Archives for category: Clarksons Research

A few weeks ago, OPEC and other major oil producers agreed to extend 1.73m bpd of production cuts until the end of Q1 2018. Despite this, oil prices have continued to slide, with Brent failing to close above $50/bbl this week. While a range of factors have contributed to this trend, perhaps the most important is US tight oil production. So what is going on in the shale patch? And why does it matter to shipping?

How Unconventional!

If nothing else, US tight oil production retains the ability to surprise. As was noted after the OPEC meeting in May (SIW 1,273), “it remains to be seen if shale production quickly offsets” the cuts. Well, if the early signs are anything to go by, this is clearly not an impossibility.

Tight or shale oil is oil extracted from otherwise almost impermeable geology via “fracking”, a process wherein fluids mixed with sands are pumped at pressure into well bores, creating fractures in the rock through which oil and gas can flow. In terms of oil price dynamics, the key aspect of shale projects is speed: they can have lead times measured in weeks and so are very responsive to changes in oil prices. But in turn, as tight oil production ramps up, it can put pressure on prices, as recent history shows.

Remarkable Resilience

The US tight oil sector really took off in 2011, with production more than tripling from 1.70m bpd to reach a peak of 5.47m bpd in March 2015, as the graph shows. At this point, tight oil accounted for 6% of global oil supply (96m bpd) and equated to 55% of the net growth in supply from 2011. Such rapid supply growth had not been priced into markets, a key factor in the 2014 oil price plunge. A partial revival in mid-2015 was smothered as US drilling was stimulated again. And, since the US land rig count hit a new low of 380 units in May 2016, activity has again been on the up; the November 2016 OPEC deal accelerated this and the land rig count now stands at over 900 units. Tight oil production growth now equates to around 35% of the OPEC cuts. Its resilience (via cost deflation) in the face of lower oil prices continues, it seems, though it may prove self-defeating yet again. Even so, tight oil could now be a long term part of the oil price context. A few years ago, forecasters saw US tight oil production peaking circa 2020. Revised projections taking into account new technologies and updated resource surveys do not see US tight oil output peaking before the 2030s.

More Surprises?

The negative and positive implications for shipping of higher oil prices were covered in detail previously (SIW 1,273). The converse applies to lower oil prices, with offshore suffering from reduced E&P activity but the merchant fleet perhaps seeing benefits from cheaper bunkers and crude oil trade growth. Tight oil also has implications for trade flows. For example, now that export restrictions have been lifted, around 0.7m bpd of crude oil was exported from the US via tankers in Q1 2017.

So a factor that was barely on the radar a decade ago has become a key determinant of oil prices, potentially for the long haul. Moreover, tight oil has a range of ramifications for shipping that merit close monitoring. Once again, shipping appears inextricably linked to a key facet of the global economy. Have a nice day.

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In the ‘Three Card Trick’ or game of ‘Find The Lady’ beloved by hustlers everywhere, the aim is to track the movement of one item amongst three, but blink and you’ll miss it! Shipping’s orderbook appears to have its own version of this pastime, with the three largest shipowning nations, in terms of the volume of tonnage on order, swapping places frequently.

Are You Watching Closely?

Today, Japanese owners account for the largest orderbook across all owner nationalities, with 488 ships (100 GT and above) of 28.2m GT on order. This year, the size of their orderbook has surpassed that of their Chinese counterparts, leaving Japanese owners on top of this particular pile. At the same time the Japanese own the world’s second largest fleet (164.2m GT) behind Greek owners (210.1m GT). This change is the latest in a recent set of switches in the leadership of ownership of the global orderbook.

Switch One

Following the boom in ordering preceding the global economic downturn, the orderbook stood at its highest ever level (416.6m GT) in October 2008. At this point in time it was Greek owners who accounted for the largest orderbook, and by some margin, 56.5m GT, ahead of the German owners in second place with 41.4m GT (today this has dwindled to just 3.3m GT). Since then, things have largely gone one way for the Greek orderbook. Today it stands at 14.7m GT, 74% smaller than back in October 2008, and it is the third largest in the world. The Greek fleet has meanwhile maintained a healthy degree of expansion, with net asset play gains adding firmly to deliveries.

