China Securities Co., Ltd. Securities: The underlying logic of the oil industry has changed, and the inventory ratchet effect has become a core feature.

China Securities Co., Ltd. Securities issued a research report stating that the underlying logic of the oil transportation industry has changed significantly, with the inventory spiral effect becoming a core feature. Under the risk of interruptions in the geopolitical supply chain, countries are re-evaluating their energy security bottom line, pushing up the safety inventory target red line and making it difficult to fall back to pre-crisis levels, breaking the previous lean operation model of low inventory and high turnover. Oil-producing countries tightening export restrictions in the short term suppress transportation prices, but actually force consuming countries to enter the warning zone for inventory. Although tightening crude oil exports in multiple countries have led to a temporary rollback in transportation prices, it continues to push the available inventory of overseas crude-consuming countries towards the safety warning zone. China Securities Co., Ltd. Securities pointed out that the anxiety of supply chain disruption has spurred additional inventory replenishment demand, releasing a core catalyst for the rise in transportation prices. In addition to routine inventory replenishment, overseas terminals will also establish high-level safety buffer inventories. The combined demand for inventory replenishment, if released through policy relaxation or concentrated release in the peak season, will drive a significant increase in transportation prices. Key viewpoints of China Securities Co., Ltd. Securities are as follows: The oil transportation industry is undergoing a significant change in its underlying logic, with the core manifestation being the "inventory spiral effect". Previously, the industry commonly used a lean operation model of low inventory and high turnover, but under the impact and potential threats of extreme supply chain disruptions such as the closure of the Strait of Hormuz, countries are fundamentally re-evaluating their considerations of energy security. Similar to a ratchet mechanism, the target red line for energy security inventory pushed up by geopolitical anxiety is difficult to fall back to pre-crisis levels. In the short term, multiple oil-producing countries have frequently tightened their crude oil export policies. While this has exerted pressure on maritime freight rates, resulting in a temporary rollback in transportation prices, it continues to push the available inventory of overseas crude-consuming countries towards the safety red line. The anxiety of supply chain disruption has spurred additional inventory replenishment demand, which, when released, will be the core catalyst for the rise in transportation prices. Strong expectations of supply chain disruption have led overseas crude end-users not only to complete routine inventory replenishment but also to allocate funds to establish high-level safety buffer inventories. The combined demand for routine inventory replenishment and safety buffer inventory replenishment, if released through policy relaxation or a concentrated release during the peak season, will be a core catalytic factor driving a significant increase in transportation prices in the oil transportation industry's next price cycle. Outlook: The pressure on transportation prices does not lie in new supply but in the Red Sea reopening. (1) Global industrial shifts remain a variable trend, with a large-scale migration from Japan-Korea-Southeast Asia-Africa/Middle East/South America bringing about differentiation in freight rates. In the global liner shipping market's macro narrative, industrial shifts are no longer simply "relocation of factories" but a profound supply chain restructuring that has become a key trend variable affecting the future trajectory of freight rates. The "lengthening" of supply chains has led to fundamental changes in trade flows. The traditional point-to-point model of "East Asian production, Western consumption" is gradually evolving into a multi-node relay model of "Japan-Korea (R&D/core components/intermediate products)Southeast Asia/Mexico (assembly processing)global market (final consumption)." This transformation has led to an explosive growth in trade in intermediate goods. For the shipping industry, this means that the simple demand for finished products transportation has been broken down into more complex regional transportation demands, providing significant support for the resilience of Asian regional freight rates. The rise of the "Global South" has reshaped the value of non-mainline routes. As industries move from East Asia to Africa, the Middle East, and South America, these regions are transitioning from mere resource-exporting countries to emerging manufacturing bases and consumer markets. The Middle East, Latin America, and Africa routes: benefited from infrastructure investments (such as the Belt and Road Initiative) and consumer upgrades, China's exports to these regions are no longer just daily necessities but higher-value engineering machinery, photovoltaic components, and new energy