Archives for category: bulk

We’re well into the Year of the Rooster in China now, but trade figures for last year are still coming in and it’s interesting to see what a major impact China still had in 2016. Economic growth rates may have slowed, and the focus of global economic development may have diversified to an extent, but China was very much still at the heart of the world’s seaborne trade.

Not A Lucky Year

In 2015 the Chinese economy saw both a slowdown in growth and a significant degree of turbulence. GDP growth slowed from 7.3% in 2014 to 6.9%. Steel consumption in China was easing and growth in Chinese iron ore imports slowed from 15% to 3%. Coal imports slumped by an even more dramatic 30%. Container trade was affected badly too. China is the dominant force on many of the world’s most important container trade lanes and is involved in over half of the key intra-Asia trade. Uncertainty in the Chinese economy in 2015 took a heavy toll on this and intra-Asian trade growth slumped to 3% from 6% in 2014. Going into 2016, there was plenty of apprehension about Chinese trade, and its impact on seaborne volumes overall.

Back In Action

However, things turned out to be a lot more positive in 2016 than most observers expected. China once again underpinned growth in bulk trade, with iron ore imports surprising on the upside, registering 7% growth on the back of producer price dynamics, and coal imports bouncing back by 20%. Crude oil imports into China also registered rapid growth of 16%, supported by greater demand for crude from China’s ‘teapot’ refiners.

In containers, growth in intra-Asian trade returned to a robust 6%, and the Chinese mainlane export trades fared better too, with Far East-Europe volumes back into positive growth territory and the Transpacific trade seeming to roar ahead. Overall, total Chinese seaborne imports  grew 7% in 2016, up from 1% in 2015, with Chinese imports accounting for around 20% of the global import total. Growth in Chinese exports remained steady at 2%.

Thank Goodness

Despite all this, seaborne trade expanded globally by just 2.7% in 2016. Thank goodness Chinese trade beat expectations. Of the 296mt added to world seaborne trade, 142mt was added by Chinese imports, equal to nearly 50% of the growth. Unfortunately, this was counterbalanced by trends elsewhere, with Europe remaining in the doldrums and developing economies under pressure from diminished commodity prices.

Rooster Booster?

So, 2015 illustrated that a maturing economy and economic turbulence could derail Chinese trade growth. But China is a big place, and 2016 shows it still has the ability to drive seaborne trade and that the world hasn’t yet found an alternative to ‘Factory Asia’. 2017 might see a focus on other parts of the world too, with hopes for the US economy, India to drive volumes, and developing economies to potentially benefit from improved commodity prices. But amidst all that, China will no doubt still have a big say in the fortunes of world seaborne trade. Have a nice day.

OIMT201702

There have been plenty of record breaking facts and figures to report across 2016, unfortunately mostly of a gloomy nature! From a record low for the Baltic Dry Index in February to a post-1990 low for the ClarkSea Index in August, there have certainly been plenty of challenges. That hasn’t stopped investors however (S&P not newbuilds) so let’s hope for less record breakers (except demolition!?) in 2017.SIW1254

Unwelcome Records….

Our first record to report came in August when the ClarkSea Index hit a post-1990 low of $7,073/day. Its average for the year was $9,441/day, down 35% y-o-y and also beating the previous cyclical lows in 2010 and 1999. With OPEX for the same basket of ships at $6,394/day, margins were thin or non-existent.

Challenges Abound….

Across sectors, average tanker earnings for the year were “OK” but still wound down by 40%, albeit from an excellent 2015. Despite a good start and end to the year, the wet markets were hit hard by a weak summer when production outages impacted. The early part of the year also brought us another unwelcome milestone: the Baltic Dry Index falling to an all time low of 291. Heavy demolition in the first half and better than expected Chinese trade helped later in the year – fundamentals may be starting to turn but perhaps taking time to play out with bumps on the way. The container market (see next week) had another tough year, including its first major corporate casualty for 30 years in Hanjin. LPG had a “hard” landing after a stellar 2015, LNG showed small improvements and specialised products started to ease back. As reported in our mid-year review, every “dog has its day” and in 2016, this was Ro-Ro and Ferry, with earnings 50% above the trend since 2009. Also spare a thought for the offshore sector, arguably facing an even more extreme scenario than shipping.

Buy, Buy, Buy….

In our review of 2015, we speculated that buyers might be “eyeing up a bottoming out dry cycle” in 2016 and a 24% increase in bulker tonnage bought and sold suggests a lot of owners agreed. Indeed, 44m dwt represents another all time record for bulker S&P, with prices increasing marginally after the first quarter and brokers regularly reporting numerous parties willing to inspect vessels coming for sale. Tanker investors were much more circumspect and volumes and prices both fell by a third. Greeks again topped the buyer charts, followed by the Chinese. Demo eased in 2H but (incl. containers) total volumes were up 14% (44m dwt).

