This Week's Snapshot on the economic and shipping environment

ECONOMIC ENVIRONMENT

   By Golden Destiny 

The second week of New Year ends with positive sentiment for the world economic growth with the World Bank revising upward its estimation for 2014. The new released World Bank's Global Economic Prospects report projects that the global GDP growth would firm from 2.4% in 2013 to 3.2% this year, stabilizing at 3.4% and 3.5% in 2015 and 2016 respectively as the firming of growth in developing countries is being bolstered by acceleration in high income countries and continued strong growth in China.

However, growth prospects remain vulnerable to headwinds from rising global interest rates and potential volatility in capital flows, as the United S

tates Federal Reserve Bank begins withdrawing its massive monetary stimulus.

"Growth appears to be strengthening in both high-income and developing countries, but downside risks continue to threaten the global economic recovery," said World Bank Group President Jim Yong Kim. The report also projects global trade to growth from an estimated 3.1% in 2013 to 4.6% this year and 5.1% in each of 2015 and 2016.

·        For developing economies, the growth is predicted to pick up from 4.8% in 2013 to a slower than previously expected 5.3% this year and 5.5% in 2015 and 5.7% in 2016. The pace of growth is about 2.2% points lower than the boom period of 2003-2007, but it remains above the growth improvement recorded in the 1980s and early 1990s.

 

·        Among developing economies, China, India and Angola are estimated to over perform with 7.7%, 6.2% and 8% growth respectively.

 

·        For high income economies, the growth would enlarge from 1.3% in 2013 to 2.2% this year, stabilizing at 2.4% for each of 2015 and 2016. Amongst high-income economies, the recovery is most advanced in the US, with GDP expanding for 10 consecutive quarters.

 

·        US economy is estimated to grow by 2.8% this year, from 1.8% in 2013, firming to 2.9% and 3% in 2015 and 2016 respectively.

 

·        For euro area, after two years of contraction, the growth is projected to be 1.1% this year and 1.4%-1.5% in 2015 and 2016 each respectively.

 

Deutsche Bank holds also promising outlook for China's economic growth and its dynamic role on the world economy with the Bank estimating 8.6% GDP growth in 2014 for the world's second largest economy.

The International Monetary Fund (IMF) said that Asia is likely to remain the world's economic engine despite increasing volatility in international financial markets. In its latest update on Regional Economic Outlook, the IMF said that they are "essentially optimistic that despite the more complex global environment, Asia will remain a growth leader with emerging Asia growing above 6% in 2013 and next year."

The IMF said that it expects Asia's economy to grow at 5.3 percent in 2014, up from 5.1% in 2013. In a report also released last month, the Organization of Economic Cooperation and Development (OECD) said that economic outlook for Southeast Asia, China and India remains robust over the medium term, from a steady rise in domestic demand. The OECD said that growth in emerging Asia is projected to moderate gradually but stay resilient over the 2014-2018 period, with an average annual growth of 6.9%, albeit less than the 8.6% recorded before the global financial crisis in 2007.

SHIPPING

Moore Stephens believes that the shipping industry's fortunes should be noticeably improved by 2015 if it maintains the recovery recorded last year. However, the prospects for recovery may still be fragile if the industry fails to meet a number of challenges, including tighter regulation and increased operating costs. It said that over the next twelve months, we can expect to see more shipping money raised in the public and private equity markets and may even see more non-shipping money invested in shipping. Freight rates are likely to continue their positive performance as vessel supply and demand levels should come closed into alignment with an upward trend also in vessel values.

Despite the recent retreat in dry bulk rates, there are no increased worries for the firm stability of the segment as China's holds its dynamic role on the tonnage demand growth. During December, Chinese imports recorded a 8.3% year-on-year increase, according to data from the General Administration of Customs indicating that domestic demand would maintain the world economic expansion.

In the tanker market, VLCC freight market momentum showed the first signs of fall compared with the unexpected meaningful upward movement in suezmax and aframax spot rates for the first time since 2009.

