Russbroker Caribbean market review

A stable shipping market against an uncertain economic background

Container Market

Globally charter rates for all container ship sizes up to 2,500 TEU peaked in late September/early October and have since follow a sideways path. This positive development had to a very large degree been driven by the installation of scrubbers which takes a substantial number of ships out of the market for about one to two months at a time. By the middle of December for example a total capacity of over one million TEU was temporarily not available due to yard stays.

The segment of 2,500 TEU constitutes, with over 100 ships, the largest category of ships trading in Caribbean/Americas related trades. For Europe to Americas trades, charterers employ almost exclusively high reefer ships of at least 500 plugs. For intra Caribbean/US Gulf, ECSA or WCSA trade about two thirds of the ships are of high reefer specification.

The surplus tonnage which had built up in the Atlantic during the summer due to several Transatlantic service up-sizings had largely been absorbed by the end of the year – either in new European services or by ballasting to the Asian trading area. As a consequence, charter rates for 2,500 TEU ships in the Caribbean recovered a bit and reached USD 10,000 levels again after several ships had to fix low USD 9,000 rates during September and October.

Despite the improving tonnage supply and demand situation, high reefer ships were still barely able to achieve a premium rate compared to standard 2,500 TEU ships and not all ships were able to secure new business with one ship for example having been idle for eight weeks and counting.

About 45 vessels in the 1,700 TEU size range are currently trading in the Americas, mainly in intra Caribbean/US Gulf and WCSA services. This size category proved to be the top performer during the last couple of months. Relatively scarce supply kept charter rates at levels around USD 10,000 with only a slight discount for one fixture with a period of up to two years. One factor in favor of the 1,700 TEU ships were two service upgrades from the 1,300 TEU scale. The upsizing to 2,500 TEU of a WCSA service, currently run with 1,800 TEU ships appears to have only a small effect on the Caribbean market as several of the soon-to-be-displaced ships are scheduled to leave the area towards Asia and a further one has been taken in by a US reefer operator.

The niche market of 1,300 TEU high reefer ships, about 20 are at the moment trading in the Caribbean area, stayed strong up until November with rates coming very close to USD 9,000. Although not yet seen, some pressure on rates could arise as two such ships fell into Caribbean spot positions in December and the sisters trading short term at much lower rates in the Mediterranean are always looking at the better paying opportunities in the Americas.

For intra-Caribbean trade the 1,100 TEU segment remains the most crucial one with over 50 ships currently plying this market. Parallel to the other size segments the 1,100 TEU market did present an unspectacular picture during the last couple of months with stable charter rates around USD 7,000. Eco-ships also continued to achieve a sizeable bonus with around USD 2,000 more than the standard ships.

The 1,100 TEU segment also nicely illustrated owners' different mindsets. One owner positioned his ship towards Europe right after the Caribbean charter ended in order to minimize the idle days, while another owner speculatively positioned his ship from the Mediterranean, albeit with paying cargo, to the Americas without any consecutive business. The second owner was probably betting on the rate difference of close to USD 1000 for Americas' trade compared to the Mediterranean.

The market for sub 1,000 TEU was rather uneventful during the last couple of months. Charter rates varied little amongst the 700 to 950 TEU ships, all ranging between mid/high USD 6,000 levels. Some ships, especially in the 700 TEU size, however, had to deal with idle days between employments.

Overall, scrubber-fitted ships are still a rare occurrence in the Caribbean area, but about a handful of 1,700 TEU and 2,500 TEU ships have been fixed for multi-year periods in the recent past. Most of them are however still being fitted and are scheduled to start sailing in the first quarter of 2,020. For ships under 10,000 TEU, scrubbers have so far not been very popular and on average less than 5% of the fleet has so been retrofitted up to today. In the Americas, scrubbers are most likely to be even less popular as the charters are commonly fixed with a base rate and a percentage split of the actual bunker cost savings, for example 80 to 20 percent in owner’s favor. The price difference between traditional 3.5% sulfur content heavy fuel oil and the new 0.5% sulphur content alternative fuel though is lower in the Americas than on the other side of the Atlantic: US West Coast 160$, US East Coast 230$ and US Gulf 240$ compared to northern Europe 300$ or Mediterranean 350$.

