Archives for category: China

“Going where the work is” has been a familiar mantra for many generations across the world, and the shipping industry is no different. Indeed, much of the world’s oil tanker and bulker fleet will be familiar with the sentiments of Simon and Garfunkel, wishing they were “homeward bound” but rarely getting “home where the music’s playing” as “every stop is neatly planned”!

Far And Wide…

Our analysis this week looks at the top shipowning nations and the trading patterns of their fleets, using data from our World Fleet Register and our vessel tracking system, Clarksons SeaNet. This analysis is based on the port calls and movements of the oil tanker and bulkcarrier fleet only (the “bulk fleet”); we will be taking a closer look at containership deployment in a future edition of Shipping Intelligence Weekly.

“Cross-Traders”…

Of the top ten owning nations, Greece, Norway, Italy and Denmark come out as the classic “cross-traders”. Ships owned by Europeans call at their “domestic” ports less than 15% of the time and rely heavily on trade routes involving Asia-Pacific countries. For nations like Greece (9% domestic port calls) this is a long-standing feature, achieving its number one shipowning status despite a global GDP ranking of 50 and a bulk seaborne trade rank of 47. The countries which Greek owned ships call at most often are China (14% by tonnage, 11% by number) and then the US (12%). Indeed for European owners generally, maintaining their share of global tonnage at an impressive 42% for the bulk fleet (45% for all ships) has come despite Atlantic trade stagnating at 3bn tonnes in the past fifteen years, while Pacific trade has more than doubled (to 8bn tonnes), a dramatic relative increase in trading outside Europe.

Sticking Close To Home…

At the other extreme, the Chinese and Japanese fleets come out with over 50% of calls at domestic ports, while the South Korean fleet sits at 38% (note the analysis includes some bunkering calls, notably at Singapore, but also elsewhere). Although China continues to be well serviced by international owners, its position as the world’s largest importer (25% of “bulk” cargo), second largest economy and number one seaborne trading nation means that 74% of Chinese fleet port calls are at domestic ports. In fact, 46% of total bulk Chinese port calls by tonnage (55% in numbers) are by domestic owned vessels, 24% by European owned ships and 24% by other Asian owned units. The growth of the Chinese bulk fleet (70% since the financial crisis) has begun to catch up with bulk trade growth (81%) but still lags significantly over a fifteen-year horizon (104% compared to 399% growth). Meanwhile, the US fleet comes in with 41% domestic port calls; this includes a large proportion of Great Lakes calls and Jones Act vessels.

500 Miles, 500 More…

So shipping is truly an industry that must go far and wide to find work. For European owners this is often a lot further than the “500 miles, 500 more” that Scottish brothers The Proclaimers sing, while for Asian owners their ships are more likely to be “Homeward Bound”. Have a nice day and safe travels home.

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China’s rapid economic growth over the last two decades has seen the country’s annual primary energy demand more than triple. Coal aside, the other key fuels powering China’s developing economy have been oil and gas. And while commodity imports have risen, economic growth has also incentivised more E&P activity in China itself. So how are things looking for China’s upstream sector, particularly offshore?

Venerable Ancestry

As of start May 2017, a total of 319 fields had been discovered offshore China (with 163 of these having been brought into production at some point) and around 5% of the active offshore fleet (over 500 units) was deployed in the country. Moreover, in 2017, 15% of total projected Chinese oil and gas production (4.43m boed) is forecast to be produced offshore.

Of course, things were not always thus. While oil extraction in China is thought to date back to antiquity, the modern industry took off during the era of Mao Zedong, in the 1950s and 1960s, with the exploitation of fields in the onshore Songliao Basin, notably the Daqing Complex, by the state. Offshore E&P was minimal before the late 1980s. As was the case in many countries, Chinese offshore oil production began at shallow water fields, in China’s case located in the Bohai Bay, Pearl River Delta and Beibu Gulf areas, which still account for 43%, 32% and 12% of the fields now active off China. A total of 139 offshore fields are in production across these three areas, of which 76% are exploited via fixed platforms. Shallow water E&P heavily influenced the development of the offshore fleet in the country: for instance, 11% of the active global jack-up fleet is deployed off China.