The upcoming trends in freight market have led vessel values to new highs. According to the assessments from Baltic Exchange for 5yrs old vessels, asset prices for capesize bulkers has now approached levels of around $40,5mil, which is up by 12.5% year-on-year, while VLCC asset values reached the levels of around $60mil, for the first time since October 2011.

In the dry market, the lack of demand for capesize vessels has dropped the BDI to levels of less than 1,500 points with Chinese iron ore fixture activity recording low levels in the first week of the New Year. According to Commodore Research, only 15 vessels were chartered to haul iron last week, 8 less than chartered during the last full chartering week ending December 20^th. Chinese iron ore fixture activity is currently under pressure due to the upcoming Chinese New Year and the rise in port stockpiles. Chinese iron ore port stockpiles have been on a steady increase for fourteen consecutive weeks and are now standing at approximately 89.8 million tons. However, expectations for a rebound in the short term are still strong as market fundamentals (vessel supply growth and demand) seem to be the most supportive in the last five years.

 

Capesize rates fell on the beginning of the week to less than $15,000/day, 65% down from the end of 2013, but vessel fleet growth is poised to be low and lifts hopes for an early rebound. According to data from China Iron & Steel Association, China imported a total 820 million tonnes of iron ore in 2013, up by 10% from 2012 levels, when arrivals rose 8.43% to 743.55 million tonnes. "Iron ore imports may surge by another 100 million tonnes this year, as increased lower-cost supplies from overseas will replace expensive domestic ore and China's steel output will keep growing," said Du Hui, an analyst with Qilu Securities in Shanghai. The Metallurgical Industry Planning and Research Institute, an industry group that provides consultancy for government policies, said last month that imports were expected to climb to 850 million tonnes this year.

 

In the panamax segment, rates fell to less than $13,000/day,down by 13% from the end of 2013, while prospects for Chinese thermal fixture activity are still firm as Qinhuangdao coal port stockpiles remain low and peak winter electricity demand season in China is underway. Supramax rates are hovering in close proximity with panama, while handysize keep resistance at levels above $10,000/day. Trading activity for grain will be supportive this year from small vessel sizes with the USDA now predicting that 341.7 million tons of grain will be exported during 2013-2014, which is 1.4 million tons more than it predicted in its previous forecast released in December.

On Friday January 17^th, BDI closed at 1421 points, down by 6% from last week's closing and up by 65% from a similar week closing in 2013, when it was 862 points. All dry indices closed in red and capesize/panamax category recorded the largest decrease. BCI is down by 4% week-on-week, BPI is down 4% week-on-week, BSI is down 2% week-on-week, BHSI is down 2% week-on-week.

 

Capesizes are currently earning $15,132/day, down by $2,320/day from last week's closing and panamaxes are earning $12,470/day, down by $451/day from last week's closing. At similar week in 2013, capesizes were earning $6,688/day, while panamaxes were earning $8,131/day. Supramaxes are trading at about $12,186/day, down by $262/day from last week's closing, about 19% lower than capesize and 2% lower than panamax earnings. At similar week in 2013, supramaxes were getting $8,441/day, hovering at 26% higher levels than capesizes versus 19% today's lower levels. Handysizes are trading at about $10,301/day, down by $164/day from last week's closing; when at similar week in 2013 were earning $7,115/day.

 

In the wet market, VLCC spot rates have started to decline from weak fixture activity in the Middle East and West African in the first days of the New Year. The supply of very large crude carriers available in the Middle East is estimated to have increased to 95 vessels (up 16 week-on-week), indicating that a short term upside in VLCC rates is limited. Rates in AG-USG fell to WS32-$8,376/day, down by 5 points from 2013 ending and up by 7.5 points from a similar closing in last year.

 

In AG-SPORE and AG-JPN routes, rates fell to WS42.5-$21,000/day, down by 17.5points from ending in 2013 and at the same levels of similar week's closing in 2013. In WAFR-USG and WAFR-China routes, the decline is softer -not more than 5points down from end 2013 levels with rates falling to WS69-$54,000/day and WS55.6-$37,000/day.

 

In sharp contract with the downward revision in VLCC rates from slowdown in Chinese oil imports, suezmax and aframax vessel categories are recording remarkable rebound due to busier chartering activity and weather delays in some routes.

