Date: Thursday, January 19, 2023
Source: Maritime Executive
Taking stock of developments in the maritime industry in 2022, one must be content: Every segment experienced a performance ranging from good to outstanding. From offshore to cruise ships and LNG vessels, shipping markets were overall profitable in 2022, in stark contrast to extremely poor markets of a couple of years earlier.
Everyone’s mind is on what’s “around the bend,” as they say. What will 2023 and the short term bring for shipping?
At the risk of stating the obvious, no one has a crystal ball, especially for an industry such as maritime, which is at the crossroads of international trade, financial markets, energy and commodity markets and, of course geopolitics. And, as Warren Buffett says, a company employing the expertise of an economist has one too many people on its payroll! So, instead of trying to foresee the future via an econometric model — which is easy to upset — we will look in the broader macro trends that have the potential to move the needle in a big way.
For starters, the overall outstanding orderbook for shipping at present is rather subdued, and generally it’s rather favorable. No sector has an outstanding orderbook of more than five percent of the corresponding existing fleet, which broadly stands among the lowest levels in the last decade.
There are certain segments within sectors where the orderbook is as high as 30 percent-plus (e.g., LNG tankers, post-Neopanamax containerships, coated long range tankers (LR2s), etc.), but generally the number of existing vessels in those segments is rather small, thus allowing for a high percentage outstanding orderbook. And most orders are set to deliver in late 2024 or later.
Thus, all in all for 2023, it can be said that tonnage supply is not expected to overwhelm tonnage demand as has been the case on several occasions during the past decade. Barring a scenario whereby demand will collapse (e.g., exogenous shock of a pandemic magnitude), the overall tonnage supply equation seems broadly balanced for 2023 and early 2024.
On the demand side, many potential scenarios can potentially play out in 2023, ranging from a mild recession in the U.S. and other developed countries to a deep recession for certain parts of the world. Inflation is on the rise, and many central banks will be extremely watchful on that and likely to act pre-emptively, dampening any strong recovery prospects rather than risk an out-of-control inflationary environment. Thus, demand seems to come with a “put call,” thereby preventing a scenario of outsized demand, at least structurally.
On balance, looking narrowly at the fundamentals of the maritime industry in 2023, there seems to be a floor for the market — due to a balanced tonnage scenario — while demand comes with a ceiling too, as it will be nipped in the bud to prevent uncontrolled inflation.
So far so good, and if we didn’t know any better, we would have said a boring market for shipping to expect in 2023!
We sense, however, that boredom is not what we will get in shipping.
The word “polycrisis” keeps popping up with increased frequency lately in economic reports and in the press. The term itself was used in the 1990s when the European Union was stretching and bending with new members and a new currency, but now the term seems to have found new popularity.
Recovery from a once-in-a-century pandemic has not been smooth with supply chains and logistics failing to cope with returning demand and also with shifting consumer patterns. As a result, raw materials and commodity prices spiked in 2022, partially driving structural inflation. Consumers with a newfound YOLO (“you only live once”) attitude and some stimulus money in their pockets were glad to pay up to get stuff now, further driving inflation.
Central banks, first believing in transitory inflation, in the second half of 2022 had to make a hard and highly visible U-turn with interest rates. For now, the jury is still out on whether inflation is under control and a “mild recession” is the most likely scenario.
As if fundamental fiscal and monetary concerns weren’t enough, one must also evaluate geopolitical events such as the invasion of Ukraine by Russia (and the ensuing turmoil in energy markets). Further to it, China has chosen its own course of dealing with the Covid pandemic which, at the very least, has put the Chinese economy and society out of sync with the rest of the world.
Whether the dictum, “When China sneezes, the world gets a cold,” still holds true or not, in any event the result of China’s dealing with the Covid pandemic for a billion-plus population may be more than just a cold. For example, when “zero tolerance” was in place last year and Chinese ports were unilaterally closing due to Covid, the impact was immediately reflected in containership rates and vessel activity in U.S. ports. Neither for Russia nor China is there a clear expectation of their economic and social course for 2023, but permutations range from “steady as she goes” to scenarios of economic implosion and social unrest.
Did we mention that there’s a clear and coordinated effort by Western countries to aggressively confront Russia and its czarist aspirations and also China and its expansionary policies? Headwinds in world trade have already started impacting certain maritime markets. And if geopolitical prospects with two critical economies (Russia for energy and raw materials and China for its sheer size) were not enough, the EU — besides the soft prospects for its economy — stands on a delicate political balance; ditto for the U.S., with a sharply divided (and dysfunctional, some might say) Congress.
Thus, global geopolitics appear to resemble a powder keg that can affect markets immensely at a moment’s notice.
There are still more unknowns to ponder for 2023 including weather conditions that get weirder with every passing day with localized flash floods, heat waves, etc., resulting in loss of property, loss of life and further compounding supply chain concerns. Some of these weather events affect food supplies too, building on concerns about the Ukrainian breadbasket that has gone empty for the season.
Lots of Uncertainty
We do not want to appear as pessimists or warmongers, or the people who see the glass half empty. The point is that there is a lot of uncertainty in the world these days, at several levels and stages of causes and outcomes.
None of these are “maritime” variables, strictly speaking, but clearly any of them can move maritime markets. And given that tonnage supply and demand are balanced and supply chains, etc., are already stretched out, we’re afraid it won’t take much to spur maritime markets and cause them to spike.
At one point in 2022 LNG tankers were accepting offers in the magnitude of $500,000 per diem for charter. We think that with the exception of a couple of sectors — e.g., large containerships (ULCVs), offshore drilling, etc. — several types of marine assets stand to have their “fifteen minutes of fame” in 2023 and the associated freight rate spike.