Archives for category: Clarksons

“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.

SIW1271

Many of shipping’s asset markets appear to offer a fairly reasonable level of liquidity most of the time, but just like the “Karma Chameleon” in the 1983 No.1 song, sometimes this can “come and go” due to a variety of factors. Recently, it appears that S&P market liquidity has been coming on strong in the main volume sectors, and once again there appear to be a number of different drivers behind the changes…

You Come And Go…

As in all economic asset markets, liquidity can change its hue according to the market environment, depending on the appetite of potential buyers and sellers to transact at a given level against a backdrop of a range of factors, including the availability of finance. From much lower or dropping levels of liquidity just a year or so ago, it seems that today S&P market liquidity has been on the up, with things looking increasingly active recently. The graph indicates, for the three main volume sectors, the monthly level of liquidity in terms of the volume of reported sales (in vessel numbers) on an annualised basis, as a percentage of the existing fleet at the start of each month. A 6-month moving average (6mma) is then taken to remove some of the month-to-month volatility and illustrate the general trend.

By George! A New High…

The lines on the graph (unlike in the song lyrics they’re not “red, gold and green”…) show how quickly the liquidity has risen in the main sectors. For bulkcarriers the 6mma has jumped from 4.1% in Feb-16 to 7.2% in Apr-17. In the tanker sector, it increased from 3.3% in Apr-16 to 4.6% in Mar-17, and in the containership sector it has leapt from 2.3% in Feb-16 to 5.5% last month. On a combined basis across the three sectors, the 6mma has increased from 3.5% in Feb-16 to 6.0% in Apr-17, and the monthly figure for Feb-17 reached 9.7%. The 6.0% figure represents the highest 6mma level of liquidity since the onset of the financial crisis in late 2008 (the low point being 2.5% and the average across the period 4.3%).

S&P’s Big Hits…

However, on inspection the drivers look a little different. In the bulkcarrier sector, as has been widely reported, with some improvements in freight market conditions buyer appetite appears to be back, and has driven pricing upwards. Reported sales volumes in the first four months of 2017 stood at 277 units, up more than 50% y-o-y. In the tanker sector, liquidity appears to be coming back after a period in which, against easing markets, prices may have been too high for buyers’ tastes. Again, volumes in the first four month are up by more than 50% y-o-y. In the boxship sector, meanwhile, it’s different once again, with distressed sales to the fore after the cumulative impact of markets which have until now been in the doldrums for some time. Mar-17 saw an all-time record monthly level of containership sales (44) and the year to date figure is closing in on the full year 2016 total.

In The Culture Club?

So, S&P liquidity can come and go, and recently it has clearly been on the way up. For those trying to transact to access tonnage, or exit the market, that’s a big help, and it’s good news too for asset players, an enduring part of the shipping market’s culture. Have a nice day!

SIW1270

In 2011, Nigerian oil production stood at 2.55m bpd (of which 71% was offshore), accounting for 7.1% of total OPEC oil production (and 40% of West African offshore oil production). Since then, Nigerian oil production has been eroded by exposure to political risk factors and weaker commodity prices, dropping to just 1.54m bpd in 2016. What, then, is the outlook for Nigerian oil production in 2017 and beyond?

A Rose-Tinted Past?

Nigeria has been an oil producing country for almost 60 years and its first producing offshore field came onstream in 1965. In the following decades, Nigerian offshore E&P was focused almost entirely in the shallow waters of the Niger Delta. Even today, there remain 104 active shallow water fields in Nigeria producing via 263 fixed platforms with an average age of 25 years. It was in the late 1990s that Nigerian E&P began moving further from shore, as oil companies sought new reserves to offset decline at mature shallow water fields. Deepwater fields were also less vulnerable to the militant activity plaguing the Delta for much of the 2000s. The first deepwater discovery in Nigeria was Abo, in 1996, which was the first such start-up too, in 2003. As of March 2017, 40 fields in water depths of at least 500m had been found off Nigeria, of which 10 had been brought onstream via a total of seven FPSOs and 253 subsea trees.

A Risky Proposition?

However, were it not for deleterious influences on Nigeria’s upstream sector in the last 10 or so years, deepwater E&P in the country could now be more prevalent still. The foremost difficulty has been the Petroleum Industry Bill (PIB), which was first introduced to the Nigerian Parliament in 2008 and which has yet to be passed. An especially contentious issue is mooted changes to deepwater fiscal terms, which IOCs argue would render deepwater projects (where breakevens tend to fall in the $60-90/bbl range) unviable. An uncertain investment climate has been compounded by court cases arising from alleged improper practices, for example at OPL 245, host to the stalled ZabaZaba project(100,00 bpd). So there have been few deepwater FIDs and just three such field start-ups off Nigeria since 2009 (versus 20 off Angola). There has thus been little deepwater oil production growth to offset onshore or shallow water field decline.