On the infrastructure side, the port of Freeport (Texas) has recently announced a planned expansion of its existing container terminal until 2022. The terminal already offers 15 meters water depths but only a berth length of 240 meters. With the projected additional 320 meters berth lengths the port would open up the possibility to accommodate very large container carriers whereas today the largest ships calling the port have a nominal intake of 3,500 TEU. Upgrades of existing services are only possible for one service presently run with 3,500 TEU ships. The other two services are reefer focused and unlikely to change but whole new route options could open up after the upgrade.

Macroeconomics

The global economic outlook for 2019 has continuously been lowered throughout the year. The International Monetary Fund (IMF) predicted 3.5% global growth in January this year but revised this down to 3.0% for 2019 in October. The expectation for 2020 now stands at 3.4% with trade growth of 3.2%.

For the Caribbean, the outlook however is well below the global average, the IMF predicts 0.2% in 2019 and 1.8% in 2020 for the Caribbean and Latin America. The United Nations Economic Commission for Latin America and the Caribbean (ECLAC) estimates economic growth for the Caribbean to reach 1.4% in 2019 and 1.5% in 2020. A positive development with respect to trade is that goods production increased faster than services.

Growth projections from the neighboring regions are subdued as well. The South American countries are expected to post the lowest growth in seven years for 2019 and to the North it also looks like a slowdown as the US GDP growth figures have come down from 2.9% in 2018, 2.4% in 2019 and 2.1% in 2020. The newly agreed trade agreement between the US, Mexico and Canada could however bring back more security for investors and boost trade in the region.

In Venezuela, the political change, many had hoped to see from "parallel" president Juan Guaidó has so far not materialized and looks far more unlikely than at the beginning of the year. Meanwhile the economic downturn is hard to measure as official figures are lacking. Fresh US sanctions have forced crude oil production and exports further down and Venezuelan bonds also reached new record lows towards the end of the year. So far about 4.7 million people have fled the country and forecasts expect this number to increase to 6.5 million by the end of 2020. Container shipping lines continue to rely on ad hoc calls as only six ships are still employed in regular services to Venezuela.

As the traditional partner Cuba also suffers but still hopes to post 0.5% positive growth in 2019. The population however is to some degree also experiencing fuel, water and food shortages. In order to deviate from the Venezuelan connection, the country is looking towards Europe and Asia where it agreed on a cooperation with France and China to promote foreign trade. Similar to Venezuela the number of ships calling Cuba has also decreased throughout the year and now stands at only five regular container vessels. Clouds are now even forming over the region's powerhouse Colombia. Growth is still forecasted to exceed 3% in 2019 and 2020 but recent social unrest, refugees from Venezuela, higher unemployment rates, lower exports and manufacturing growth of only 1.5% all point to slower trade expansion in the future.

Sale & Purchase of Container Tonnage in the Caribbean

The most prominent development on the sales front has been the, mainly bank-driven sell-off, of container tonnage from one German owner who had previously sold his Caribbean liner business in late 2018. Several 700 and 1,100 TEU ships are currently for sale or have recently been sold, some being idle for longer periods before the sale.

In addition to those sales, one Caribbean-trading 2,500 TEU ship changed hands from one German owner to another and a Greek owner snapped up another CV 1,100 type ship, thereby expanding his count of this type of vessel to 17.

One 700 TEU geared ship was sold to European end users but was replaced by another 700 TEU geared charter ship coming from Europe. The trend of a shrinking 700 TEU geared fleet is not only a Caribbean phenomenon but also a global one as some ships that are being sold, are afterwards used for general cargo rather than for container trade.

In general, ship prices have come under pressure towards the end of the year as the banks were pushing lots of tonnage into the market while purchase interests and charter rates did not increase/improve.

When looking at newbuildings, almost all orders for smaller container ships in recent years have been for Eco-Bangkok-Max types (1,700 to 1,900 TEU). Currently the orderbook for 2020 holds about 40 such ships, all of those however are projected to be delivered as gearless ships. Those new Eco-ships are much more fuel economic than the 1,700 TEU vessels currently plying Caribbean- and Americas-related trades. Fleet numbers however indicate that those ships will not cross the Pacific to in the Americas in the near future. At the moment there are about 260 1,700 TEU ships trading in Asia and the majority, 140 of those, are still of older designs. Of the 120 new Eco-ships only 20 are geared.
As the replacement potential of older types in Asia is still substantial and the more than three weeks positioning voyage from Asia to the Caribbean will become even more expensive under IMO 2020 regulations, it is highly unlikely to see those ships any time soon in the Americas. Before facing unemployed waiting times in Asia, though, the standard types might make the "investment" to cross the Pacific if the demand is there.