Switch Two

By start 2011 the Chinese owners’ orderbook was the world’s second largest and across the period 2012-15 it vied with the Greek orderbook for pole position before pulling ahead last year. Ordering, often state-backed, and significantly at Chinese yards, propelled the Chinese orderbook to become the world’s largest by October 2015, and today it stands at 24.8m GT (17% of the Chinese fleet), still close to the largest in dwt terms (39.1m dwt).

Switch Three

The final switch came in December 2016 when Japanese owners took the lead in the orderbook stakes. The Japanese orderbook surged in 2015 as Japanese owners contracted 22.0m GT, often bulkers (42%) and largely at domestic yards (87%). The global orderbook is much smaller than it was back in 2009 (at 136.6 m GT), but the Japanese orderbook has held its own through 2016 and into 2017 to take top spot, and today is equivalent to 17% of the Japanese fleet.

Top Hat Trick

So, against the background of a declining orderbook since 2008, the Japanese orderbook has switched from third to first position. But it’s still close and the Chinese orderbook is just 3.4m GT smaller today. Contracting has been extremely limited last year and this year so far, but at some point it will come back in greater volumes and then it will be necessary to watch the movements in the orderbook even more intently. Have a nice day.

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The vast majority of the world’s trade in goods is moved by sea, and it has long been recognised how shipping is a critical element of the global economy, providing the connection between producers and consumers all over the planet. However, what is less frequently mentioned is the tremendous ‘value for money’ with which it does so; this is clearly worth a closer look…

Bargain Of The Century?

One US dollar doesn’t get you much in today’s world. On the basis of latest prices it would buy 0.025 grams of gold or 2% of a barrel of crude oil. Based on Walmart’s latest online pricing it would buy about half a litre of milk. That’s not a lot whichever way you look at it, in a world economy that is 75 trillion dollars large. But in shipping one dollar still gets you something very substantial. One way of looking at this is to take the movement of cargo in tonne-mile terms and divide it by the estimated value of the fleet. Here, to try to do this in like-for-like terms, the calculation includes crude and oil products, dry bulk, container and gas trade, and the ships that primarily carry those cargoes. On this basis, one dollar of ‘world fleet value’ at the start of May 2017 would have bought 110 tonne-miles in a year, based on 2017 trade projections. What an amazing bargain! One tonne of cargo moved more than 100 miles, per year, all for one little greenback!

What’s In A Number?

What drives this number? Well the essence of the value of course lies in the huge economies of scale generated by moving cargo by sea in vast quantities at one time over significant distances. The average haul of one tonne in the scope of the cargoes listed above is estimated at 5,016 miles and the average ship size at 58,706 dwt. Of course the amount of tonne-miles per dollar can vary over time, depending on changes in asset market conditions, the underlying cost and complexity of building ships and vessel productivity, speed and utilisation (rates of fleet and trade growth aren’t perfectly aligned most of the time). Across sectors the statistics can vary significantly too.

Buy In Bulk

One dollar of bulkcarrier and oil tanker tonnage accounts for 154 and 101 tonne-miles of trade per year respectively. For more complex, expensive ships the figure is lower: 20 for gas carriers. For boxships, despite their higher speed, the figure stands at 114. Vessel size (economies of scale in building) and cargo density (this analysis is in tonnes) play a role too in these relative statistics (which also don’t always capture the full range of cargo carried by each ship type).

Value For All Time

Nevertheless, whatever the precise numbers and changes over time, 110 tonne miles of trade each year for one dollar of asset expenditure just sounds like mighty good value at a time when a dollar doesn’t go very far. This underpins shipping’s ability to carry an estimated 84% of the world’s trade in tonnes and act as the glue holding the globalised economy together. Shipping’s famous volatility retains the ability to make and lose fortunes for asset players but the underlying economic contribution of each dollar invested may just be one of the greatest bargains of all time. Have a nice day.

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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.