Stability Or Volatility?

Uncertainty about the PIB remains, but in 2016, disruption caused by militants, notably the Niger Delta Avengers, came to the fore: attacks on oil infrastructure saw oil production dip below 1.25m bpd at times in 2016. Moreover, weaker oil prices have hit government finances and so its ability to dampen unrest. Production recovered slightly in Q4 but conditions in the Delta remain febrile. And if oil production does continue to ramp back up to over 2.0m bpd, it could imperil gains in the oil price that followed the OPEC deal (Nigeria is exempt from quotas). If prices cannot climb above $60/bbl, there is little prospect of Nigerian deepwater projects (of which there are 13 with a total oil production capacity of over 0.81m bpd yet to be sanctioned) hitting FID any time soon.

So in the short term, Nigeria could prove a key factor in the global oil price equation. And in the long term, undoubtedly the country has a great deal of deepwater potential; however, before this is likely to be realised, numerous challenges need to be overcome. Nothing is certain.

OIMT201703

In the high jump ‘the scissors’ was one of a number of techniques eventually superseded by Dick Fosbury’s ‘Flop’, which saw the American athlete win the gold medal at the 1968 Olympics in Mexico City. The container shipping market has seen a bit of ‘flop’ of its own in recent years but today a return to the ‘scissors’ appears to be providing some helpful support at last…

The Flop

It has been clear to market watchers that containership earnings have spent most of the period since the onset of the global financial crisis back in 2008 at bottom of the cycle levels. The Analysis in SIW 1,245 illustrated how cumulative earnings in the sector in that time proved a bit of a flop, and notably so in comparison to those in the tanker and bulker sectors. However, it’s fair to say that things have started to look a little bit better recently.

Jumping Back

The first building block was that the freight market appeared to bottom out in the second half of last year, with improvements in box spot rates on a range of routes backed by careful management of active capacity. In the first quarter of 2017, the mainlane freight rate index averaged 64 points, up 42% on the 2016 average. However, containership charter rates remained in the doldrums into 2017, with the timecharter rate index stuck at a historically low 39 points at the end of February, before the market picked up sharply during March taking the index to 47 (though since then market moves have been largely sideways). This change in conditions was partly supported by liner companies moving quickly to charter to meet the requirements of new alliance service structures, but how much were fundamentals also driving things?

Well, the start of some upward movement at last was to some extent in line with expectations, with demand growth expected to outpace supply expansion this year, and no doubt accelerated charterer activity helped too. However, the market received additional impetus from recent sharp shifts in supply and demand.

Doing The Scissors

The lines on the graph (see description) show y-o-y growth in box trade and containership capacity; this is where the scissors come in. In 2015, capacity growth reached 8%, and remained ahead of trade growth until Q4 2016 when the lines crossed. In 2017, with capacity declining by 0.1% in Q1, backed by historically high demolition, and trade growth, notably in Asia, pushing along nicely, a big gap between the two lines has opened up. Demand is projected to outgrow supply this year (by c.4% to c.2%), but not by quite as much as seen so far. Full year expectations may be a little more restrained, but it’s still a helpful switch.

Going For Gold

So, in the case of the recent changes in containership earnings, maybe a bit of extra heat from the charterers’ side helped, but it looks like fast-moving fundamentals have offered some support too. Perhaps it all goes to show that old methods can sometimes be as good as new ones, and right now boxship investors should be happy to forget the ‘flop’ and focus on the return of the ‘scissors’.

SIW1269:Graph of the Week

The shipping industry has long provided investors with opportunities for asset play, reflecting the volatility in prices and relative shifts in the value of certain classes or ages of ships. Recent months have been no exception, with changes in tempo clearly evident in some shipping sectors. What can conducting a quick survey of the classic asset market indicators tell us today?

Classical Repertoire

One classic indicator (see SIW 1175) of the state of the asset market in any particular sector is the ratio of the 5 year old price to the newbuild price of a similar ship. On the basis of a 25 year lifespan, a 5 year old vessel depreciating evenly would be worth around 80% of the newbuild price. The level of this ratio can demonstrate how keen investors are to purchase assets on the water today.

