Weekly Market Review

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1 25/4/2014 2/5/2014 9/5/ /5/ /5/ /5/2014 6/6/ /6/ /6/ /6/2014 4/7/2014 Week 27 1,500 1,400 1,300 1,200 1,100 1, Source: Clarksons Key Shipping Indicators SCFI Shanghai-Europe Freight Rate $/TEU Shanghai-Europe Containerised Freight Index ($/TEU) W/E 5 th July ,346 W/E 4 th July ,416 Average % change Y-O-Y: +5.2% Container Market: Box volumes at North European ports to maintain growth Box traffic in Northern Europe s six largest ports will rise by 6.9% in the latter half of 2014, Lloyd s List has reported. According to the latest Global Port tracker report published by Hackett Associates and the Institute of Shipping Economics and Logistics, imports will increase 5.1% and exports 2.5% throughout Europe during the six-month period. Total container volumes throughout 2014 are expected to increase, with imports estimated to expand by 4.3% to 20.5m TEU and exports by 4.8% to 20.6m TEU. It is expected that volumes will fluctuate with regard to region, as a market-share war happening between Hamburg, Rotterdam and Antwerp is likely to continue for the rest of this year. Ben Hackett on behalf of Hackett Associates warned: As the European Central Bank continues with its extremely low interest rate policy, the demand side of the equation remains firmly in the hands of the consumer boosted in confidence with solid growth in the UK and Germany. Dry Bulk Market: Doubling of Capesize rates set to squeeze miners 380cst bunker prices, Rotterdam ($/Tonne) W/E 5 th July W/E 4 th July Average % change Y-O-Y: -0.7% Baltic Exchange Dry Index W/E 5 th July ,137 W/E 4 th July Average % change Y-O-Y: -22.5% Tight tonnage and record supplies of iron ore for shipment look set to cause a doubling of Capesize rates to $28,000 in 2015, according to a consensus of shipping analysts, with fund manager Liberum Capital claiming that mining companies will feel the squeeze on margins. Mining Weekly reported that steadily declining investment in newbuild vessels in the dry bulk market, combined with record growth in iron ore production will result in a shortage of tonnage over the coming 12 months, leading to the surge in Capesize rates. Iron ore miners followed by coal miners are expected to bear the brunt of this freight inflation, with downgrades of the 2015 consensus 1 P a g e

2 earnings per share (EPS) for Rio Tinto (-13%), Anglo American (-9%) and BHP Billiton (-9%). Liberum further projected an 81% rate increase for the Panamax class, 66% increase for Supramax and 57% increase for Handysize vessels. Tanker Market: US Shale to drive LPG market and tanker demand Record shipments of liquefied petroleum gas (LPG) from the US, resulting from increasing shale oil production, is set to cause rising tanker demand, Bloomberg has reported. US exports of LPG used primarily for cooking, heating and in the petrochemicals industry as a feedstock reached record levels of 506,000 bpd during April, according to the Energy Information Administration (EIA), as production has gradually risen in response to higher oil prices and improved techniques for extraction of gas trapped in shale rock. Consequently, the demand for VLGC s (very large gas carriers) hauling LPG has surged: the cost of shipping one million tonnes of LPG from the Middle East to Japan has risen by two-thirds over the last year. Commenting on this trend, Paris Kassidokostas-Latsis, director at Latsco Shipping said: We are very optimistic on further growth of demand for LPG ships, especially from the U.S. on the back of shale, adding The long-term fundamentals are strong for the products market in general. In response to the gradual rise in demand, the LPGhauling fleet is set to increase by 50% in the coming two years on the back of increasing newbuild orders, however Kassidokostas-Latsis said: In any other sector that would be a red flag, but these new ships will be absorbed by extremely buoyant export growth, primarily from the U.S. Short Sea Market: Weekly update Activity in the European short sea bulk market stood soft/steady last week, according to the latest report from H.C. Shipping & Chartering. Freight rates continued to decline in the marketplace, coming ever closer to the level at which they become unmanageable for shipowners. It was reported that many owners have moved beyond off-setting loss making vessels with the voyages of better performing ones, to where simply keeping the vessels actively trading is the goal whether through shareholder pressure or in an attempt to appear to be weathering the adverse market conditions. On a positive note for shipowners, a number of grain fixtures were recorded for the week, as the market looks forward to what is hoped to be a bumper harvest later in the summer. However in the short term, the options will continue to favour those charterers who bring firm cargo into the market, as an abundance of open tonnage remains in most sectors. Ports: Congestion at European ports set to continue Rising congestions at North European ports is set to continue as vessel sharing alliances develop, the latest research from Drewry indicates. A number of factors have led to the current congestion, particularly at Rotterdam and Hamburg. Upgrading of existing facilities and larger volume surges resulting from the increased average size of box ships have both placed constraints on terminal capacity, however Drewry note that the recent decline in the schedule reliability of carriers has been key: on time port calls for all carriers on the Asia-Europe lane have dropped from a high of 83% in mid-2012 to just 51% during January-March this year. A leading cause of declining reliability has been the implementation and 2 P a g e

