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As 2022 comes to a close, industry stakeholders are looking ahead to what comes next. This year, high inflation rates and Russia's invasion of Ukraine had a significant impact on the shipping industry, which will most likely continue into 2023. The containership market reached all-time highs, generating unheard of returns - but the party is over. Ratings agency Fitch Ratings recently revised its outlook for shipping from neutral to deteriorating, reflecting significantly weaker profits in the container segment due to "normalising" rates. Still, while one sector is in decline, others are thriving. With the impact of Russia's war on Ukraine fundamentally reshaping global trade routes, the tanker market has sprung to life, while, liquefied natural gas (LNG) carriers are the toast of the industry as European countries seek ways to ensure energy security. Containers The global pandemic threw the liner sector into a frenzy that is gradually easing as rates normalise, capacity becomes available, and the number of ships waiting outside of global ports decreases. After two years of pandemic-induced upheaval, gravity-defying charter rates and profitability, the container shipping environment is on a correcting trajectory, with arrows pointing down wherever you look. The grim macroeconomic outlook and massive inflation have dampened consumer spending, muffled trade volumes and cash-rich carriers are aware that their peak profits have passed them by, with most accepting that similar figures are unlikely to be seen again. "The easing of supply chain pressures has led to the near normalisation of container freight rates, which suggests that profits in 2023 will be much weaker than they were over the last three years, when they were supersized," Fitch Ratings noted in its most recent shipping outlook report. London-based valuation platform VesselsValue cautiously predicts that an increasingly muted outlook for economic growth combined with inflationary pressures, fears over a recession and interest rate hikes may take their toll on the market. "The containership sector is set to feel strong headwinds next year and beyond," warns Dr Adam Kent, managing director of UK consultants Maritime Strategies International (MSI) Over the next two years, a tidal wave of new containerships is expected as owners kept placing newbuild orders even as freight rates begin to normalise in 2022. "The fortunes of the containership sector have already changed dramatically, but I believe the weakness will continue, if not intensify next year as a record number of ships is set to deliver into a weakening market," says Burak Cetinok, head of research at brokers Arrow, observing over 2.5m teu of containership capacity entering the market in 2023 - 54% more than the previous peak in containership deliveries in 2015. The following year is expected to apply even more pressure on liners with 2.8m teu set to deliver, although Cetinok notes this figure may change in the coming months due to cancellations or changes to other ship types. According to VesselsValue, the orderbook is currently at 30% of the existing fleet, the highest levels since the peak in 2008. Meanwhile, shipping consultancy Drewry is forecasting liners will idle up to 1.5m teu of tonnage next year, with analysts warning images of boxships in lay-up and scrapping could become commonplace once again. "Scrapping levels are low but we expect this to pick up as the market stabilises after 2022 and decarbonisation regulations come into force," VesselsValue notes. With all this like-mindedness, it’s safe to say the container market is widely expected to cave in next year. "I think the unwinding of the anomalous containership spike will continue, with contracts reset substantially lower and the spot rates remaining under immense pressure," reckons Jonathan Chappell, a shipping analyst with Evercore ISI. Cetinok finds that with exports expected to fall sharply in 2023, container freight rates will be pulled back to pre-covid lows forcing liners to redeliver chartered-in tonnage to owners where they can which will likely put rates under further pressure. Oslo-based box freight rate platform Xeneta has warned that nothing is left to keep spot rates elevated and now a lot is being said on how the liners will manage the expected downturn, with some analysts already pointing to reduced vessel capacity, blank sailings or a descent into a price war and battle for market share. Christian Roeloffs, co-founder and CEO of Container xChange, an online platform for container logistics, reckons there’s a high possibility of an all-out price war. "It doesn’t seem that the capacity restrictions that we have seen in the past two years are due to return, so we’ll just have ample capacity both on the vessel as well as on the container side. With the competitive dynamics in the container shipping and liner industry, I don’t expect especially the big players to hold back, and we do expect prices to come down to almost variable costs," he says. According to Sea-Intelligence the floor is going to be determined by the complex competitive game between the carriers. When will they all – individually – decide that enough is enough? "Given the massive cash piles they all sit on, all it takes is for one or two major carriers to keep pursuing volume and there is – quite literally – no lower limit, as to how far this can go before rates bottom out," the Copenhagen-based liner consultancy said. As for newbuildings, which are still being booked, admittedly at a much lower level, VesselsValue believes prices will generally remain at current or higher levels through the coming year, while post-2023, total ordering activity is forecast to cool off as the appetite for new boxships declines. Tankers So, with the containership market looking