How does the fast fall in oil prices impact the maritime industry? – FEBRUARY 2015
IHS Consultant Diana Illing reports from Germany
The fall in oil price has had several impacts on the shipping sector; to understand them one has to look at the nature of transportation. The demand for transportation occurs if goods are shipped around the world. This happens in a globalized world when goods are produced in one part of the world but mainly consumed in another. Transportation ensures the goods are shipped where they are consumed. In the current world, many consumer goods – shipped in containers – are consumed in Europe and the Americas with Asia being the workbench producing many of those goods. Indeed the largest trade routes of container ships are Asia-Europe route and the transpacific routes. When we look at economic indicators predicting economic activity in Europe and the Americas, the picture looks at least stable; this is supported by the low oil prices.
In the EU, economic recovery will be constrained by high unemployment and weak consumer confidence, but a positive stimulus from lower fuel prices will help to sustain gradual economic recovery. Overall EU GDP growth is forecasted to improve from 1.3% in 2014 to 1.7% in 2015, supported by the European Central Bank’s continued quantitative easing policies and the stimulus from very low oil prices and the markedly weaker Euro. The growth in North America seems to be stable, with an upwards direction – this is supported by all main indices.
In the US economy, GDP growth is forecasted to strengthen from 2.2% in 2014 to 2.7% in 2015, helped by improving domestic demand. US consumer spending is expected to pick up, helped by sustained jobs growth and large declines in oil prices. The decline in US retail gasoline prices will add an estimated additional USD80 billion to US consumer spending power on other goods and services. These positive effects are expected to outweigh the damage of lower oil prices on the US oil and gas sector and translate into higher imports of consumer goods.
The sharp decline in world oil prices will provide a substantial positive stimulus to Asia-Pacific economic growth in 2015, helping many industrial economies which are heavily dependent on imported oil and gas, including China, India, Japan, South Korea and Thailand.
All in all, higher disposable income should bring more demand for consumer goods coming from Asia, which should be good news for container shipping. But this is not the end of the story. Goods that are produced in Asia need input materials which have to be shipped to Asia. Hence, the increased demand for goods production can in turn push some demand on petrochemical and chemical feedstock that are upstream products for final end consumer products and these indeed need to be shipped to production facilities.
The second impact is a direct one on the shipping industry due to the contractual structures in the shipping industry. For the last half decade, profit margins in nearly all segments have been low, apart from some very specialized niche segments with higher profit margins like the OSV market where demand in recent years has seen a constantly upward trend.
The situation has been especially tough in the container sector. The segment fights with low freight rates and overcapacity in TEU supply, which causes fierce price competition with low profits.
Now that one-year contracts have been settled with ship owners, still expecting low profit margins and a bunker oil price of 600 USD, the actual oil price of less than 300 USD (IFO380) leaves shipping operators with an unexpected positive profit margin to consolidate their finances. This is what has happened during recent weeks: bunker prices have fallen faster than contract freight rates and spot rates, leaving additional profits for operators.
Keeping in mind that fuel is a key operating cost, the transport sector will be a significant winner, including not only the shipping industry but also commercial aviation and road freight transportation. Decisions on whether the low oil price also impacts the currently usual mode of slowsteaming will have to be left to operators.
The oil tanker market
Tanker activity actually intensified in last couple of months thanks to Contango. Current prices are low but are expected to increase in the future so people are buying and storing oil, either for speculative purposes in expectation of a higher price of oil in the future, or just for topping up strategic crude oil reserves at currently low prices. Primarily, China and some OECD countries are currently taking advantage of the cheap crude at the moment. These reasons and a higher seasonal demand due to winter time in the Northern Hemisphere pushed the rates to the highest level in the last five years for VLCCs and Suezmaxes.
In shipping, segments that see a long-term fall in demand for cargo space and lowered trade freight rates are adjusted as per bunker costs. Certainly in sectors like dry bulk, low bunker rates may spell a year of record low rates.
Summing up, the lower oil price acts as a more than welcome boost for the world economy and this higher economic activity finally breaks down to higher demand in many shipping segments. Additionally, many industries for which energy costs are an important input cost, and shipping is certainly one of them, will be clear beneficiaries from the slump in oil prices.