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HANSA 06-2022

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MÄRKTE | MARKETS Container market poised for another surge Freight rates appear to have bottomed out as China’s export engine revs up again. Analysts and liner companies alike expect volumes to surge in the near term. By Michael Hollmann Sentiment in container shipping is picking up once more at the end of May with a stabilisation and tentative recovery of freight rates as the lockdown in Shanghai starts getting lifted. The plan set out by the authorities calls for a ramp-up of public life and economic activities from 1 June, with export liftings expected to increase quickly over the coming weeks. Loadings at China’s biggest port had been constrained for about two months chiefly due to production outages and restrictions on hinterland cargo transfers while some volumes were shifted to the port of Ningbo in the south or as far away as Qingdao, according to freight forwarders. The outage coincided with the seasonal lull in trades after Chinese New Year and is likely to have pushed out the seasonal recovery starting with the intra- Asia trades from May. In view of rising trade expectations the fall in container spot rates slowed down and came to a halt as illustrated by the first marginal rise of the Shanghai Containerized Freight Index (SCFI) on 20 May after circa four months of erosion. Previously, especially the westbound trades out of the Far East had seen quite a price correction, with spot freights for liftings from Shanghai to North Europe slipping by more than one fourth since January and those for shipments to the East Coast of South America even more. Currently, SCFI index rates for loadings to Europe and the Mediterranean have steadied at around 5,800 $/ TEU and 6,600 $/ TEU. By contrast, rates for transpacific business to North America recorded only modest falls over the past months because of the greater backlog of cargoes and severe congestion on this route. Clemens Schapeler, Head of Ocean Market Intelligence with logistics consultant Transporeon, pointed out that long-term (contract) rates had not followed spot rates on their way down recently, instead remaining stable. This shows that the »expectation of a temporary rebound« is already embedded in the market. »Carriers have not changed their internal capacity split, still restricting the amount of capacity dedicated to contracts, while shippers are not (yet) willing to adjust volume forecasts downward,« Schapeler explained. Transporeon seems to rate the impact of the Russia/Ukraine war higher than some other analysts, suggesting that the closure of ports, sanctions and inflation led to a measurable loss of cargo int the Asia/ Europe trade. Around 10 % of westbound volumes were bound for European Russia or Ukraine before the war, it says. However, the forthcoming cargo peak season in Europe and North America should be strong enough to offset this loss of volume. Hence, Schapeler warned shippers that spot rates will rebound in the coming weeks and that it would take at least until the end of 2022 for freight rates to go into structural decline again. This could even be delayed into 2023 if contract negotiations for dockers on the US west coast hit a snag and terminal processes are slowed down. Also, there is a chance that consumer VIEWPOINT Interest rate hikes call for hedging Capital costs for shipowners go up as the Federal Reserve continues to hike interest rates. Oliver Faak, Partner & Head of Europe at advisory and fund manager Transport Capital, says it’s about time to consider fixed instead of floating rate loans in ship financing. War, sanctions and inflation are causing turmoil in the world economy. Downside risks for shipping have increased. Does it impact the ship finance market? Oliver Faak: Supply of debt capital for shipping is surprisingly stable and even expanding. There are still new debt/ credit funds entering the market and adding to competition. As a result, we have seen an erosion in interest margins for shipping loans, which are down to 250 b.p. in some cases, along with a relaxation in terms & conditions, covenants etc. No doubt, this is a comfortable situation for shipowners as most of them will assure you that credit availability is not an issue at all. However, we believe the situation is about to turn at some point soon as banks won’t be able to maintain this kind of risk appetite. On the whole, the implications of the war and sanctions against Russia on ship financing were marginal so far. All we saw was the insolvency of Amsterdam Trade Bank and some isolated cases of Russian involvement in projects that look manageable. Still, there is a potential for the conflict to escalate further. For me the worst scenario from a ship finance perspective would be if China got dragged into it and afflicted by sanctions against its finance sector including ship leasing. Oliver Faak Partner & Head of Europe, Transport Capital Dollar interest rates are rising faster than expected now, with the Fed hiking its prime rate to 0.75–1.0 %. Should shipowners be alarmed about rising capex? How should they react? © Transport Capital 10 HANSA – International Maritime Journal 06 | 2022