Order Drought….

Depending on your perspective, an overall 71% drop in ordering (total orders also hit a 35 year record low) is either cause for optimism or for further gloom! In fact, only 113 yards took orders (for vessels 1,000+ GT) in the year, compared to 345 in 2013, with tanker orders down 83% and bulkers down 46%. There was little ordering in any sector, except Cruise (a record 2.5m GT and $15.6bn), Ferry and Ro-Ro (all niche business however and of little help to volume yards).

Final Record….

Finally a couple more records – global fleet growth of 3% to 1.8bn dwt (up 50% since the financial crisis with tankers at 555m dwt and bulkers at 794m dwt) and trade growth of 2.6% to 11.1bn tonnes (up 3bn tonnes since the financial crisis) mean we still finish with the largest fleet and trade volumes of all time! Plenty of challenges again in 2017 but let’s hope we aren’t reporting as many gloomy records next year.
Have a nice New Year!

Shipping is a cyclical business. For many years, Clarksons Research has tracked the ups and downs of its cycles via the ClarkSea Index, a weighted average of vessel earnings in the main shipping sectors.  In the first half of August, the index averaged less than $7,500/day, around 60% down on July 2015’s ‘mini-peak’, with most sectors having weakened. But how long should one expect a downturn to last?

Tired…

As summer 2016 has progressed, owners could be forgiven an element of downturn fatigue. Average bulkcarrier earnings from January to July 2016 were 21% down year-on-year, whilst the equivalent containership index fell by 37%. Average weighted LPG carrier earnings lost 49%. Even the tanker sector, which had been buoyed by lower oil prices stimulating demand, was down by 35% in terms of its component element of the ClarkSea Index. Both crude and product tanker earnings levels have softened over the course of Q2 2016.

Nor is the decline restricted to the major sectors. Offshore drilling rig dayrates are down by a further 30% or so year-on-year, and OSV term rates about the same amount. LNG carrier spot charter rates are 24% lower. Multi-purpose vessel charter rates have also come under further pressure. Amongst the few areas to have shown signs of improvement have been the ro-ro and ferry markets, but these are far from volume sectors.

…Crotchety…

So, the industry is undergoing a downturn, and it would be reasonable to ask: how long might the pain last for? Clearly, there are external macro-economic factors, such as the policies of the Chinese state, actions by OPEC or the effects of the Brexit decision, which might have specific influences on the future. However, perhaps past cycles could provide an indication. As the graph shows, the progress of the current weaker market has followed the trend of some previous downward moves – with the clear exception of the 2008-09 crash.

…And Emotional

The graph shows that, over the last 25 years, major downward movements in the ClarkSea Index have tended to begin to be reversed around a year to eighteen months after they began. Of course, the picture is complicated by seasonal factors. Additionally, a “dead-cat bounce” is also never off the cards: for example, the first signs of recovery in the aftermath of the 2008 crisis. This improvement, between the one and two year marks on the graph, was quickly snuffed out, partly by the heavy ordering of bulkcarriers, helping to prevent a continued recovery along a similar trajectory to previous cycles.

In 2016, the market has probably learnt this lesson, with newbuild ordering numbers lower than at any point in the last two decades. Other actions are also being taken to try to turn the market balance around: ‘non-delivery’ of newbuild tonnage in the first seven months stands at 45%, whilst owners scrapped 30.2m dwt, 33% up when annualised with potential to get close to the record of 58.4m dwt set in 2012. So, it is possible that the index may follow previous trends, and begin to reverse course. But as well as a more controlled supply side, short-term demand will also help determine whether the market stalls, or can embark on the road to recovery. Have a nice holiday.

SIW1235 Graph of the Week

With seaborne transportation accounting for the vast majority of the world’s international trade, the importance of the shipping industry to the mechanics of the world economy is generally fairly evident. But putting it into context in actual annual value terms, how does the magnitude of the shipping business compare to the size of some of the world’s economies?

Big Traders

There are a number of ways to attempt to put the annual impact of the shipping industry into the context of the wider world economy. One is to examine the value of seaborne trades. Seaborne iron ore trade totalled 1.3bn tonnes in 2015. At an annual average ore price of around $50/t, that equates to a value of $68bn. That’s about the size of the GDP of Kenya. However, that’s dwarfed by seaborne crude oil trade. At 37.4m bpd last year, at an average oil price of around $52/bbl, that’s an annual value of $717bn, almost equivalent to the GDP of Turkey (the world’s 18th largest economy). On the container side, taking port handling as an interesting metric, last year there were an estimated 664m TEU lifts at the world’s box ports. Average handling charges vary significantly, but if they worked out at $150/TEU that’s an economy of just under $100bn, almost the size of the GDP of Angola.