OIMT201705

Global oil prices were buoyed in Q4 2016 by OPEC’s decision to cut production. Perhaps more surprising still was the extent of compliance with quotas, for an organisation with a past track record of over-production. At their recent meeting, OPEC overcame some members’ objections and agreed to extend the cuts until March 2018. How will this affect the oil price and how does it impact the shipping industry?

Cutting To The Quick

Twenty years ago, OPEC had substantial control over the supply side of the oil market. Today, the rise of shale oil has created doubts that OPEC retains the power to influence the market in a lasting way. This question is still to be resolved, though it is true that the cuts have allowed shale producers a new lease of life in terms of spending (up c.50% in 2017) and drilling (the US land rig count is up 120% y-o-y). However, OPEC are making the most concerted attempt for more than a decade to control supply. As the Graph of the Month shows, past quota compliance has been poor, and indeed for a decade this was effectively acknowledged by the lack of a formal quota.

Cutting Down

The difference recently is that OPEC has actually succeeded in cutting to below the level of the quota, despite allowing some members (such as Iran) to avoid formal cuts. The collective reduction has partly been down to outages (notably in Nigeria and Venezuela). However, it also reflects Saudi Arabia shouldering a lion’s share of cuts (c.0.75m bpd or 55%).

Expectations of an extension to cuts boosted oil prices in the run up to the announcement (though after the meeting, prices fell as investors took profits). Higher prices have a range of ramifications for shipping. One consequence is higher fuel prices, increasing shipowners’ costs unless they can pass this on. Previous periods of high fuel costs pushed owners to slow steam. This mitigated the problem, to some extent, but few ships sped up when prices came down. So currently this would be a difficult trick to repeat.

Cut And Run?

The cuts could also affect tanker demand, either via lower crude and product exports (27% of seaborne trade), or lesser import demand if high prices moderate demand growth. So far, price increases have been moderate, and it seems as if the Saudis in particular have been doing their best to curtail domestic oil usage to protect long-haul export customers (more than 18m bpd, of 47%, of crude trade is exported from the Middle East Gulf).

Perhaps most obviously, the OPEC cuts have brought a modicum of more bullish sentiment to oil companies’ E&P investment decisions. This has helped offshore markets a little, notably through a small upturn in tendering and fixing activity for drilling rigs (Clarkson Research’s average rig rate index is up 2% since end-2016). However, there has been little to no effect on rates in related markets such as OSVs, and most would acknowledge the extreme fragility of any improvement.

So, the widely-trailed extension to OPEC production cuts boosted oil prices during May, although it remains to be seen if shale production quickly offsets this. Oil price dynamics have a mixture of positive and negative effects for shipping, but certainly remain crucial given the key role of oil both for shipping and for the wider economy. Have a nice day!

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“Look after the pennies and the pounds look after themselves” goes the saying, a mantra the shipping industry has a long taken to heart. In this week’s Analysis, we review trends in ship operating expenses (OPEX) that have taken the total cost base of the shipping industry through the $100 billion barrier for the very first time.

Watching The Pennies!

Of all global industries, perhaps few have had the extreme cost focus of shipping over the past 30 years. During the 1980s recession, any operating “fat” was largely removed with the growth of open registries and a drive to outsourcing. This helped shipping, alongside its near “perfect” competitive economic model, deliver exceptionally cheap and secure freight, in turn a key facilitator of globalisation.

Nice And Lean…

OPEX response since the financial crisis has been relatively modest. Our average OPEX index (using the ClarkSea “fleet” mix and information from Moore Stephens) shows just a 1% decrease in OPEX since the financial crisis to $6,451/day in 2016. By comparison, the ClarkSea Index dropped 71%, from $32,660/day in 2008 to $9,441/day in 2016 (a record low). In part, this modest, albeit painfully achieved, drop reflects upward pressures from an expanding fleet and items such as crew and ever- increasing regulation. However it also reflects the already lean nature of OPEX.

