Put The Heating On
The ClarkSea Index provides a useful way to take the temperature of industry earnings, measuring the performance of the key market sectors. Since Q4 2008 it has averaged $12,289/day, compared to $23,656/day between the start of 2000 and the end of Q3 2008. However, earnings aren’t the only thing that can provide ‘heat’ in shipping. Investor interest in vessel acquisition has often added ‘heat’ to the market environment in the form of investment in newbuild and secondhand tonnage. To account for this, this analysis revisits the quarterly ‘Shipping Heat Index’, which reflects not only vessel earnings but also investment activity.
In 2014 the Shipping Heat Index averaged 65 points, supported by investment activity early in the year in spite of the difficult earnings environment. But in 2015 the average dropped to a distinctly cooler 62 points, with an increase in earnings this year offset by a more significant decline in investment activity. The main driver of the increase in earnings has been a single sector (tankers). Whilst this has boosted tanker investment, weak earnings in the bulker sector (where investment has been most significant in the last few years) has led to a slump in bulker investment. Secondhand bulker sales have increased, but contracting is down by around 70%.
Slightly Less Chilled
The trend did vary across the year, and the Shipping Heat Index actually trended gently upwards across the first three quarters of 2015 to reach 68.6 points in Q3. The modest uptick in Q3 was driven by an improvement in bulker earnings (though they remained at historically weak levels), as well as gas carrier earnings. Additionally, boxship ordering surged in Q3, with 106 units contracted, up from an average of 33 orders in the previous four quarters.
Ice, Ice, Baby
However, for the first time since Q4 2008, the Shipping Heat Index fell below the Earnings Index in Q4 2015. Although the ClarkSea Index has still been supported by firm tanker earnings (VLCC average spot earnings have topped $100,000/day, the highest levels since July 2008), contracting and S&P activity has been limited largely due to reduced appetite for bulkers and boxships, with the challenging earnings environment eventually dragging the ‘heat’ into more icy conditions.
A Chilling Tale?
So, a chilling tale indeed. Shipping investors, generally a quite optimistic bunch, can often create a nice degree of heat even when it’s icy out. But even these hardy players can eventually get dragged down by the cold. Let’s wish for something warmer next year. Merry Christmas.