3 expansion of vessel sharing alliances, which have seen vessels shuffled around networks. The response of carriers to congestion at certain ports has been to either move or cancel some calls, with congestion surcharges even being touted. At Hamburg, congestion which extends to trucking and rail to and from the port has led to the G6 alliance announcing its intention to move a call from Hamburg to Bremerhaven, while Team Lines have signalled the possibility of omitting calls or even introducing congestion surcharges at Hamburg and Rotterdam, following delays of up to 48 hours. According to Drewry, the development of alliances and their steady state reliability performance remains the key variable for future port congestion. 3 P a g e

4 25/4/2014 2/5/2014 9/5/ /5/ /5/ /5/2014 6/6/ /6/ /6/ /6/2014 4/7/2014 USD Week Source: OPEC Key Economic Indicators OPEC Basket Price OPEC Basket Price W/E 5 th July W/E 4 th July Average % change Y-O-Y: +6.4% Exchange Rates /US$ W/E 5 th July W/E 4 th July Average % change Y-O-Y: +5.2% /UK W/E 5 th July W/E 4 th July Average % change Y-O-Y: -7.0% Irish Economy: GDP up 2.7% in Qtr 1 Based on preliminary estimations from the CSO Ireland s GDP stood at 2.7% for the first quarter of 2014, indicating a rise of 0.2% from last year. The main driving force behind this increase was a rise of 1.8% in Irish exports. Ireland's debt-to-gdp ratio now stands at 116% while its deficit stands at 6.7% of GDP in Previous estimates were 123.7% and 7.2%. In terms of output, Industry, distribution, transport, software and communications all recorded increases in volume in the first quarter, while public administration, defence, agriculture, forestry and fishing declined. The domestic economy remained inert as personal consumption declined by a marginal 0.1% from the previous three months. Merrion economist Alan McQuaid noted that An increase of 3% plus [for 2014] looks on the cards which should significantly ease the burden on the level of fiscal austerity required in the October Budget, especially as sizeable upward revisions to nominal GDP have reduced Ireland s Debt/GDP ratio figures. Irish Economy: Manufacturing expands The latest Investec Manufacturing Purchasing Managers Index (PMI) for the month of June saw Irish manufacturing orders hit their highest level in three years, as the sector continued its more than year-long expansion. The PMI recorded 55.3 pts in June, an increase of 0.3 pts from May. The sub index for new orders rose from 55.6 pts in May to 58.7 pts in June, which represented the highest level since February Despite declining from a 15 year high in May, the expansion of the manufacturing industry has sustained high employment rates. Investec Ireland chief economist Philip O'Sullivan said "The sharp increase in new orders was attributed to improving economic conditions and higher demand from abroad". "Given the improving economic 4 P a g e