The Deepwater Leap Forwards

In recent years though, the drive to raise production has seen Chinese E&P shift into deeper waters, in mature areas as well as frontiers in the East China Sea, the Yinggeh Basin and the South China Sea. That being said, just 13 fields in depths of at least 500m have been found to date (the first in 2006), of which only two are active: Liwan 3-1 and Liuhua 34-2, both in the Pearl River Delta. Hence demand for high-spec floaters, MOPUs and OSVs remains limited. Deepwater E&P in China was led by IOCs, but then CNOOC began concerted independent efforts. However, this process has been slowed by the oil price downturn, which prompted the NOC to put deeper water projects such as Lingshui 17-2/22-1 and Liuhua 11-1 Surround on the backburner.

Conquering The Seas?

The outlook for Chinese offshore projects seems to have improved since the OPEC deal though, and CNOOC is reportedly planning over 120 offshore exploration wells in the next five years. But there are contrary factors, not least of which is political risk in the East and South China Seas, where China and neighbours such as Japan and Vietnam are engaged in bitter border disputes, notably over the “nine dash line”. Moreover, government plans to increase onshore shale gas output at Fuling and elsewhere may divert investment from costly offshore projects.

So there are clearly risks to continuing E&P off China in more frontier areas. But even as the country’s economy matures, energy demand growth is likely to remain substantial. The fundamentals thus suggest that the onwards march of E&P off China is likely to be far from over yet.

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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.

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As the pace of growth in Chinese seaborne imports has slowed, and prospects for a return to stronger rates of expansion appear to have diminished, focus on the potential for other countries to help provide impetus to global seaborne trade growth has increased. With an economy expanding at a robust pace, and a population close to China’s, India has increasingly featured in the spotlight.

The Big Bang

China’s dramatic growth and increased raw material demand since the turn of the century propelled world seaborne trade to new heights. By 2014, China’s imports of dry bulk goods, crude oil and oil products reached 1,850mt, 1,600mt more than in 2000. China’s industry-led development saw unparalleled growth in steel output, whilst refinery capacity and coal imports surged. But with coal demand and steel output falling, imports stalled in 2015.

A Dimmer Light?

This rapid expansion in China’s imports occurred fairly quickly, and comparison to a ‘base year’ shows that Indian imports are tracking behind China’s progression. In 2000, China’s GDP per capita stood at US$1,000, and the country’s dry bulk and oil imports topped 200mt. India reached both of these milestones in 2007, and since then, Indian imports have risen by 280mt to around 500mt, compared to China’s 950mt of extra imports between 2000 and 2009. Differing political systems and economies have clearly proved key. Industry accounts for a greater share of China’s GDP than India’s, whilst 25% of growth in the value of India’s trade in the last ten years (in both goods and services) was accounted for by the service sector, compared to 12% for China.

Reaching For The Stars

The concern for some shipping sectors is that the pace of growth in India’s import volumes already appears to be slowing, partly as targets for thermal coal self-sufficiency have undermined coal imports since mid-2015. Meanwhile, India is aiming to become a ‘global manufacturing hub’, with ambitious targets to treble steel production capacity to 300mt by 2025. However, the steel industry globally is currently under severe stress, and it is also unclear to what extent output growth may boost iron ore imports given India’s domestic ore reserves.

What Do The Skies Hold?

Nevertheless, India seems to hold plenty of potential in some areas. The outlook for imports of coking coal, crude oil and oil products still appears positive. And at a macro level, in 2015, India’s dry bulk and oil imports represented 0.4 tonnes per capita, below the global average of 1.0 tonnes per capita. Bringing India towards this level could generate significant additional import volumes.

