Archives for category: bulkcarriers

Once upon a time, before the Chinese economic boom captured so much of the attention of the world of shipping, the US was a more important demand source for seaborne trade. Its share of global imports is lower today, but the US still plays a key part in world seaborne trade. What’s the detail behind this backdrop and how might the big changes in US politics impact the trends?

In A Chinese Theatre

Looking back, in 2006, North American container imports accounted for 18% of world box trade, whilst 22% of global seaborne crude oil trade went to the US. In 2016, these figures were 13% and 12% respectively. Some of this change is relative: rapid growth in China and developing Asia has clearly reduced the US share of global trade. Nevertheless, US imports have actually fallen in many of the major categories of seaborne trade. The volume, however, is still highly significant, so changes in US trade patterns are of major importance. The import trades shown on the graph alone account for around 6% of global seaborne trade.

A Mexican Stand-Off

Looking forward, one key aspect is the clear scenario in which US policy under the new administration becomes more protectionist. The US is withdrawing from the mooted Trans-Pacific Partnership and there is the possibility of punitive tariffs. The focus is manufacturing: attempts to ‘re-shore’ production which once upon a time would have taken place in the West. This could have a negative impact on certain import trades. The US accounted for 23% of all car imports by sea in 2016. Tariffs could harm this trade, as could a more aggressive approach against alleged dumping of cheap Asian steel products (the US imported more than 30mt of steel in 2016, 8% of the global seaborne trade). Meanwhile, efforts to promote US products could imperil the c.4% pa compound growth rate of eastbound transpacific container trade since 2010, although more jobs in manufacturing might also support increased US consumer activity.

Spaghetti Western

Another key aspect relates to energy. The US economy was once driven by cowboys; more recently shale oil has taken a key role. This has reduced energy imports, the US’s largest import category. Crude and products imports fell 45% in the last decade, whilst LNG imports dropped by 86%. Pro-energy industry policies of the new administration may have some further negative effects on hydrocarbon imports, though the set-up of US refineries means that some heavy crude imports are needed to ensure a balanced refinery slate. Conversely, oil industry-friendly policies could encourage exports, although additional LNG exports will partly depend on continued expansion of high-CAPEX liquefaction capacity.

 

Coming Up Next?

So, the backdrop is that seaborne trade is less dependent on the US than it once was, with some volumes that used to “Go West” increasingly heading to Asia. But, US seaborne trade does remain highly significant, and key elements appear potentially exposed to shifts in aspects of US policy. Though there may be pros as well as cons, looking ahead it’s clearly going to be important to watch closely for the impact of the big change in the US.

 SIW1258

Every year, readers of the Shipping Intelligence Weekly are invited to submit their predictions of the value of the ClarkSea Index at the start of November the following year. The predictions are always illuminating, indicating how market watchers feel the shipping markets may pan out in the coming year, as well as shedding light on how well they have fared in avoiding potential forecasting ‘traps’…

Treading Carefully

So far in 2016, the ClarkSea Index has averaged $9,131/day, 37% lower than the full year 2015 average, with earnings in each of the sectors that comprise the ClarkSea Index down in 2016. Although there was a general consensus that tanker and LPG carrier earnings would come off this year, with accelerating fleet growth expected, some were hopeful that earnings in the bulkcarrier and containership sectors had bottomed out and would see some upside. Whilst these views on the tanker and gas carrier sectors appear to have played out broadly as expected, year to date average bulker and containership earnings currently stand 20% and 33% down on full year 2015 average levels respectively, and on November 4th the ClarkSea Index stood at $9,207/day.

Avoiding The Traps?

In the past, the ClarkSea Index competition has often indicated that participants expect the market to improve in the coming year. However, this year, many participants have avoided this potential ‘trap’, with just one third of entrants expecting (or perhaps hoping) that the ClarkSea Index would stand above the full year 2015 average on 4th November 2016. In fact, only 20% of entrants expected the ClarkSea Index to improve to $15,000/day or above at that point in time.

However, the majority of participants’ entries failed to avoid another ‘pitfall’ of forecasting, not expecting (or perhaps not wishing) that overall market conditions would deteriorate further. Rather expectations appeared to be that the ClarkSea Index would remain broadly steady. Overall, the average of the entries was $13,442/day, broadly in line with the 2015 average of $14,410/day, with around 70% of competition entrants predicting that the ClarkSea Index would stand between $11,000/day and $15,000/day on the first week of November.

Circumventing The Pitfalls

As those in shipping are all too aware, predicting how the markets as a whole will fare in the year ahead is a tricky task, especially when considering the often contrasting fortunes of the sectors that make up the ClarkSea Index. Throw the issue of timing that prediction to a single week into the mix, and side-stepping the various traps becomes even harder. The average of the predictions was more than $4,000/day away from the actual result.

So, the ClarkSea Index highlights the still very challenging market conditions, and although some of the optimism of previous competition entries was not so evident this year, it was still the case that the majority of predictions were too high. Nevertheless, the competition as always provided one winner. This year’s closest prediction was a forecast of $9,042/day, just $165 away from the actual value. Congratulations to the winning entrant; the champagne is on its way.

