As 2024 comes to a close, Jan Fraser Jenkins sat down with Arlie Sterling, President of Marsoft, to reflect on the year’s most significant developments. From unexpected trade disruptions to record-breaking ship orders, Arlie shares insights into what caught the industry off guard and how these surprises are shaping expectations for 2025.
Arlie, what were the big surprises of 2024?
Well, there are a few days left so we cannot be sure that there aren’t more surprises coming! But there are a few big items that stand out to date:
Changes in trade patterns due to ongoing Houthi attacks in the Red Sea and low water levels in the Panama Canal stand out in 2024. Relative to our expectations at the end of 2023 average distances are up 13% for containerships and about 3% for bulkers and tankers. On average, disruptions to trading patterns accounted for more than half the increase in the demand for ships between 2024 and 2023.
The weakness in Chinese import demand, especially towards year end, was another surprise. Government efforts to boost demand fell short in 2024, leading to overcapacity and deflationary pressures. It is likely that those efforts will be redoubled in 2025, particularly in response to punitive tariffs. Our Base Case view is that Chinese GDP growth is likely to be slower in 2025 than 2024.
Chinese steam coal imports were another surprise. We expected imports to moderate as hydroelectricity production was restored. Just the opposite occurred – Chinese steam coal imports are up by 67% in 2024 vs. 2023. Most of those fancy new electric cars are in fact coal-powered!
Shipyards (especially Chinese builders) were the beneficiaries of the biggest surprise of the year: the surge in ordering. Orders in 2024 are double what we expected at the end of 2023! In dollar terms that amounts to a $60 billion commitment, mostly from liner companies and the LNG market (at current NB prices). Happy holidays for shipyards!
Of course, a lot more went on in 2024 – the collapse of the LNGC market in the last months of the year is pretty dramatic – but those are the most consequential surprises.
Sounds like a flock of Black Swans from a Marsoft perspective!
The forecasting life is unforgiving! Our clients expect us to make our best judgements about future developments and be sure to keep them informed as things change. The good news is that most of the surprises were big positives for the industry, at least until recently.
What have we learned from all that?
A key point is the message we give our clients all the time – be prepared. We create scenarios to illustrate specific outcomes and encourage our clients to ask us for more scenario building. I think of this from a financial perspective – what is the value of the options you (as an owner, charterer, or banker) are creating with your portfolio and decisions today?
Uncertainty translates into higher option value – helping to recognize and build that option value is one way we help our clients.
How have your expectations for 2025 changed as a result of the 2024 developments?
Our November 2024 Base Case scenario is more optimistic than much of the recent market commentary. Most importantly our Base Case view is that the Red Sea disruptions will continue through 2025. Based on the most recent few months of news I would say it’s likely that we will give more emphasis to our Low Case scenarios and probably revise our Base Case down a little in 2025.
It is fair to say that the geopolitical environment has changed radically in the Middle East recently. TradeWinds has already reported signs of a new tone from the Houthis regarding Red Sea navigation. Disruptions there may ease sooner as a result.
We’ve already noted that US foreign policy under the Trump administration is likely to shift to a more protectionist, isolationist stance. If the past is any guide, the impact is not likely to be too disruptive. But the incoming administration’s tone in 2024 is different – more assertive and more confident. In the unlikely scenario of punitive tariffs being put into place there could well be a front-loading of imports in the very short-term, but world trade would suffer in the medium- and long term.
What about shipyards – are they going to continue to enjoy strong demand?
Probably not. We think the right question to ask is what will happen when containership and LNGC orders collapse (relative to their 2024 pace).
Our view on that is that the combination of long delivery lags and yard capacity management imply that yards will be able to maintain their recently discovered pricing power. Newbuilding prices are unlikely to collapse sharply – in contrast to recent cycles.
In other words, we believe there has been a secular shift in shipbuilding markets and newbuilding prices. As China comes to dominate the global shipbuilding market, it is likely to exert greater control over capacity utilization and pricing than in the past. Rising labor costs in China and the lack of any serious new, lower-cost shipbuilding nations will also support higher prices.
Marsoft welcomes comments and questions from our friends in the global shipping world.
