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Tankers It’s been a very solid month for crude and product tankers with China noticeably back in big buying mode. Rates for multiple tanker classes are at highs not seen for many months. McQuilling’s prevailing view for the crude tanker markets favours mid-sized tankers over VLCCs in 2024 as major VLCC hubs – Middle East and West Africa – reveal tighter crude balances. McQuilling’s base case 2024 TCEs is $45,900 a day for VLCCs, while aframaxes and suezmaxes outperform at $55,000 a day and $50,200 a day respectively, basis eco tankers without scrubbers. McQuilling calculations amid Red Sea developments reveal a negative impact (-$8,300 a day) on VLCC earnings should Saudi Arabia maximise its East-to-West Pipeline throughput, while aframax TCEs may increase by $42,400 a day from the base case. Turning to product tanker earnings McQuilling projects LR2s to earn $56,500 a day in 2024, basis eco tankers without scrubbers, out-earning MRs by 40% excluding Red Sea impacts. Secondhand values for aframax and LR2 tankers have the most upside over the next two years, McQuilling is forecasting. The Middle East continues to be a vital part of the global oil market, both in terms of production from nations in the region, and a bottleneck in global seaborne oil supply chains. By late February, roughly one in two tankers on routes between Asia and Europe had opted to give the Houthi missiles a miss, adding significant tonne-miles to a sector that is already running at very high utilisation levels. At 12 knots, the journey time for a Jubail-Rotterdam voyage via the Cape of Good Hope increases by 16 days to around 39 days compared with the same route via the Suez. “This is creating greater fleet inefficiency and that will continue to underpin rates in the short-term until owners and charterers deem that the risk on Red Sea transits has lessened,” broker SSY noted in a recent report. Dry Bulk In late January, a Hong Kong court ordered the liquidation of the Evergrande Group, bringing an end to two years of financial instability during which the company struggled to meet its debt obligations. This development underscores concerns about the economic challenges facing China, as the property sector represents about 25-30% of the nation's GDP and approximately a third of the country's domestic steel demand. Despite, or maybe because of the court ruling, broker SSY is constructive on the Chinese steel complex going into this year, contrary to most macroeconomists. For one, the property market correction in China has now been ongoing for nearly four years, which means that the sector is smaller relative to the other sectors driving steel demand - from approximately 40% share of domestic steel demand in 2020 to an estimated 33% in 2023. Secondly, the other sectors — notably auto manufacturing, shipbuilding, infrastructure and manufacturing — showed strong growth throughout 2023 and have the continued support of Chinese policymakers for 2024. Capesizes look strong on paper, with SSY projecting 2024 tonne-mile growth of 3.3% versus a mere 1.3% forecasted fleet growth. Reasons to be bullish going into the Year of the Dragon include the fact that capesize spot rates are at 15-year highs for this time of year “The Atlantic market remains the main driver of such an astonishing yet surprising performance, while the reasons behind the current strength all point to inadequate vessel supply in the western hemisphere,” Breakwave Advisors noted in a recent report, which predicts a spot market that remains strong for a long period of time. Freight futures have already priced in such a scenario, with the next two years now showing above $20,000, a stretch of strength that has not happened since the late 2000s for capesize vessels. The bullish sentiment is also reflected in the current capesize sale and purchase market, something that Shipping Strategy argues can be interpreted as confidence in the freight market outlook for the next few years. “The freight market cycle has reset and is likely to start climbing this year to a peak next year or even in 2025,” states a new report from Shipping Strategy. Finally, Tim Huxley, chairman of Mandarin Shipping, had some useful advice for cape watchers. As the guest speaker at the Hong Kong Shipowners Association annual analyst lunch earlier this month, Huxley told attendees: "The volatility we saw in 2023, particularly in the last few months reflected how finely balanced the dry bulk sector is, particularly 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." Containers The Houthis have saved container shipping’s bottom line for now. In what was supposed to be an annus horribilis for container shipping with more than one newbuild delivering each and every day in 2024, the overcapacity spectre has been shelved thanks to the Red Sea shut-in. The Red Sea crisis sent ocean freight rates through the roof to highs not seen in history bar the pandemic years. However, there are already signs that a plateau has been passed. Emily Stausbøll, a market analyst with Xeneta, commented: “Unlike during covid-19 when disruption continued to wreak havoc, shippers and carriers now know what they are dealing with in terms of ships being diverted around Africa to avoid the Suez Canal. Rates are still elevated so the impact of this crisis is far from over - and the situation can still change at any moment - but perhaps some semblance of order has been restored.” Avoiding the Red Sea probably absorbs an additional 5% of global shipping capacity, more or less, according to HSBC. However, it’s important to bear in mind utilisation was hovering around 70% last year, according to estimates from DNB Markets. That is well below levels in recent years which have consistently been over 80%. Maersk expects global container volumes to grow 2.5%-4.5% in 2024. But new container shipping equal to about 11% of the current fleet will enter the seas, according to DNB. Despite the boost from the crisis in the Red Sea, around twice as many new vessels are being delivered to the market compared to the extra capacity required to send ships around Africa, according to analysis from Maersk. More bullish are analysts at Jefferies who reckon fleet utilisation has jumped 10% as a result of the diversions. Prior to the re-routing Jefferies had estimated fleet utilisation at 79% and projected that to fall to 76% by the end of 2024. Utilisation is now estimated by Jefferies at 90% and, even with record newbuilding deliveries in 2024, utilisation would ease to what it regards as a still healthy 85% by the end of the year should diversions persist.

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