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  • Writer's pictureNikos Doukas

John N. Cotzias: Economic Headwinds, Geopolitical Storms - The Global Shipping Industry Braces for a Bumpy Ride



John N. Cotzias: President of the Hellenic Shipbrokers Association
John N. Cotzias: President of the Hellenic Shipbrokers Association

The year 2024, the Year of the Dragon for China, is set to bring significant changes to the global shipping industry. As we assess the broader economic landscape and its impact on shipping, our primary focus remains on China's economic trajectory. While global GDP growth remained subdued during 2023, particularly in goods-producing sectors, the global economy has largely avoided recessionary conditions.


However, China's economy is still in the process of finding its footing. China's GDP expanded by 5.2% year-over-year (YoY) in Q4 2023, a slight improvement from the 4.9% growth in Q3, but still below market expectations of 5.3% but more than the official government target of 5%.

While Chinese authorities' stimulus packages have had a positive impact, they have not yet translated into stronger steel demand or iron ore trade.

On the other hand, the dry bulk market has been propped up by China's coal imports, accounting for most of the growth witnessed throughout 2023. However, the continued weakness in the property market has also negatively impacted dry bulk shipping. Looking ahead, we anticipate a gradual upward trend in the Chinese economy over the next 12 months. While the European economy remained relatively stagnant throughout 2023, we expect to see a recovery in activity in the second half of 2024, coinciding with China's implementation of its mandate to construct strategic coal storage facilities over the next few years. Furthermore, Rio Tinto, the world's largest mining company, shares our optimism, anticipating a gradual economic recovery in China driven by stimulus measures, particularly after Q2 2024. In fact, robust economic activity in China, fuelled by stimulus packages, has already led to a 5% increase in Rio Tinto's iron ore production in Q4 2023.


China has presently very high stockpiles of coal and that is why we say that after two quarters there are chances to see more demand for coal imports from China. Right now, Coal demand and coal shipments are decreasing and that is one of the reasons that Capes and dry in general are correcting. Chinese New Year also is a commonly known seasonality that will give us some sort of indication after 18th of Feb 2024 when the new year festivities are over.  On the Supply side we expect about 520 Bulkers (36.5mil dwt) to be delivered in 2024 and another 560 ships (or 44.4mil dwt) in the years to follow.


If all orders are delivered as penned, this is an annual increase in no of ships of 3.8%, and we exclude the vessel scrapping which last year was around 8mil of dwt capacity which makes supply demand equation is manageable and in accord to world growth, thus we feel in 2024 market balances will be somewhat matched as where they were in 2023. Current Bulker orderbook stands at 1104 ships (8.2%) of 82mil DWT (8.2%) – In brackets is the orderbook to fleet ratio.

 

If we look for a bright spot globally, we think we should start focusing on India. In 2023 we have seen some strong growth rates in India, and we expect to see this continue into 2024. Interest rates in major economies remain elevated. But they're of course starting to return to more normal levels, deflating economies and bringing prices to more affordable levels, which in turn may boost consumption and this is what shipping requires. We have read estimates that in 2024 growth in demand will be close to 4% year over year.

 

The geopolitical events we've observed throughout 2023, particularly intensifying towards the end of the year, have heightened tensions in and around the Red Sea and the Suez Canal. These developments are undoubtedly poised to have short-term implications for nearly all shipping sectors. However, the precise way these events unfold and their long-term impact on shipping and supply chains will hinge on the duration of this heightened threat and the response of global powers to the situation off Yemen.

 

As we've seen, markets are notoriously volatile, and this volatility could potentially translate into short-term gains. The sector has experienced a rollercoaster of ups and downs in recent months. Adding to these oscillating market dynamics is the disruption of the Suez Canal, which has caused significant disruptions to global trade. At this juncture, it's difficult to accurately assess the overall impact of these events. As mentioned earlier, the key factor is the duration of the Red Sea situation.

 

 

The Suez Canal is the shortest shipping route between Europe and Asia, and through the Canal passes about 30% of the total container traffic, 12% of gas carriers, 8% of dry bulk carriers and 9% of oil tankers. In total 12% of all world trade transported by sea goes through Suez.