SIW1247

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

Despite the many domestic and market challenges facing the Hellenic ship owning community, Greece has continued to strengthen its position as the largest ship owning nation in recent years. As the shipping community begins to gather for another Posidonia, Greek owners today control some 18% of the world fleet, with a 333m dwt fleet on the water and a further 40m dwt on order.

Greek owners continue to top the league table of ship owning nations with a 196m GT fleet and global market share of 16% (by GT), followed by Japan (13%), China (11%) and Germany (7%). In recent years this position has in fact been consolidated, with the Greek fleet growing by over 7% in 2015 – the most significant growth of all major owning nations. Aggregate growth since 2009 is even more significant; some 70% in tonnage terms. The big loser in market share in recent years has been Germany, while China’s aggressive growth in the immediate aftermath of the financial crisis has slowed (the Chinese fleet doubled between 2009 and 2012 as solutions were found to distressed shipyard orders). Athens/Piraeus also features as the largest owning cluster globally, with Tokyo, Hamburg, Singapore and Hong Kong/Shenzhen making up the top five.

Punching Above Their Weight!

Greek owners remain the classic “cross traders”, developing their market leading position as the bulk shipping system evolved in the second-half of the twentieth century. Today, the Greek owners’ share of the world fleet at 16% compares to a seaborne trade share for Greece of less than 1%. By contrast, Chinese owners control 11% of the world fleet relative to the Chinese economy contributing to 16% of seaborne trade.

Sticking With Wet And Dry

Although a number of Greek owners have diversified into other shipping sectors, Greek owners have generally retained a focus on the “wet” and “dry” sectors. Today, the Greek fleet is largely made up of bulkcarriers (47% by GT) and tankers (35%) with this combined share hovering around 85% for most of the past twenty years. There has been some development of the Greek owned containership fleet (up to an 11% share) and gas carriers (up to a 4% share) but this is still generally limited. By contrast, Norwegian owners have trended towards more specialised vessels (e.g. offshore, car carriers) and the German fleet has remained liner focused.


Asset Players

Greek owners have also retained their role as shipping’s leading asset players and today operate a fleet with a value of some $91 billion (actually third in the rankings behind the US due to the value weighting of the cruise fleet). In 2015, Greek owners were the number one buyers (followed by China) and number one sellers (followed by Japan and Germany) in the sale and purchase market. Greeks have not been quite so dominant in the newbuild market recently and in 2015, Greek owners ($6.9bn of orders) trailed Japan ($13.1bn) and China ($10.7bn) in the investment rankings.

So despite facing many challenges, Greek owners continue to “punch above their weight” as the world’s leading shipowners for yet another year!

SIW1223

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

Conditions in many sectors of the shipping market are extremely challenging today, but some asset market watchers might look at that as fertile ground for new opportunity. However, different parts of the market cycle pose different questions for shipping’s asset players. What does the historical data tell us about investor behaviour across the cycle in the key shipping sectors?

Where In The Cycle?

The graph illustrates the share of reported secondhand sale and purchase (S&P) activity since 1997 at different ‘price point quartiles’, across the three main sectors and also for total sales activity (see graph explanation for more detail). According to asset investment theory, one might not expect the pattern across the quartiles to be even. At the top end of the price cycle there are limited numbers of ‘optimistic’ buyers willing to make a deal with many keen to sell at rewarding levels, and at the bottom end there are fewer sellers ready to dispose of assets at challenged prices. But how does the pattern look across the shipping sectors?

Life At The Top

Tanker sales reveal a focus at the upper end with a 30% share in the top quartile, and 50% in the middle two quartiles. Less than 20% of sales fell in the bottom quartile. In the bulkcarrier S&P market, transactions have historically been even more concentrated in the upper two quartiles, which accounted for almost 60% of sales in 1997-2014, boosted by record sales numbers in 2007 to many ‘exuberant’ buyers when prices and markets were near to the peak. However, with asset values falling further in 2015, and the market remaining liquid in recent times, in part due to increased pressure from traditional shipping banks, the share of bulker sales in the bottom quartile has risen to 20%, more than in the tanker sector.

Boxships At The Bottom

In the containership sector, the pattern has been more differentiated. Sales in 1997-2014 were much more heavily weighted towards the bottom quartile, with over 30% of transactions occurring there. Often outside of the more traditional ownership structures, it appears that many investors have felt pressure to exit their positions in the prolonged doldrums since the financial crisis. The record number of sales in 2015, at a low point in the price cycle, amplified the trend; by March 2016, 34% of boxship sales since 1997 had taken place in the bottom quartile.

An Optimistic Bunch?

Overall, across all reported vessel sales, only 51% of transactions took place in the mid-quartiles, and almost 30% at the top end compared to 20% at the bottom. What does this mean? Does it make shipping investors an optimistic bunch?

Well, given some of the market ‘spikey-ness’ the top quartile here probably factors in some less than top quartile levels in terms of absolute price range, so that may not be fully true. But still, containership sector aside, it leaves analysts of today’s markets with something to chew over. Even at the darkest of times for some of the sectors, analysis of historical asset play activity could potentially provide some reassuring evidence of more ‘optimistic’ behaviour in the past.

 
SIW1213