Of course the value of global seaborne trade must be huge. The WTO estimates the value of all global trade at $16.5 trillion, and almost 85% by volume moves by sea. Seaborne trade is probably a little skewed to relatively cheaper goods but even allowing for, say, 50% of the total value, that’s still over $8 trillion, heading towards the size of China’s economy!

Adding The Value

Another way to put shipping’s magnitude into context is to take a look at the value of the assets. Between 2007 and 2015 the average annual level of investment in newbuildings was $127bn. That’s bigger than the GDP of Hungary. Alternatively, taking the value of the fleet today, $904bn, and allowing for, say, another 15 years of trading (the average age by tonnage is around 10 years), would equate to a per annum value of $60bn, still bigger than the economy of Panama.

Call In The Revenue

But perhaps the clearest way to mirror GDP is to check the annual earnings of the vessels, just as GDP measures economic production. In 2016’s challenging market conditions, the ClarkSea Index has averaged $9,733/day (which would total aggregate earnings of $77bn in a full year across the c.22,000 vessels in the main volume sectors), but back in 2007 it averaged over $33,060/day (across over 15,600 vessels). Across a year that’s earnings of $189bn. Almost as big as the economy of shipping’s favourite investor nation, Greece!

A Big Whole

Shipping is just one of a wide range of economic activities on the planet. Sometimes its impact can be hard to put into context. But in terms of ‘economic magnitude’, elements of the shipping industry can be as big as the whole of one of the world’s larger economies, especially in a good year. Have a nice day!

SIW1231 Graph of the Week

Along with cyclicality (see SIW 1219), the other characteristic of the shipping markets which receives frequent mention is volatility. This is so evident that the shipping markets are often reported to be many times more volatile than the stock markets or other fluctuating economic variables. Here we take a look at some metrics which shine some light on the relative volatility of the industry.

Measuring The Waves

Many metrics can be used to measure aspects of volatility (though none are perfect). A few are calculated here to compare volatility in the shipping markets with that in the stock and commodity markets. One classic measure of volatility is the ‘coefficient of variation’ which takes the standard deviation of a series over time (a measure of the degree of dispersion of observations in a series) and divides it by the mean (average) level of the series.

Volatile Business

This metric highlights the degree of volatility present in the shipping markets (see graph). For the ClarkSea Index it stands at 50%, for VLCC spot earnings 73% and Capesize spot earnings 104%. For the FTSE-100 the figure stands at 29% and for the S&P 500 43%. The stock markets, often thought highly capricious, appear to be quite a bit less volatile than shipping on this basis (and given that stock markets generally track a trend rather than a cycle, one might have expected their coefficients to be biased upwards). The oil price compares more closely to shipping; the figure for Brent crude stands at 73%. Another useful metric is the average absolute monthly change as a percentage of the mean. For the ClarkSea Index this stands at 8%, for VLCC spot earnings at 26% and Capesize spot earnings 18%. For the FTSE-100 and S&P 500 this stands at around 3% and for Brent at around 6%, so again much lower.

Of course this analysis doesn’t capture everything. It excludes week-to-week (or day-to-day) volatility, though one might suppose that this could further emphasise shipping’s volatility (for example, see VLCC spot earnings on page 2). Equally it does not handle (or ‘de-trend’) indicators differently to account for the fact that stock markets typically follow a long-term trend, rather than a cycle like shipping.

Variation On A Theme?

But, even using a regression approach to ascertain variation from simple trend levels, over 60% of the FTSE-100 movement is explained by the trend. In shipping, much more of the variation appears to remain ‘unexplained’ (less than 10% of the variation of the ClarkSea Index would be accounted for by a simple trend).

Need Good Sea Legs?

So, volatility in shipping easily holds its own against fluctuations in other economic phenomena. It’s a competitive business, and rapid changes in pricing can be driven by the steepness of the supply curve at the margins, as well as a range of quite unpredictable factors. This helps make shipping interesting for asset players and short-term speculators but tricky for investors looking for certainty of return and analysts looking for a clear picture. Like seafarers themselves, shipping market players can quite rightly point to having the stomach for ups and downs as much as anyone. Have a nice day.

SIW1220

It has been a grim start to 2016 for the bulkcarrier market, with the Baltic Dry Index sliding to new record lows on almost every day of the year so far. With a nearly constant stream of negative news continuing to emerge across each of the key dry bulk cargo sectors, it is almost as if Poseidon, the Greek god of the sea, has with his powerful trident launched a three-pronged attack.

Down To The Ocean Depths

The current depression is indeed severe. The Baltic Dry Index, a daily indicator of bulkcarrier rates, fell to its 19th consecutive record low of 317 points on 29th January. This is far below the average of 718 points in 2015, which itself was the second lowest annual average on record, and represented a year in which bulker earnings averaged around $7,000/day, little over estimated operating costs.