Change Of Tempo

The graph shows the 5 year old to newbuild price ratio for a Capesize and a VLCC. The ratio is clearly volatile, and recent trends in the Capesize sector are illustrative of how conditions in shipping asset markets can change rapidly. Since the start of 2009, the Capesize ratio has fluctuated within a wide range from 50% (reached in early 2009 and again in early 2016) to 110% (although this was still well below the peak of 160% in mid-2008 at the height of the boom). The ratio has also moved significantly even in the last few weeks, as Capesize secondhand prices have risen robustly. At the end of February 2017, the 5 year old Capesize price stood at $25m, 60% of the newbuild price. By the end of March, the 5 year old price had risen to $33.5m, 80% of the newbuild price and the highest ratio since autumn 2014, indicating the improved appetite for tonnage in the bulker market.

New World Or Old Classics?

While these trends in asset price ratios can indicate the market’s view on the relative value of newbuild and secondhand tonnage, changes in the ratio can sometimes subsequently impact on decision making by investors. When the ratio falls to low levels (the Capesize ratio remained below 70% from Jan-15 to Feb-17), secondhand purchases can often appear more attractive than newbuildings, whilst higher ratios can sometimes eventually stimulate newbuild interest.

Orchestrating Opportunities

Even more starkly, the volatility in price ratios reinforces the opportunities for asset play in the shipping markets. To take an example, a 5 year old Capesize vessel one year ago could have been picked up for about $23.75m. Trading the vessel on a 1-year timecharter (around $8,000/day at the time) and selling the unit as a 6 year old, for say $31.5m, would have generated a return of almost $8m after OPEX (34% of the original outlay).

Still Making Overtures?

So, even after a prolonged downturn, the classic indicators show a shipping market still volatile and open for asset play. Recent shifts, especially in the bulker sector, offer an excellent example. Whilst the outcome is always highly difficult to predict, there still appear to be opportunities for those willing to take a chance, hoping to hit the right note. Have a nice day!

SIW1267:Graph of the Week

The introduction of new environmental regulations is leading the shipping industry to look for ways of reducing its emissions of harmful gases. This week we focus on two separate but related issues: the way in which vessels are powered, and the type of fuel that they use. New technologies are being adopted, with certain ship types leading the way…

Electric Therapy

The majority (96%) of active merchant vessels are powered by mechanical systems in which a form of fuel oil powers a main engine (usually a 2 or 4-stroke diesel) which is connected to the propeller. Most other vessels are “diesel-electric”, in which the power generated by the (4-stroke) main engine(s) is converted to electricity before being transferred to propeller(s) or thruster(s) via electric motors.

By optimising the loading of the engines, diesel-electric systems can lower fuel consumption and emissions. These systems are well established in sectors such as offshore, tugs and passenger, where manoeuvrability, variation in power demand and engine noise are important considerations. For larger cargo vessels, where demand for power is generally higher and more consistent, conventional mechanical systems remain more efficient and cost-effective. Our Graph of the Week shows that against a backdrop of reduced contracting in the larger cargo sectors, electrically-driven ships have assumed a greater share of the newbuilding market, accounting for 22% of reported newbuilding contracts so far this year.

Battery Charged

The next step for electric power may be more widespread adoption of batteries in main propulsion systems. There are 22 vessels in service and 14 on order that use batteries, mostly alongside either conventional diesel or dual-fuel generating sets. As well as reducing emissions when using battery power, these can enhance efficiency by optimising engine loads and transferring surplus power to or from the batteries as required. For smaller ferries intended for short routes, all-electric propulsion systems are feasible.

Gas Treatment

LNG has been identified as a cleaner fuel capable of reducing vessel emissions in line with new regulations. Clarksons Research’s World Fleet Register currently identifies 542 merchant ships in the fleet and on order capable of using LNG fuel. 351 of these are LNG carriers, which can use cargo boil-off to fuel a choice of turbine, dual-fuel diesel electric or dual-fuel 2-stroke main engines. In other sectors LNG fuel has taken longer to gain market share, but there are signs that where ship designs and the supply of bunkers allow, it is becoming more popular. Out of the 130 contracts recorded so far in 2017, 21 are for vessels capable of using LNG fuel. These include 4 Aframax tankers, the largest vessels other than LNG carriers to adopt dual-fuel 2-stroke engines.

More efficient power systems and cleaner fuels are two examples of how the shipping industry is responding to the challenges set by new environmental regulations. Alongside other developments in vessel design and operating practices, shipping is steering towards a more efficient and cleaner future. Have a nice day!

SIW1266:Graph of the Week