5 conditions at home and abroad and manufacturers' own confidence, the outlook for the rest of the year looks bright," O Sullivan concluded. Eurozone: Business growth at slowest in six months Concerns have risen as firms in the Euro zone as a whole have experienced a slowdown of business growth. In June, firms expanded at the slowest rate in six months. Germany and France, the Euro zone s biggest economies have seen business activity slow down and in France s case decrease. The service industry is the biggest affected. Service providers have been continually cutting prices for the last three years to stimulate growth but in June, with inflation at just 0.5%, this has not been the case. The ECB is unlikely to take policy action after cutting interest rates to record lows last months. It instead hopes that banks will begin to lend more freely to businesses, particularly SMEs. This is in line with the PMI (Purchasing Managers Index) for the Eurozone's service industry which fell to 52.8 pts from 53.2 pts. In Britain however, business growth in the services industry has expanded steadily. This suggests that the British economy continued to grow in the first half of 2014 and could lead to an increase in interest rates this year. Global Economy: Second quarter ends on a high The global economy ended the second quarter strongly, with growth in output and new orders accelerating to a three-year high. The JP Morgan Global PMI, an all-industry output index, rose to 55.4 pts in June, up from May s 54.2 pts and the highest reading since February Based on the average index values during the second quarter, global GDP is currently rising at an annual rate of 3%, up from the first quarter reading of 2.3%. Growth also notably broadened out, with a resumption of growth in Asia accompanying strong performance in advanced economies, particularly the UK and US. Looking towards the remainder of 2014, David Hensley, a director at JP Morgan said: Gains in the levels of the new orders and employment indices suggest that the underlying trend in global economic conditions remains solid moving forward, pointing to above trend growth of global GDP in the second half of the year. US Economy: Record exports narrow trade deficit A record high level of exports in May caused the US trade deficit to narrow more than expected, signalling that the negative effect of trade on second quarter growth could be less than earlier forecast. Exports for the month of May rose 1% to a record high of $195.5 billion, boosted by the highest recorded monthly exports of automobiles, parts & engines and consumer goods, according to official figures from the Department of Commerce. On the import side, figures showed a record high level of non-petroleum imports, suggesting a rise in domestic demand and stronger second quarter growth. Petroleum imports however fell, with the net result being a 0.3% decline in overall imports to $239.8 billion. As a result, the US trade balance for May narrowed by 5.6% to $44.4 billion, lower than analysts expectations of $45.0 billion. Panama Economy: Lure of canal to boost medium term growth Panama s economy could grow as much as 7% annually up to 2020 as the expanded Panama Canal is 5 P a g e

6 expected to attract firms servicing Asia-US-Europe trade. The incoming Economy & Finance Minister, Dulcidio de la Guardia said: The canal is like a road and we re currently adding a third lane to it that is wider and which will allow Panama to further position itself as a logistics hub servicing new trade routes. While mining, tourism and financial services will remain the mainstays of growth in the future, logistics companies are projected to see a rise in demand when the new set of locks open in early Currencies: Euro at 22-month low against sterling Impressive UK construction growth in June adding to the view of a strengthening economy caused the pound sterling to rise to a 22-month high against the euro. Markit s UK construction PMI rose to 62.6 pts for June, up from 60 pts in May and signalling a continuation of the more than year long expansion in the sector. A five-year low unemployment rate and soaring house prices further strengthened the pound, while the release of lacklustre manufacturing and employment figures for the Eurozone saw the pound appreciate to a daily average of pence per euro on Friday, its highest value since September Michael Sneyd, a foreign-exchange strategist at BNP Paribas said: We continue to favour euro-sterling lower Data divergence between the UK and the euro area has been very supportive of this view. The divergence of data refers to the Bank of England hinting that their next policy move will be an interest rate hike, while the European Central Bank continues to reaffirm that rates will remain low for some time to come. We welcome your feedback, comments and contributions. Fergal Curtin Shipping Market Analyst Fergal.curtin@imdo.ie Information Sources: - BBC - Bloomberg - Business World - CSO - Drewry - H.C. Shipping & Chartering - Irish Examiner - Irish Independent - Irish Times - Lloyd s List - Markit Economics - Mining Weekly - Reuters - RTE 6 P a g e