Surprise Attack

Of course, difficult market conditions are nothing new. Bulker earnings have been under pressure since 2011, when more than 100m dwt of deliveries kept fleet growth in double-digits. Whilst fleet growth eased to 2.4% in 2015, the slowest pace in 16 years, new demand-side pressures emerged, with dry bulk trade remaining flat last year. In Greek mythology, Poseidon’s trident had the power to cause earthquakes on earth, and there has certainly been evidence of a shake up recently. But where have each of the three prongs hit, and how sharply?

Strikes To The Core

The first earthquake is being felt in the iron ore trade, which accounts for around a third of dry bulk trade. Following rapid growth of 15% in 2014, Chinese imports eased in 2015, and expansion in iron ore trade slowed during the year (see graph). Overall, global iron ore trade is estimated to have grown by only 2% in 2015, and continued weak Chinese steel demand and the temporary closure of several major iron ore ports in January has done little to reverse this trend into 2016 so far.
The second shake up has hit trade in coal, which accounts for a quarter of dry bulk trade, very hard. Volumes declined by an estimated 5% in 2015, and the decline in volumes on the top 100 coal trade flows neared 10% y-o-y in Q3 2015, as Chinese and Indian imports fell. With several countries looking to increase reliance on clean energy sources, a major improvement in volumes seems unlikely.

Shifting The Currents

Finally, whilst the third earthquake has perhaps been less obvious than the first two, it has still had a significant impact. Growth in minor bulk trade, a diverse cargo grouping that accounts for more than a third of dry bulk trade volumes, was limited to 1% last year, owing in part to lower Chinese demand for imports of forest products, steel products, nickel ore, and various other smaller cargoes.

Stem The Tide?

So, the seas have been exceedingly stormy in the dry bulk sector. The impact from China’s economic transition is still resonating, and as yet there are few signs of an imminent improvement. As distressed conditions take their toll, hopes will be that the power of Poseidon’s trident will eventually start to ebb.

Analysts are busy updating their models for the new US budget year. If the big picture for tankers and bulkcarriers is what interests you, it’s not enormously complicated. Everyone uses roughly the same information, and data for running supply-demand balances is readily available. Of course it’s a complex world, but one conclusion is recurrent – overall, there’s still plenty of surplus shipping capacity.

Same Surplus, Different Rates

The fundamentals have not changed much over the summer. Comparing ‘raw’ supply and demand figures, both the tanker and bulker sectors appear to have a surplus of around 25%. These are the same numbers that have been cropping up for a while. But earnings statistics tell a different story. Over the last year tanker earnings averaged $29,000/day (VLCCs $50,000, Suezmaxes $43,000 and Aframaxes $35,000). But bulkers only managed $8,000/day (Capesizes $11,000, Panamaxes $8,000 and Supramaxes about $7,600). If both markets have 20-30% surplus capacity, what’s going on?

Could the statistics be wrong? It’s possible but it’s hard to see how. In tankers, for example, 2015 seaborne oil imports are only 6% higher than in 2008 but the tanker fleet is 33% bigger. These statistics are fairly easily verified. Bulk trade is up 38% since 2008, but the fleet has grown 93%. There may be some extra tonne-miles, but not enough to change the conclusion that both markets are carrying a lot of surplus ships.

A Slow Moving Mystery

Another possibility is our old friend ‘slow steaming’. Maybe tanker owners are getting smarter. The tanker fleet trading at 15 knots carries around 25-30% more cargo than at 11-12 knots. Supply-demand calculations are usually based on a ‘design’ speed, say 15 knots. So if the fleet trades at 11 knots, the ‘surplus’ disappears because the fleet is strung out around the world, with no surplus ships at the loading zones. Freight negotiations are based on prompt ships, so it’s the backlog that does the damage. If ships speed up, surplus capacity is released to undermine the boom. But if owners do not speed up, and are sufficiently aggressive, they can benefit from the supply curve kink until someone breaks ranks, and create market spikes.

Cargo Helps

Bulkers operate in a more complex market, with different charterers. Capesizes trading at around 11.5 knots have squeezed out a few short spikes in recent years, but the smaller ships haven’t. A market moving from demand growth to apparent stagnation does not help either. Owners have a better chance of pushing rates up when cargo volumes are rising.

Does It Matter?

So there you have it. Tankers are doing well today, but are they now a better investment? The red line on the graph shows the trend in the difference in earnings over 25 years. Tankers on average earned about $7,300/day more with a slight trend in bulkers’ favour. But what the graph really demonstrates is that it basically averages out in the end. Like poker, it’s not about the hand, it’s about the players. Have a nice day.