Danish bank forecasts 10% drop in container freight rates in 2009

Danish bank forecasts 10% drop in container freight rates in 2009 A Danish shipping bank said it expects containership freight rates — excluding bunker charges — to decline by more than 10 percent in 2009.
   “Freight rates continue to decline as supply outpaces demand. Secondhand prices are declining accordingly, but newbuilding prices remain high. Still, ship owners’ appetite for newbuildings seems almost insatiable. Future demand is expected far from adequate to absorb the entry of new vessels,” explains the mid-year review issued by Danmarks Skibskredit A/S (Danish Ship Finance A/S) this month.
   The report said that adjusted for bunker costs, weighted average head-haul freight rates have reached a five-year low.
   Nominal rates that include fuel charges tell a different story. That is because the cost of bunker fuel increased 52 percent in the first seven month of 2007.
   In the Asia/Europe trade, nominal rates that include bunker charges actually rose 9 percent in the first half of 2008 and stand 17 percent higher than the five-year average.
   In the Asia/North America trade, nominal rates that include bunker charges rose 1.5 percent during the first seven months of 2008 after falling 7 percent in 2007 and 10 percent in 2006, but they now stand 8 percent below the five-year average.
   Looking at the supply and demand situation for containerships, the bank said, “downward market momentum is accelerating,” as the availability of vessels is increasing and period charters are becoming shorter. The bank points to a Howe Robinson report that said average spot fixtures fell from 410 to 330 days in the second quarter of 2008.
   The bank said with head-haul growth for 2008 is expected to average 4 percent and effective supply growth of 11.5 percent, it expects a supply surplus of 7.5 percent.
   The bank said that full 2008 fleet growth is actually expected to be about 16 percent, but said it came up with the 11.5 percent figure after adjusting for potential scrapping.
   It said it assumes ships are not to be scrapped before they are 35 years old, but said if rates plummet, “it seems likely that vessels significantly younger than 35 will be scrapped. Currently 9.6 percent of the fleet is older than 19 years.” The average age of the world fleet is about 11 years.
   The bank said it does not expect a movement by owners to slow steam vessels to sop up a lot of extra capacity.
   “We have not seen further slow steaming in the last six months and do not expect to do so. Owners are concerned that further speed reductions will cause lasting engine damages and that it will not provide the expected savings in bunker costs as bunkers will not be burned as efficiently,” the report said.
   In 2009, it said it expects aggregate head-haul demand to increase 6 percent, citing a forecast by the consulting firm Global Insight. It said European imports are expected to lose momentum in 2009, and that growth in North American imports will be “insufficient to absorb any now-entering tonnage as volumes are still expected below 2007-levels.”
   “We do not see much supporting evidence for a U.S. import recovery in 2009,” the bank said.
   And it said it does not expect China to “take a front seat supporting intra-Asian or even world demand in tandem with Europe and North America.” While Chinese growth has been strong for the past five to 10 years the country’s domestic demand still “represents a modest contributor to economic growth.”
   Despite a somewhat gloomy forecast for the container trade, the bank said its own business is strong. Friday it reported net income and fee income was 395.5 Danish krone ($78.2 million) in the first half of 2008, up nearly 20 percent from last year.
   The bank lends to various sectors of the shipping market, including bulkers and tankers. As a whole it said, “The shipping market remains strong and shipping companies are generally in a financially favorable position” and that credit quality in its loan portfolio is quite high. The bank said it would further diversify its portfolio by including different sorts of vessels including cruise ships, liquefied natural gas and semi-submersible vessels used for oil drilling.
   To see the bank’s full midyear forecast go to: www.shipfinance.dk/Default.aspx?ID=1540