We are talking about a passage that when it was blocked for more than a week in 2021 when the Ever Given closed the Suez inbound/outbound crossing, the supply chain problem was huge, but the impact on consumers was ultimately relatively small. This time, however, trade is disrupted not by accident or a mistake, but by the deliberate actions of a determined well trained armed militant group. The result could be a prolonged and extensive impact on trade. All is very uncertain. To Note that more than a trillion dollars per annum is the value of goods transported through Suez. 


The tanker market in 2023 was characterized by high levels of volatility, with significant swings in spot earnings across various markets. Despite this volatility, the overall trend was one of strengthening earnings. This positive performance was largely attributed to the broader geopolitical situation, which has a significant impact on the tanker sector. Policy decisions at international, national, and corporate levels have played a pivotal role in shaping the market. OPEC's production cuts and the lifting of US sanctions on Venezuela, along with the ongoing conflict in Russia and Ukraine, have all contributed to a redistribution of cargo flows, alterations in trade patterns, and the introduction of new routes. These developments have led to increased ton-miles, benefiting the tanker sector. Despite the anticipated moderation of geopolitical and policy factors in 2024, earning levels are expected to remain relatively robust. Even if tanker time charter levels decline by 15%, earnings will still be well above historical averages. We observe the low level of new tanker deliveries in 2023 and 2024, with only two VLCCs scheduled for delivery in 2024, and that will further support the tanker market. Current Tanker orderbook stands at 586 ships (7.8%) of 48mil DWT (7%) – In brackets is the orderbook to fleet ratio.


Coming back to the supply side, we need to look at each sector individually. Although we have showed the orderbook to fleet ratio in Tanker and Bulker markets we see that these two sectors are not threatened by the NB orderbooks, but this is not the case in the container markets. We are seeing a huge orderbook in the container market which is already starting to be delivered and we expect to see a lot more tonnage hitting the water within the next 2 years. Now looking at the container freight market in 2023, it had plunged back into reality following the unprecedented rise we witnessed during the pandemic in both 2021 and 2022. Container market was affected by the large influx of tonnage that has been entering the active fleet, which is about 1.5 new container ships delivered every day during mid-2023 and 2024 with this frequency expected to continue all this year. China is dominating the global new building order book for container ships, but we will continue to see fewer container ships being ordered as the big surge occurred 2 years ago, when the freight rates at historical highs enabled owners to have plenty of cash reserves. But just how bad is this overcapacity going to be? Many heavy burning non-Eco container vessels which are now being replaced by more economical ships, utilising the latest fuel efficiency technology, will have to exit the market to leave room for the coming newbuilds. Despite the overcapacity issue, we now face several other factors coming into play in the container shipping market. We have the restrictions with the Panama Canal due to the water shortage issues they are facing, but the global aggregate impact of the Panama Canal doesn't seem that significant so we should focus entirely on the recent diversions from the Red Sea and Suez Canal around Africa due to the already explained extreme situation.

 

If we look at these, what impact could these have on the container market as we move into 2024? As we mentioned 30% of the container trade goes through Suez, so we will focus entirely on this segment as the impact of the Suez Canal deviation on Drybulk and Tankers which have less than 10%, are less severe.

 

Given that approximately 30% of global container trade transits through the Suez Canal, the ongoing disruptions in the Red Sea have the potential to significantly impact the container shipping market in 2024. The decision by major carriers to temporarily halt transits through the Suez Canal has added significant additional distance to shipping routes, potentially prolonging transit times and driving up container shipping costs. The impact of these disruptions is already evident.


The cost of a 40-foot container from Shanghai to Piraeus has surged from approximately $1,200 in early December 2023 to over $6,000 in mid-January 2024, reflecting the increased costs associated with longer transits. These additional costs are further compounded by the EU-ETS emission trading system, which came into effect on January 1, 2024, adding further expenses to shippers.

The extended transit times also strain the availability of empty containers, creating logistical challenges and potentially leading to shortages of goods and delays in receiving shipments. These disruptions could have a ripple effect throughout the supply chain, impacting businesses and consumers alike.

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