vehicles. This migration has led to a significant "structural differentiation" in transportation rates. In the future, the main routes between Europe and the Americas will become increasingly mature, entering a "stock game" where freight rate fluctuations are mainly influenced by macroeconomic factors and new ship deliveries. These routes may exhibit low volatility and low profit margins. In contrast, the North-South and emerging market routes, due to relatively backward port infrastructure, restrained capacity allocation, and demand growth outpacing supply, will be more susceptible to high freight rates premiums caused by congestion or demand surges. (2) By 2026, container shipping capacity deliveries will only reach 1.5 million TEUs, with a nominal capacity growth rate of approximately 3.7%. In 2026, global container shipping fleet capacity is expected to deliver 1.5 million TEU, the lowest figure in the past three years. However, the real pressure will depend on whether the Red Sea can resume normal navigation. The Red Sea crisis has damaged around 10% of container shipping fleet capacity, and once the Red Sea reopens, it may cause significant port congestion in the short term but will also exert immense pressure on freight rates in the medium to long term. Estimated deliveries of 3.1 million, 3.7 million, and 1.6 million TEU capacity are expected in 2027, 2028, and 2029, respectively, casting a shadow over the market in the coming years. Currently, 33% of the industry's fleet is over 15 years old, with 13% over 20 years old. If the market effectively retires ships over 20 years old within the next five years (dynamically, after five years, 15-year-old ships will also become 20 years old), the market may not experience a cliff-like decline. (3) Container port congestion will become the new normal. In the post-pandemic era, it has become a fact that port congestion is no longer a random "black swan" event but a systemic issue embedded within the global shipping system. Looking ahead to 2026, congestion will evolve from being a single terminal operation issue to a structural norm, originating from a deep-seated misalignment in ship-port coordination: the imbalance between the influx of container fleets and the shortage of port capital expenditure. The pulse effect of ever-larger ships and the peak effect of deliveries are nearing the terminal's limits. With the dense deployment of ultra-large container ships of 24,000 TEU, ports face not a steady flow of cargo but instantaneous surges of immense volume. The arrival of a single ship results in a huge increase in handling operations, leading to yard density reaching saturation in a short period. Despite improvements in quay crane efficiency, bottlenecks remain in yard turnover rates and the overall containerized transport system, a hardware mismatch of "large ships, small ports," that ensures fluctuations in operational efficiency will be the norm. The "hub-and-spoke" network of new alliances exacerbates the vulnerability of hub ports. Represented by the new transportation network "Gemini" in 2025, which has significantly reduced direct calling ports and relies heavily on transfer capabilities at core hub ports such as Shanghai and Singapore. While this model has increased trunk-line utilization, it has also concentrated risk significantly. If any hub port experiences an operational halt due to weather conditions or strikes, its chain reaction will quickly paralyze the entire regional supply chain through secondary networks. The repeated occurrence of "damming up" phenomena at hub ports will be a recurring issue. Non-market factors are prolonging long-term disruptions. Whether due to periodic strikes by European and American port unions against automation or increased frequency of port closures due to extreme weather, effective operating time at ports is continually being compressed. Port congestion is no longer a simple issue of insufficient capacity but the loss of systemic resilience. For the market, this normalized congestion plays a role in "passive tonnage control," absorbing some excess capacity but making "on-time performance" the most expensive and scarce resource. In conclusion, there is significant downward pressure on the liner shipping market in 2026, with the reopening of the Red Sea being a decisive factor. The US fiscal deficit and easing policies may mitigate some market declines, but it may be insufficient to support comfortable prices for shipping companies. The lower oil prices provide an opportune moment for the industry, but may also become fodder for price wars. It is believed that the liner shipping market in 2026 will face substantial pressure overall, with further differentiation in route structures and port congestion becoming a long-term issue. Oil transportation: Moving towards compliance The conflicts between Russia and Ukraine have altered the global oil supply landscape. Due to constraints in Russian oil, countries in the EU have significantly reduced their dependence on Russian oil, which is now being supplied to the Asian region. Meanwhile, other oil-producing countries like the US and Brazil are increasing production, with some African countries leaving