 

In the suezmax segment, rates keep their upside with fixture activity in the West African market recording last week excessive levels. Rates in WAFR-USAC route climbed to WS122.5-53,000/day, up by 12.5 points from ending in 2013 and up by 60 points from a similar week's closing in 2013. In B.SEA-Med route, rates moved up to WS130-$67,000/day, up by 10 points from end 2013 levels and 62.5 points above from a similar week's closing last year.

 

In the aframax segment, rates are showing remarkable rebound with urgent need of vessel capacity in the Black Sea and Mediterranean market from an increase in refining throughput. Rates in CBS-USG route accelerated to WS260, up by 70 points from end 2013 levels and up by 175 points from a similar week's closing last year. It is worth mentioning that the market has not seen so high levels since the beginning of financial crisis in 2009.

 

In the panamax segment, CBS-USG rates are also excessively high at WS190, up by 25 points from end 2013 levels and 85 points up from a similar week closing in 2013.

 

In contrast with the firm performance of crude rates, MR shows weakens with rates in AG-JPN route falling to WS70 for 75,000dwt vessels, down by 12.5 points from end 2013 levels and 18 points down from a similar week closing in 2013. For 55,000dwt vessels, AG-JPN rates fell to WS90, down by 19 points from end 2013 levels and 25 points less than a similar week's closing of last year.

In the gas market, LNG spot rates give a softer picture outlook from the beginning of the year by falling at around $80,000/day and it seems that would be under further pressure as LNG newbuildings are floating in the market with no secured charter agreements.

 

In terms of demand, Japan's appetite for LNG imports would keep supportive with Japan's Tokyo Electric Power company planning to buy around 2.3 million mt of liquefied natural gas in January, up 7% from its estimated purchase volume of 2.15 million mt in December. Tepco had already estimated to buy 2.2 million mt of LNG in December.

 

In terms of LNG exports, Barclays in its latest Commodities' Research Report estimated that the US will become a net exporter of natural gas by the first half of 2016, largely due to the expected rapid growth of the US liquefied natural gas export industry along with a boost in Mexican pipeline capacity and a drop in domestic demand for Canadian gas. Barclays' 2016 estimate is a full two years ahead of the US Energy Information Administration's estimate that the US will be a net exporter of natural gas beginning in 2018.

 

In its Short-Term Energy Outlook released Tuesday, EIA backed this 2018 prediction, pointing to the expected launch of several proposed US LNG export facilities in fourth-quarter 2015 and growing domestic production, which has replaced Canadian pipeline imports and boosted pipeline exports to Mexico. "EIA expects these trends will continue through 2015," the agency said. "EIA projects net imports of 3.0 Bcf/d in 2014 and 2.5 Bcf/d in 2015, which would be the lowest level since 1986."

 

Barclays predicts that six projects will be operational by 2020: Sabine Pass, Lake Charles Exports, Freeport LNG, Cameron LNG, Dominion Cove Point and Southern LNG Company's Elba Island project. These facilities will turn the US into a top global LNG producer, behind only Qatar, by 2020. "This would bring geopolitical and price diversification to the global LNG markets and re-draw regional LNG shipping trends, sending tankers sailing on longer trade routes," the report said.

 

In the container market, the Shanghai Container Freight Index fell during the second week of New Year to 1168 points from a 2.9% weekly decline in Asia-Europe and 2.5% weekly decline in Asia-Mediterranean rates. The announcement of general rate increases for January lifted the market sentiment to firm levels for the trouble Asia-Europe route from overcapacity issues and remains to be seen if rates would maintain their pace at levels of more than $1,500/TEU.

 

In Asia-Europe, rates are now at $1713/TEU, up by $202/TEU from end 2013 levels and up by $295/TEU from a similar week's closing last year. In Asia-Mediterranean route, rates fell to $1745/TEU, but are up by $175/TEU from end 2013 levels and up by $3589/TEU from a similar week's closing in 2013.

