand market. In recent years, a weaker yen has helped owners and operators who had Japanese-owned ships on charter with purchase options.

The declaration of these options has meant that Japanese owners have had fewer ships to sell in the open market, and this is reflected in the current competition when Japanese ships come for sale. I would certainly expect the intense competition for modern secondhand ships to be maintained this year, especially if the chartering market delivers on the promise currently being shown.

So, with limited modern ships to buy, we could face a repeat of the sins of the past. In the run-up to Chinese New Year, I was doing my annual clear out of my home and came across a copy of Asia Pacific Shipping dated April 2006 and an article I wrote  about how shipping could be cautiously optimistic if it can adjust without the onset of massive overbuilding, but that history has a habit of repeating itself, and the temptation to reinvest the bumper profits of the previous few years in a flood of new buildings may prove just too tempting for shipowners.’ Of course, that is just what happened, and most owners were consigned to pretty miserable dry bulk earnings for some time.

This, of course, is one of the fundamentals of shipping-we might have a mountain of regulatory changes to work through, and geopolitics will keep us awake at night, but the crux of the issue is always going to be that if we have an oversupply of ships, we will have a weak market. Once again, the fate of the markets is in the hands of the owners.

Turning to the tanker market, it’s been a strong start to the year, with earnings above those seen in Q4 of 2023, but this is the industry sector that is particularly susceptible to geopolitical and economic shocks. The product tanker sector has seen the biggest boost from the crisis in the Red Sea, with rates hitting their highest levels in history.

Demand growth for oil and oil products is set to slow over the next two years but will remain healthy at growth of about 1.3 million barrels per day after a strong performance last year, which saw demand surge by just under two million barrels per day. But again, it’s been in terms of tonne miles where the real gains have been made for the tanker market since the low point of 2020/2021 at the height of the pandemic.

The Ukraine war has been a huge boost to tonne miles in terms of both the cessation of overland exports to Europe and the large increase in exports of Russian crude to India and China, but these have probably now peaked, and by the end of last year, the tanker market was looking for a further boost to come from elsewhere.

That now looks like taking the form of increased tonne miles as a result of the Red Sea crisis. Whilst it has to be recognized that there is still plenty of tonnage going through the Red Sea, volumes through Suez have dropped off in the tanker trades, although not by as much as in containers.

Certainly, if trade through Suez halts or there is continued large-scale disruption, a lift to tonne miles is inevitable, although there seems to be a widely held belief that this will be temporary. That is one of the many imponderables that we start this year with and what makes forecasts, at best, difficult and, at worst, meaningless.

To be honest, it’s impossible to forecast what is going to happen with respect to the Middle East this year, and at the moment, whilst the events of any war are shocking, the impact on the world economy is pretty limited and a fraction of the impact we saw in the pandemic. The Financial Times recently quoted two eminent economists as estimating the rise in transportation costs on account of the Houthi action will lead to a 0.1 per cent rise in global transportation costs, possibly as high as 0.2 per cent in Europe. That is no more than a rounding error in inflation measurement. Shipping has handled the pandemic and conflicts around the world in the past few years and generally comes through with flying colours. I believe this will probably be the same. In the meantime, we have the best product tanker market on record, so for those who have stuck with this sector, enjoy it.

Tanker trades are going through a period of change, and the market is becoming far more complex. OPEC production cuts in 2023 definitely affected the freight market last year, and cuts in both Saudi and Russian supply took around 5 million barrels per day out of the market. Of course, nobody ever seems to be able to check if OPEC production cuts are valid and enforced and we supposedly have another 0.9 million barrels a day cuts coming, but China’s imports have got off to a cracking start with import quotas already up 60pct over last year and with oil prices currently relatively low, you can expect Beijing to take the opportunity to secure cost-effective supplies.

Meanwhile, OPEC, which in decades gone by could hold the West to ransom with its grip on oil prices, is not such a dominant force, with Angola having left the cartel and new member Brazil quite likely to want to flex its muscles.

What prospects for the shadow fleet, the mysterious fleet of up to 600 ships which has been carrying Russia’s crude exports? The shadow fleet has effectively removed most Russian oil volumes from the market, but the fleet has also removed a vast amount of tonnage from the market, and this has offset the cargo loss. What is important to recognize is that even should sanctions be lifted, it is unlikely that these ships will come back into the market.

Prospects for this year? The economic outlook remains fragile, with a possible recession in Europe and a stumbling Chinese recovery post-COVID. The U.S. economy looks to be proving quite resilient and with interest rates cuts deemed likely to provide some stimulus to growth and, by extension oil demand.

So a fairly optimistic outlook for tankers for the balance of the year, an increasingly positive outlooks for dry bulk for2024, and fairly grim prospects for containers, particularly on the bigger ships where they are hampered by new tonnage.

If I were given a hundred million today, I would probably be tempted to opt for modern, efficient bulk carriers with a view to having an exit path in three to four years before the regulatory landscape becomes too burdensome. I would also look at regional container trades to take advantage of ‘near shoring’ and ‘friend shoring’ which will likely see an increase in intra regional trade. But if there is one thing I do expect this year, it’s more volatility,

The regulatory landscape continues to get more complicated. Achieving net zero seems to be a moving target, and my belief is that shipping will continue to make incremental gains through improved existing technology rather than any quick, widespread adoption of new technology. As we see countries such as Britain roll back on their climate change promises simply because of the cost of implementation, the willingness of consumers to actually pay for the changes required is being called into question. There is no denying we need action, the question is who will pay for it and will it be effective.

And what does the year ahead hold for Hong Kong shipping? There is no denying that over the past few decades, our local shipping industry has contracted in terms of the number of active shipowners and charterers headquartered here, and that has had a knock-on effect in terms of our shipping services. But Hong Kong is still a leading maritime centre, and I was incredibly proud to attend a naming ceremony in Ningbo in December where a privately owned Hong Kong shipowner took delivery of a ship that was financed by the Hong Kong branch of a major international shipping bank, with the legal work done by a Hong Kong lawyer, insured through the Hong Kong office of a major P&I Club and managed by one the world’s largest ship management companies who were originally founded and remain headquartered in Hong Kong.

We might not have the dozens of active shipowners we had here at the beginning of the 1980s nor the huge volumes of cargo which were controlled here in the pre-Financial Crisis days, but the quality of the whole range of shipping services available here are without parallel anywhere in Asia and attracting business from elsewhere in the region, as well as the opportunities on our doorstep,  has to be where we have the best prospects for growth. That growth will not come as a result of subsidies or incentive packages or from the establishment of committees and focus groups. It will come from the same source that made Hong Kong shipping great in the first place- the talent, commitment, and dedication of those who choose to work in Hong Kong shipping and make Hong Kong their home.

I wish you all every success in the Year of the Dragon, and let’s all continue to strengthen Hong Kong’s maritime sector, of which the HKSOA is very much a cornerstone.

Thank you.

Tim Huxley

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