bleak after a period of record-breaking earnings, it is time for other sectors to take centre stage. Because of the rush for energy security, fossil fuel shipping on tankers and LNG carriers is returning with a vengeance. The tanker market has finally come to life after a couple of difficult years. The shift in trade patterns caused by sanctions on Russian exports has boosted tonne-miles requirements, with a variety of new long hauls from Russia to China and India replacing shorter ones previously supplied to Europe. "Across the board the wet sectors have rallied in Q4 2022 and although some of the froth driving earnings to their recent highs will dissipate next year the underlying fundamentals suggest there is tangible strength in these markets for some time to come," observes MSI’s Kent. The sector is raking in long-awaited earnings. The strength in the market, lack of newbuildings, and higher long-term contract rates have bumped up prices of older tankers especially those earmarked for lifting Russian crude. The show's stars have been 15-year-old and older aframaxes, which have more than doubled in value. On the product tanker side, time-charter rates have seen the highest level since the heady days of 2008, with rejigged global trade flows soaking up vessel supply. Looking at 2023, the tanker orderbook situation appears to be quite favorable for owners, the lowest it has been since 1985 when compared to the fleet, according to MSI, as a percentage of the fleet, and shipyards have large backlogs of containerships and LNG carriers to build, so virtually no berths are available for the next few years. Given this backdrop, if demand does not crumble, we could be looking at a multi-year upcycle, which the market is well aware of. Fitch Ratings expects demand growth for oil tankers in 2023 to be similar to that in 2022, with this segment having more solid prospects than others. Evercore’s Chappell is also one of the many analysts who place their bets on tankers. "I’d be surprised if this is much out of consensus, but I think the best performing sectors will be tankers, both crude and product. A nearly de minimis orderbook, with depleted inventories, and the ongoing redrawing of the global trade map for the commodity is likely to lengthen tonne-mile demand, stretch utilisation, and keep an elevated floor on spot rates with a parabolic upside potential during times of extreme disruption," he summarises. Cetinok from Arrow remarks that confusion over the EU’s proposal to delay the implementation of its Russian oil price cap plan and the softening global oil demand picture triggered a response from the charterers to hold back some cargoes recently. However, he goes on to say: "While the uncertainties during the transition period may cause further volatility in the short term, the tanker market remains exceptionally firm on the back of a structurally tighter supply-demand balance." VesselsValue analysts also estimate the supply side to be moving in a supportive direction and should help keep the tanker market busy as deliveries are slowing, and capacity is set to become less efficient with the IMO’s limits on CO2 emissions coming into force in 2023. For the UK valuation platform, areas for concern include uncertainty over economic growth and the impact on demand from high energy prices, which could hamper a market rebound to pre covid consumption levels. Arrow’s view is that the recession’s impact will be limited on crude oil and products shipments as global inventories are well below the long-term average levels and need replenishment. "We think lower oil prices as a result of a recession could incentivise restocking and open up arbitrage trades. Fuel oil looks to be an attractive alternative in power generation encouraging gas-to-oil switching as gas and coal prices trade at multi-year highs, says Cetinok adding that with products in short supply and prices high, benchmark refinery margins are expected to remain significantly higher than the long-term average, resulting in higher crude runs over the next 18 months. "Any potential drop in demand due to the recession could be offset by China reopening entirely." Kent estimates that with a 4% year-on-year crude oil trade increase this year, deadweight demand growth when factoring in tonne-miles and other factors was likely doubled, and that overall distances oil barrels move on the water are set to see further increases in 2023, due to continued reshuffling of trade routes. He expects the positivity in oil tankers to also spill over into the chemical tanker sector. "With oil/chemical swing tonnage engaged in oil product shipments, the pure chemical tanker fleet will feel the full force of improving trade across organic and edible oils after a hiatus in growth during 2022." For Cetinok, a combination of strong demand, rising tonne miles across all tanker segments, and slowing supply growth translates into an appealing earnings outlook for tanker owners in an increasingly tight oil market. "We think 2023 will be a very strong year for the tanker sector," he concludes. Tankers are also next year's favorites for Jefferies research analyst Omar Nokta. "Tanker equities performed very strongly in 2022, but we see further upside as the group trades at just 82% of our ending 2022 NAV assessments and only 69% of our ending 2023 forecasts. With stronger balance sheets today and rising free cash flow, we see return of capital as a key theme in 2023," he says. Drewry, meanwhile, is forecasting tonne-mile demand d to increase by 3.5% in 2023, going so far as to suggest that average annual one-year time charter rates for VLCCS may surge by 30-35% next year. Bulkers The dry bulk shipping market suffered a major slump in Q3 this year and faces significant headwinds in the short-term, as the slowdown in the western economies intensifies and China