So, the stars don’t seem to be in a hurry to line up Indian imports for growth on this explosive scale for now, with coal imports likely to fall further. But this may not be the end of the story. Growth in India’s refinery capacity, steel production, GDP and population looks set to outpace China’s in the coming years. Whilst Indian imports may not dazzle in some areas as brightly as China’s have, the shipping industry will still be hoping they may provide some sparkle in others.

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Following several years of a more cautious approach to ordering, it appears that we have entered a new phase of cruise ship investment. This summer’s activity has lifted the cruise orderbook to record levels, and the sector is hoping to take advantage of the mobility of its assets to tap the enormous potential in emerging markets.

Looking Up…

The cruise industry today appears to have once again entered a phase of rapid growth. Since the start of last year we have recorded 24 firm orders for new vessels, including 15 with capacity in excess of 3,000 passenger berths. The orderbook now consists of 41 vessels with a combined berth capacity of 120,664, equivalent to 25% of the current fleet. In the 3,000+ berth sector the orderbook is equivalent to 73% of the current fleet.

A continued focus on “mega” cruise ships is evident from the orders noted so far this year. Royal Caribbean has ordered another Quantum-Class, 4,200 passenger ship for delivery in 2019. Elsewhere, Carnival Corporation has firmed the first four of a previously announced plan for a nine-ship order. These will be the largest ships contracted by Carnival at 180,000 GT, and while not as large as the Royal Caribbean Oasis-Class ships (225,000 GT), they will have a higher total passenger capacity (6,600), giving Carnival at least a claim to having the largest cruise ships afloat.

Looking Back…

In the past 20 years we have seen three distinct phases of expansion, with the orderbook exceeding 100,000 berths in early 2001, in 2007-08 and again in 2015. The two previous peaks were followed by a sharp drop as investment in new vessels was abruptly cut off by economic slowdown in the established key markets in North America and Europe. What factors will determine whether the current phase is similarly short-lived or a more sustained phase of investment?

Looking East…

In the short-term the performance of the cruise sector will remain closely linked to that of the major “western” economies. Last year North American and European passengers accounted for 55% and 29% of the global market of 22 million respectively; these markets will continue to exert an important influence. However, the outlook may be shaped by developments further east. Thus far, relatively few of Asia’s rapidly growing middle class have been exposed to cruises, but the cruise lines believe they can develop significant demand growth in this region. In 2015 the number of mainland Chinese tourists cruising is expected to pass 1 million for the first time, and according to industry sources in 2014 the number of cruises based at a Chinese ‘home port’ grew by 9% y-o-y to 366, while another 100 cruises called at a Chinese port (up 41%).

So, the cruise sector once again seems to be in rapid expansion mode. This time, the question is whether the establishment of new Chinese brands, the deployment of vessels specifically designed for Chinese operation and further investment in Asian cruise ports could drive a more sustained phase of ship investment. Finding the answer will certainly make for an interesting itinerary. Bon voyage!

In English if you say “he’s gone west” you mean he’s a “goner” (i.e. dead). It’s a phrase the stock market might now be applying to China’s economy. But in China, if you “go west” you get to the town of Urumqi. It has 3 million people, per capita income of $11,000 a year, the Texas Cafe serves great Tex-Mex, and it’s China’s “fastest growing city”. Oh yes – and it’s the world city most remote from the sea (2,400km).

China Really Is A Big Place

The point is that, unlike any other developing region, China is a very, very big place. Many economists would classify China’s recent growth as typical of the “Trade Development Cycle” model. Economic development uses vast quantities of raw materials, for building infrastructure and stocks of durables. Then the focus turns to less material intensive products – there’s not much iron ore in a Gucci handbag. Anyway, it looks as if China might have reached this inflection point in its development cycle.

Previous Growth Regions

Forty years ago Europe and Japan went through the same process. Between 1965 and 1973 Japan was the miracle economy, accounting for two thirds of dry bulk trade growth – just like China. The problems began in 1973 as heavy industry, especially steel, reached unsustainable capacity levels. In 2001 China’s  steel output was 151mt, up from 90mt in 1993. Useful growth which brought China’s steel production in line with Europe’s output of 159mt. But by 2013 China’s output hit 815mt and is likely to be about the same in 2015. Familiar territory.