Orders & Sales – Container Ships New Orders – Activity in the newbuilding market has recently declined – no wonder it you look at the past order spree and the tight yard capacity. Currently the order book amounts to 27 % of the active fleet in service, 6.8 mill. TEU are booked. Shipowner Costamare, however, is taking the opposite way: After 2 x 12,690 TEU, now orders for 4 x 15,000 TEU and another 2 x 12,690 TEU were cancelled. Analysts suspect disputes with the unnamed shipyard in Asia as the reason for the failure of the projects. Long-term charter contracts are said to have been in place for all the ships. Secondhand Sales – That the big wave of sales has ebbed away somewhat does not indicate less interest, analysts say. Several players still think it is »cheaper« to buy than to ink long-term charter. Many negotiations are said to be ongoing. In recent weeks, MSC has again been among the buyers, taking over the »Norderoog« and »Suderoog« from Briese in Leer, among others. Demolition Sales – Even if the uncertainty in the market is currently increasing rather than decreasing, the situation does not (yet) have an influence on scrapping activities. In this sense (again and again): »No demo news«. spending on goods and thus container import growth may remained elevated (versus services) for some more time if energy inflation cools down again. Meanwhile, UK shipping consultant Drewry predicts a major backlog of cargo resulting from the Shanghai lockdown and adding fire to the peak season. 260,000 TEU of export cargo will have to be added on top of normal seasonal growth. Latest trends in the charter and the S&P market for container ships indicate that the liner companies clearly expect volumes to surge in the near term. Chartering demand reportedly picked up again after several quiet weeks. Sales activity also increased with a number of notable deals on 2,500 TEU and on 1,700/1,800 TEU tonnage. Container ship t / c market 4000 3500 3000 2500 21.12.21 MÄRKTE | MARKETS COMPASS ConTex 25.05.22 Month on Month 3,120 -2.9 % Container freight market WCI Shanghai-Rotterdam WCI Shanghai-Los Angeles 9,793 $ /FEU 8,700 $ /FEU Dry cargo / Bulk Baltic Dry Index 3,127 Time charter averages / spot: $ /d Capesize 5TC average 33,069 Panamax 5TC average (82k) 28,965 Supramax 10TC average (58k) 31,168 Handysize 7TC average (38k) 29,799 Forward / ffa front month (Jun’ 22): $ /d Capesize 180k 36,107 Panamax 82k 28,768 MPP - 5.5 % - 0.7 % +29.0 % +79.1 % +10.8 % +3.6 % +5.2 % +46.1 % + 6.1 % May '22 22,577 $ Faak: The Fed is expected to lift its key rate to 2.5 %, perhaps even to 2.75–3.0 %, by the end of the year. For sure, this can have a major impact on debt service levels. It is something owners should be keenly aware of in order to prevent getting squeezed if at the same time charter markets go into decline. I believe it is time for owners to consider a switch from traditional floating to fixed-rate loan agreements when refinancing ships. Currently, the premium for fixed-rate shipping loans, respectively interest rate hedging, is still pretty high at around 130 b.p. versus floating. But taking into consideration aforementioned Fed interest rate hikes at the short end of the interest rate curve, the overall yield curve could turn into a flat if not an inverted mode. Therefore, hedging could offer good value in the face of more upcoming interest hikes and a more challenging economic environment. How about the growing use of »green loans« linked to the performance on emission savings? Can it help owners contain capital costs? Faak: »Green« projects are generally the more attractive propositions for investors. From a debt perspective, it is a different story. Amid all the hype about green loans people tend to overlook that the financial benefits are at best minimal. The margin grid, i.e. the benefit for maximum performance on emission savings for a financed fleet, is as little as 10 b.p. With all respect, that’s a joke when you compare it with the margin spread linked to financial covenants of 60-100 b.p. However, this differential is probably justified because interest margins are there to cover default risks which depend on the financial performance. There is no logical link between default risk and environmental factors, at least not a direct one. mph May '21 8,984 $ 12,500 tdw MPP/HL »F-Type« vessel for a 6–12 months TC Tankers Baltic Dirty Tanker Index Baltic Clean Tanker Index 1,119 1,491 - 9.3 % + 23.5 % Shortsea / Coaster Norbroker 3,500 dwt earnings est. € HC Shortsea Index BMTI/EUSSIX Inter-Black Sea ($/t) 4,700 34.06 67.92 - 21.6 % + 0.2 % + 63.6 % Norbroker: spot t/c equivalent assessment basis round voyage North Sea/Baltic; HC Shipping & Chartering index tracking spot freights on 5 intra-European routes; BMTI/EUSSIX: 3,000 t Odessa to Sea of Marmara Bunkers VLSFO 0.5 Rotterdam $ /t MGO Rotterdam $ /t TMI – Toepfer's Multipurpose Index Forward / Swap price Q3/22 VLSFO 0.5 Rotterdam $ /t 832 1,107 735 - 5.0 % - 14.8 % +9.1 % Data per 25.05.2022, month-on-month HANSA – International Maritime Journal 06 | 2022 11

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