faces a volatile period phasing out its zero-covid policy. "Over the course of 2023 dry bulk sector will continue to feel the impact of unwinding trading inefficiencies coupled with stagnant trade growth at best," advises Kent from MSI. Fitch Ratings expects dry bulk volumes likely to be almost flat as key factors that are affecting demand will remain in place in 2023, despite some moderation in their intensity. "Demand for iron ore volumes will suffer from lower steel production in China due to continuing lockdowns and the real estate market’s weakness," it said. The report stated further that despite longer alternative routes leading to higher tonne-miles for coal transportation, increased land-based coal imports to China will offset this benefit, highlighting also that demand for grains will be affected by high prices and disruptions to Black Sea trade flows. Arrow’s Cetinok tells Splash Extra that 2023 will likely be "a year of two halves" for the bulker market with the first six months marred by slowing consumption and investments in the west and volatile Chinese demand. "The second half should see demand bottoming out and then rebound as China fully reopens and boosts investments and consumption, and the West slows its rate hikes and then reverses course," he predicts. Analysts at VesselsValue also expect a rebound once the lockdowns end and the pledged stimulus packages from the Chinese government begin to take effect. As per Kent, a positive for bulkers, unlike containers, will be minimal fleet increases, with forecasted scrapping totals helping to partially offset new deliveries. The supply side is looking up also, according to VesselsValue, noting: “Newbuilding orders are expected to fall due to concerns over fuel insecurity, high newbuilding prices and increased slow steaming to meet new IMO regulations coming into effect in 2023 may also encourage the scrapping of less efficient vessels." An increase in dry bulk newbuilding orders is predicted between 2023 and 2024, with a potential slowdown in 2025, as new vessels are delivered into a market that is no longer maintaining the growth rate of the covid recovery. Arrow expects that on average, next year should be a decent year for bulkers, but with the recovery skewed towards the later part of the year. "In the near term, however, headwinds will persist," Cetinok insists. "We see firmer dry bulk rates in the coming quarters and expect the equities to perform strongly in 2023," Nokta says – pointing to China as it moves away from its zero-covid policy, which is likely to stimulate economic and industrial activity. LNG Liquified natural gas (LNG) carriers have probably been the hottest ticket in town this year. Russia's invasion of Ukraine has pushed energy security to the top of the priority list, with Europe scrambling to find alternative supplies to replace piped Russian gas. Spot rates for LNG carriers rose to historic highs, flirting with the half a million per day mark, only to recently correct to nearly $200,000, while time-charter rates surpassed $200,000 per day, the highest on record. Newbuild prices continue to rise, reaching $250m per vessel, but orders continue to flow, with more than 300 ships on the orderbook. Demand for LNG imports has intensified after the ruptures on the key Nord Stream pipeline system quashed any prospect of Russia turning its gas taps back on. This has forced dozens of countries in Europe to turn to floating LNG terminals, or FSRUs. LNG shipping is expected to become an important component of the energy transportation matrix with the new supply diversification and increased self-reliance, as long as the shore-side infrastructure can keep up. “While LNG spot rates have eased in recent weeks from their all-time highs, long-term charter demand remains robust which supports asset values and long-term earnings visibility,” notes Nokta from Jefferies. LPG According to VesselsValue, VLGC shipping demand is expected to be supported by continued firm US export growth, and stress on Panama Canal transits this winter. "Propane remains an attractive feedstock for European and Asian ethylene producers and despite a cloudy economic outlook, shipping demand is likely to keep pace with fleet growth even through 2023 where we could see periods of elevated earnings. In 2024, we expect softer demand growth and a more balanced market." The mid-sized gas carrier fleet is set for a period of considerable fleet expansion between 2023-2024. Earnings are likely to weaken in the second half 2023, despite firm demand growth in both the ammonia and LPG trades. For the smaller gas vessels covering both LPG and petrochemicals, a weaker economic growth scenario for 2022-2023 is likely to drag down the market sentiment despite a very moderate orderbook. The market may turn positive again in 2024-2025. Nokta from Jefferies has this to say on LPG prospects: "The LPG segment has performed very strongly and VLGC rates are currently hovering at multi-year highs on strong export activity out of both the US and Middle East markets. While newbuilding capacity starts to deliver meaningfully in 2023, wide price dislocations and arbitrages are likely to support rates at higher than historical norms." In terms of the marine market which will see the best relative gains in 2023, MSI awards this accolade to sectors in the offshore market. “High oil prices and energy security concerns have fuelled a new oil and gas upcycle. Drilling activity is set to continue to improve next year alongside fixed and floating platform activity. Although earnings and values across offshore asset classes have recently come off the floor, there remains headroom to see significant improvements in 2023 as the market continues to tighten,” says Kent.

Which sector will perform best in 2023

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