How Big Is Too Big?

The problem is figuring out when China’s trade development is overshooting. China is so much bigger than Japan and Europe. But by looking at the ratio of the growth in total Chinese seaborne imports to growth in Chinese industrial production, a change is apparent (see chart). If the ratio is over 1, trade is growing more quickly than industrial production – from 2000 to 2003 the ratio averaged 1.6. If the ratio is 1, seaborne imports and industrial production are growing at around the same rate – in 2004-12 the ratio averaged 0.9. Below 1 is bad news – since 2012 the ratio has averaged 0.4 and has been negative in recent months.

Good News & Bad

The good news is that China’s industrial production trend remains at about 5-6% per annum. There is still a long way to go in developing the economy, especially the inland provinces. The bad news is that the stagnation of imports looks suspiciously like the structural slowdown of a maturing Trade Development Cycle. For a while it seemed that coal might fill the growth gap, but with the new attitude to the environment, that seems less likely.

Pushing West

So there you have it. Lots of drama, but the underlying economics suggest that the Chinese economy is having normal development pains, intensified by its size and the pace of growth. For shipping this may not be the end of the road, but it’s time to take a careful look at the management of the business. When a customer the size of China gets growth pains, you just can’t ignore it. Have a nice day.

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Ingmar Bergman’s classic movie The Seventh Seal is about a knight who, during the Black Death, challenges Death to a chess match, in the hope that while the game continues he can put off his demise. This grim epic could be seen as a metaphor for the daunting progress through long shipping cycles, as one risk-laden move in the toxic chess game follows another.

August 2007 – The Game Starts

Today’s cycle started eight years ago in 2007. It was an epic year. Capesize earnings averaged over $110,000/day and merchant shipbuilding investment reached a record $229 billion (excluding offshore). But there was good reason to be apprehensive. In August the first signs of the financial crisis hit Europe, as interbank investors grew paranoid about the vulnerability of their counterparties to CDO exposure, bringing Eurodollar trading to a halt. Meanwhile analysts were worried that the Chinese super-boom would peak out after the Olympic Games in 2008. So although dry bulk investors were still making money and ordering ships, the solitary chess game with destiny had already started.

Mounting A Comeback

Seven years later the chess game is still going on. The financial crisis got off to a more dramatic start than anyone anticipated. In 2008 as panic swept through financial markets and trade credit became almost unobtainable, the world economy, including China, came precariously close to meltdown. But fortunately this time the politicians eased through the crisis successfully. China mounted a heroic infrastructure programme which gave bulkers a very decent boom in 2009-10. Following this the market fluctuated, but reached decent levels in late 2011 and again in late 2013.

Not Deadly Or Distressed?

As recessions go so far the game with destiny has gone quite well. Since the end of 2007 Capesize earnings have averaged $32,300/day and the market has soaked up 490m dwt of new bulkers. In 2013, 104m dwt of bulkers were ordered. So someone in the industry believed bulkers would win their chess game.

But in 2015 the game changed. Capesize earnings averaged only $6,212/day in the first half. For the first time signs of real distress are apparent. After 8 years, dry bulk sentiment finally collapsed and bulker orders fell from 16m dwt in January 2014 to 0.05m dwt in June 2015. A helpful step towards market recovery, but it leaves the shipyards with a problem. Over the last 8 years bulkers were a third of shipyard workload (see inset pie chart). Although tankers and container ships are still being ordered, they show no sign of filling the gap left by bulkers.

Dance Macabre

So there you have it. Bulkers have finally made a meaningful move towards better times by cutting investment. But the game isn’t over yet. They still need a strong world economy and continued Chinese import growth. Meanwhile a new chess game with destiny is getting started, this time in the shipyards as they try to plug the bulker gap. Maybe the game’s not over yet. So if you want a nice relaxing summer, our advice is don’t watch The Seventh Seal. Have a nice day.

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