Many an old joke starts with “Doctor, Doctor…” but today a health check for the shipping industry is no laughing matter. The patient is clearly in distress, but as all good practitioners know pain is relative and needs careful assessment.
How Painful Is It Now?
The ClarkSea Index, a weighted average of earnings for tankers, bulkcarriers, containerships and gas carriers, is a helpful barometer for the overall well-being of the industry. The average value of the index in April 2013 was around $9,400/day. As the graph shows, looking over time at the value of the index back to the start of the 1980s, that is pretty near to historical lows. Yet between October 1981 and July 1987 the index value was lower, bottoming out at around $4,600/day in March 1986. On that basis, the patient has felt worse before.
Seven Year Itch?
However, in order to assess the cumulative impact of vessel earnings on the industry, performance over time needs to be taken into account to arrive at a fair diagnosis. Taking 7 years as a typical average length of a market cycle, the graph shows a moving average of the ClarkSea Index back to 1980. Today the 7-year average stands at $19,200/day, bolstered by the inclusion of a few years of boom market conditions that preceded the start of the downturn in late 2008. This figure is much higher than the 7-year average for all of the 1980s and 1990s, and even some of the 2000s. But of course, as the period of lower earnings drags on this figure will decline.
But maybe that’s still not a fair analysis of the pain level? One dollar of vessel earnings historically is not worth the same as it is today. The ‘nominal’ index figures need to be considered in ‘real’ terms. One adjustment could be to remove operating expenses, another to assess the relative spending power of the earnings by accounting for inflation. The graph shows the impact of the latter, adjusting the series for dollar inflation, as good a measure as any available.
Worse Than It Looks?
In inflation adjusted terms, the ClarkSea Index itself is today at roughly the same low as in the 1980s, with the $4,600/day low point back then equivalent to $9,900 today. The 7-year average of the inflation-adjusted index shows the real cumulative impact of developments in earnings. Today the adjusted 7-year average stands at around $20,900/day. That is quickly heading towards the 7-year average of the adjusted figures in the low-$17,000s/day seen in early 1989 and late 2002.
Will It Get Better, Doctor?
So, in real terms things are as bad as they look, and probably worse, and a visit to the doctor for the shipping industry is a painful experience. The only good news on offer is that the past has shown the pain is rarely terminal and most patients get better at some point. Have a nice day.