$100 Billion And Counting…

Our estimate for aggregate global OPEX for the world’s cargo fleet has now breached $100 billion for the first time, up from $98 billion last year and $83 billion in 2008. The largest constituent remains crew wages ($43 billion covering 1.4 million crew across the fleet). By comparison aggregate ship earnings for our cargo fleet fell from an eye watering $291 billion in 2008 to $123 billion in 2016!

Cutting The Fat…

One sector that has seen dramatic cost reduction has been offshore. Estimates vary, but 30% seems a reasonable rule of thumb for reductions in OPEX since 2014. While painful, this has been part of a process of making offshore more competitive against other energy sources (offshore contributes 28% of oil production, 31% of gas, and 16% of all energy) and one of the factors behind the increase in sanctioning of offshore projects.

Getting Smarter…

So shipping is one of the leanest industries around but is always under pressure to do more! It seems clear that squeezing cost in the traditional sense, offshore aside, will be pretty challenging — UK media reported on the docking of the 20,150 teu MOL Triumph, highlighting it was manned by only 20 crew! Getting smarter, collecting and using “big data” and technology and automation are all gaining traction. The industry’s fuel bill (accounted for outside of OPEX) is clearly a big target.

This will all require new technology, skills and perhaps new accounting approaches. Plenty of food for thought but it seems like just going on another severe diet won’t work this time. Have a nice day!

SIW1272

In recent years, in generally difficult market conditions, it has been no surprise that many sectors have seen a significant removal of surplus tonnage. This has been particularly notable in the bulkcarrier and containership sectors, and in the case of the Capesizes and the ‘Old Panamax’ boxships, it has been a bit like the famous race between the tortoise and the hare but with even more changes in leadership…

At The Start

Back in 2012, Capesize demolition was on the up with the market having softened substantially in 2011 on the back of elevated levels of deliveries. Meanwhile, ‘Old Panamax’ containership demolition (let’s simply call them Panamaxes here) was also on the rise with earnings under pressure. Across full year 2012, 4.7% of the start year Capesize fleet was sold for scrap (11.7m dwt) and 2.6% of the Panamax boxship fleet (0.10m TEU). In both cases this was working from the base of a fairly young fleet, with an average age at start 2012 of 8.2 years for the Capes and 8.9 years for the Panamax boxships.

The cumulative volume, as a share of start 2012 capacity, of Capesize demolition remained ahead of Panamax boxship scrapping until Sep-13, by which time 7.3% of the start 2012 Panamax boxship fleet had been demolished compared to 7.2% of the Capesize fleet. In 2013 the Cape market improved with increased iron ore trade growth whilst the boxship charter market remained in the doldrums. In 2013, Cape scrapping equated to 3.2% of the start 2012 fleet (7.9m dwt); the figure for Panamax boxships was 6.0% (0.24m TEU). The fast starter had been caught by the slow burner.

Hare Today…

But by 2015, Cape scrapping was surging once more, regaining the lead from the Panamax boxships. By May-15 the cumulative share of the start 2012 fleet scrapped in the Capesize sector was 13.7% compared to 13.4% for the Panamax boxships. Iron ore trade growth slowed dramatically in 2015, whilst the Panamaxes appeared to be enjoying a resurgence with improved earnings in the first half of the year ensuing from fresh intra-regional trading opportunities.

…Gone Tomorrow

But the result of the race was still not yet clear. Today the Panamaxes are back in front again, thanks to record levels of boxship scrapping in 2016, including 71 Panamaxes (0.30m TEU) on the back of falling earnings, ongoing financial distress and the threat of obsolescence from the new locks in Panama. Despite a huge run of Capesize scrapping in Q1 2016 (7.5m dwt), the cumulative figure today for Capes stands at 22.3% of start 2012 capacity, compared to 25.4% for Panamax boxships, remarkably similar levels.


Where’s The Line?

So, today the old Panamax boxships are back in the lead, but who knows how the great race will end? Capesize recycling has slowed with improved markets, but Panamax boxships have seen some upside too, even if the future looks very uncertain. Hopefully they’ll both get there in the end but no-one really knows where the finish actually is. That’s one thing even the tortoise and the hare didn’t have to contend with. Have a nice day.

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