the OPEC organization, leading to a gradual decrease in OPEC's market share and leaving room for increased production by other countries. By 2025, OPEC had shifted from its previous strategy of production cuts to one of increased production, entering a substantive phase of production expansion. While increased production may not necessarily mean an increase in maritime crude oil exports, actual trade volume data seen since August has indeed increased, effectively driving a significant rise in oil tanker freight rates. Although China's seaborne crude oil imports were weak in 2024 and early 2025, the trend in recent months has been stronger, with third-quarter import volume growing by 5% year-on-year. The resilience in refinery processing volumes has also provided additional momentum to import volumes. In 2025, refineries processed an average of about 14.8 million barrels per day of crude oil, a 3% increase year-on-year, with third-quarter processing volumes rising by 7% year-on-year. The upward adjustment in import taxes on fuel oil and bitumen in the first half of the year supported this trend, prompting independent refineries to process more crude oil. The growing demand for petrochemical feedstocks also helped support this, and in recent months, refinery maintenance plans have been reduced, particularly in state-owned facilities. Accelerated inventory activity and increased refinery throughput have driven stronger import demand, providing potential support for this year's oil tanker market. The increase in shipping volumes in China has also provided potential support for the market. China's crude oil inventory days have increased to 110 days, with strategic crude oil reserves and commercial inventories increasing by approximately 150 million barrels, valued at around $10 billion. It is expected to increase to 140-180 days in the future, mainly due to: (1) the current historically low oil prices providing a strategic buying opportunity, (2) the new Energy Law effective in 2025 requiring state-owned and private enterprises to jointly assume strategic reserve obligations, creating institutional accumulation momentum, (3) about 20-30% of oil imports coming from countries sanctioned by Europe and the US, posing a risk of supply interruption and increasing reserves as a preparation for potential crises (including geopolitical situations), and (4) a significant surplus in the current account providing foreign exchange funds to buy oil. The continuous expansion of refining capacity (expected to surpass 18 million barrels per day in 2026) supports crude oil demand. The ongoing upward inventory trend may support import volumes until 2026, with state-owned oil companies further increasing crude oil storage capacity by 169 million barrels, and further softening oil prices also potentially providing support. China's seaborne crude oil import volume is initially expected to grow by 3% to 10.7 million barrels per day next year, but there may be further room for upward growth. Due to the expansion of Western sanctions on shadow fleets, especially since the beginning of 2025, the US has increased sanctions on shadow fleets, leading to a reduction in effective capacity in the market, pushing up the central freight rate and increasing the price elasticity in peak seasons. Currently, about 16% of VLCC fleets are restricted vessels, with Aframax vessels closely related to Russia accounting for 33%. Although prices for new shipbuilding have recently seen a slight downturn, the overall value of second-hand ship transactions continues to rise, which is related to the significant increase in rental prices lately. Assuming a 10-year-old ship that cost around $95 million for new construction in 2015, with depreciation over 20 years, without considering residual value, the current book value is $47.5 million, but the market value has reached $88 million, showing an appreciation rate of 85%. While there is an increase in supply pressure in 2026, limiting the extent of high transportation rates, the aging of the fleet remains significant, gradually shifting the central freight rates upwards. Special transportation: New exports driving market demand, continued prosperity in the export of special goods As of August 2025, China's total clean energy technology exports exceeded a record high, with a total value exceeding $141 billion. Europe is almost the largest importing region for China's clean energy products. The regions of the Middle East, Latin America, Africa are the most potential growth areas in the future. Due to the larger-scale of new energy equipment, product transport is gradually shifting from containerized transport to special cargo transport, especially for wind power equipment, energy storage containers, and other products. China's wind power and engineering machinery exports are still in a prosperous phase. The regions where companies are currently located in Southeast Asia, East Africa, South Africa regions, and Latin America region are the core areas for future industrial migration, with the transportation demand brought about by the relocation of numerous factories driving the steady increase in charter rates for the company's main vessel types.