 

In transpacific routes, rates showed a mild upward movement by ending at $1866/FEU for Asia-USWC rates, up by 2.8% week-on-week. Compared with end 2013 levels, Asia-USWC rates are by by $63/FEU, but down by $475/FEU from a similar week's closing last year. In Asia-USEC route, rates ended at $3217/FEU, up by 2.5% week-on-week and up by 3.5% from end 2013 levels. Asia-USEC rates are $308/FEU less than similar week's closing levels in 2013.

In the shipbuilding industry, the new orders placed at Shanghai Waigaoqiao Shipbuilding (SWS) reached a record high of 10.73M dwt, from 54 vessels in 2013, accounting for 11% of global new orders in terms of dwt. The completed newbuilding at the Chinese shipyard totalled 5.66M dwt in 2013, an in-house newspaper of China State Shipbuilding Corporation (CSSC), the parent group of SWS, said. The new orders included 27 6th-generation 180,000dwt capsizes, 10 VLCCs, three 18,000teu containerships, four 83,000m³ VLGCs and 10 other class bulk carriers. In its offshore equipment sector, SWS won orders for a total of six jack-up drilling platforms and four platform supply vessels.

In the shipping finance, Nordea Finland is said to have sold three credit facilities of Oslo-listed tanker operator Eitzen Chemical worth of $230mil at a price of around 84 cents in the dollar. Eitzen Chemical's senior bank loans consist of a $510mil, $265mil and $170mil credit facilities, according to the company's third quarter report. Nordea Finland is the agent bank of three loans. The new holder of Eitzen's bank debt will play a major role in any future restructuring negotiations. In its third-quarter report, which describes itself as "still overleveraged", Eitzen said it was exploring opportunities with its senior lenders to strengthen its balance sheet and raise new equity.

 

In terms of ship financing deals, Diana Shipping is said to have secured and already drawn down an $18mil credit facility with Commonwealth Bank of Australia and the proceeds will be used to finance the acquisition of two panamax bulkers delivered in January 2010 and August 2013.

 

In the capital markets, GasLog Ltd announced its Board of Directors has authorized the Company to make a confidential submission to the United States Securities and Exchange Commission (the "SEC") of a draft registration statement on Form F-1 for an initial public offering of units in a master limited partnership (the "MLP") to be formed to own certain of GasLog's LNG carriers with multi-year charters. The proceeds of the offering would principally be used to reduce indebtedness. Completion of the initial public offering is subject to further Board authorization as well as completion of the SEC review process.

In addition, GasLog announced three vessels acquisitions of 145,000cbm steam powered LNG carriers from BG Group affiliate, Methane Services (MSL), for $468mil. The three vessels are to be chosen from 6 ships built between 2006 and 2007 already managed by GLOG, and be chartered to MSL for six years at $60,000- $ 65,000/day. The transaction is expected to close in Q1/Q2 2014 and the vessels would be financed with a $325.5mil credit facility and bridge loan (~4.6% interest rate), a 8.4mil share equity offering (with a 30day option for 1.26MM additional shares) and as well as a $30mil private placement.

Costamare Inc. announced that it plans to offer its Series C Cumulative Redeemable Perpetual Preferred Stock, par value $0.0001 per share, liquidation preference $25.00 per share (the "Series C Preferred Stock") to the public. In connection with the offering, the Company intends to grant the underwriters a 30-day option to purchase additional shares of the Series C Preferred Stock. Following the offering, the Company intends to file an application to list the Series C Preferred Stock on the New York Stock Exchange. The Company plans to use the net proceeds of the offering for general corporate purposes, including making vessel acquisitions or investments.

Teekay Offshore Partners L.P. announced that it intends to issue minimum NOK 700 million in new senior unsecured bonds in the Norwegian bond market that mature in January 2019 which, at current conversion rates, have an aggregate minimum principal amount equivalent to approximately USD 115 million. The proceeds of the bonds will be used for general partnership purposes.

South Korean Hyundai Merchant Marine announced that the board approved a proposal to raise Won93.1bn ($87.8mil) by disposing of the 2.1mil shares it holds in Shinhan Financial Group, according to an exchange filing. The transaction is due to be finished by July 13^th.