Archives for category: Container

In last year’s half year shipping report, we reported on an industry that “must do better”. With the ClarkSea Index averaging $10,040 per day in the first half (up 2% y-o-y but still 14% below trend since the financial crisis) there are still many subjects (sectors) struggling for good grades as our Graph of the Week shows. But are there some that are showing a bit more potential?

Don’t Rest On Your Laurels!

A year on from record lows, bulker earnings remain below trend (defined as the average since the financial crisis) but are showing signs of improvement. Capesize spot earnings moved from an average of $4,972/day in 1H 2016 to $13,086/day (75% below trend versus 33% below trend). Indeed, based on the first quarter alone, Panamax earnings moved above trend for the first time since 2014 and we have certainly seen lots of S&P activity. The containership sector has responded to the Hanjin bankruptcy with another wave of consolidation (the top ten liner companies now operate 75% of capacity) and some improvements, albeit with lots of volatility, in freight rates. Improved volumes, demolition and the re-alignment of liner networks, helped improve charter rates and indeed feeder containerships rates have moved above trend for the first time since 2011. Although some gains have been eroded moving into the summer, fundamentals for both these sectors suggest improvements in coming years but it may be a bumpy road!

Dropping Grades!

After solid marks in last year’s reviews, the tanker sectors tracked here have moved into negative territory compared to trend, with the larger ships feeling the biggest correction as fleet growth, particularly on the crude side, remains rapid and oil trade growth slows. Aside from a small pick-up in the LNG market in recent weeks, the gas markets remain weak, with VLGC earnings 42% below trend. Some increased activity, project sanctioning and investor interest has not yet taken offshore off the “naughty step” .

Still Top Of The Class?

The only sector significantly above trend for the first half is Ro-Ro, with rates for a 3,500lm vessel averaging euro 18,458/day, 42% above trend. There also continues to be strong interest in ferry and cruise newbuilding (the 2 million Chinese cruise passengers last year, now 9% of global volumes, is supporting a record orderbook of USD 44.2bn, as is the interest in smaller “expedition” ships). We must also give a mention to S&P volumes that are 60% above trend (51m dwt, up 50% y-o-y) and to S&P bulker values which improved 25% in the first quarter alone.

Showing Potential?

Upward revisions to trade estimates have been a feature of the first half, and we are now projecting full year growth of 3.4% (to 11.5bn tonnes and 57,000bn tonne-miles). Although demolition has slowed (down 55% y-o-y to 16m dwt), overall fleet growth of 2.3% is still below trend but an increase on 1H 2016 (1.6%). While there has been some pick-up in newbuild ordering to 24m dwt (up 27% y-o-y), this remains 52% below trend. Last year we speculated on an appointment with the headmaster – still possible but perhaps this year extra classes on regulation and technology? Have a nice day.

SIW1280

Conventionally, the container shipping market is viewed as made up of two key elements: the freight market for moving boxes from A to B, and the charter market for hiring ships. Often these markets are happily moving in sync, but that’s not always the case. How does the relationship work and how closely have these markets moved in relation to each other, both in recent times and historically?

Happy Couple?

Let’s start with recent history. Improved fundamentals in 2016, when box trade grew by 3.8% but containership capacity expanded by just 1.2%, and into 2017, have had a twin impact on the container shipping markets. Firstly they helped the box freight market bottom out. The mainlane freight rate index (see graph) increased from 24 in Mar-16 to 73 in Jan-17, and this pattern has been mirrored across many trade lanes. Secondly, the backdrop eventually helped support a slightly improved charter market, with rates moving away from the bottom of the cycle in late Q1 2017. In theory, demand from freight market end users (shippers) filters down to the vessel charter market in the end, with additional volume driving charterers (liner companies) to access additional units (from owners).

Splits And Separations

But does the power of the fundamentals always drag the two markets along together? It is not always the case; they often move apart. Before the financial crisis, the freight market appeared somewhat less volatile than today, but that did not always see the markets in sync. Despite more than 20% cargo growth in 2005-06, and the freight market holding most of its ground, the charter rate index slumped by 47% from an all-time high of 172 in Apr-05 to 91 in Dec-06, as super-cycle peak rates proved unsustainable.

The post-downturn period has seen similar instances. The box shipping markets moved into an era of ‘micro’ management of supply (slow steaming, idling and cascading) and this has impacted both freight and charter markets. In both early 2011 and 1H 2015 charter rates rose as freight rates dropped like a stone. In 2011 the freight rate index dropped by 38% to 47 whilst the charter rate index rallied, as operators deployed additional capacity to the detriment of freight rates. But soon after the opposite occurred, and freight rates increased but charter rates dropped back to bottom of the cycle levels where they remained for the next three years.

Re-Coupling…

In the long-term, however, the two spheres do appear to be aligned. What simple inspection suggests, the numbers confirm. In only 33 of the months on the graph (21%) have the markets actually moved in opposite directions (excluding monthly movements of less than 1%).

Let’s Stick Together!

So, the two box markets do move independently at times but they often move in sync and when apart they tend to re-align (what econometricians might call an ‘error correction mechanism’). Perhaps this just confirms that ‘cargo is king’ and the supply side eventually adjusts. Whatever the case, box shipping’s famous couple can’t keep themselves apart for too long. Have a nice day.

SIW1277

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.

SIW1274

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 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

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

After another year of extremely difficult market conditions, many would forgive liner sector players for an air of resignation. However, despite a challenging freight market, charter rates remaining firmly in the doldrums and a major corporate casualty, looking back 2016 may well be seen as the year in which the container shipping sector really started to tackle its problems head on.SIW1255

Sustained Struggles

The container shipping sector has spent much of the post-financial crisis era under severe pressure and, as many expected, 2016 proved no real exception. Box freight rates in general remained weak, and the SCFI Composite Index averaged 18% lower in 2016 than in 2015. However, by late in the year it did appear that spot freight rates might be bottoming out on some trade lanes.

Against this backdrop, charter market vessel earnings remained extremely challenged, at bottom of the cycle levels. The one year rate for a 2750 TEU ship averaged $6,000/day in 2016, 37% lower than in 2015. ‘Old Panamax’ types fared even worse, averaging $4,979/day in 2016, 58% down on 2015, with the opening of the new locks at the Panama Canal impacting vessel deployment patterns.

Fundamental Traction?

Nevertheless, sector fundamentals did appear a little more positive in 2016. Demand conditions improved, with global volumes expanding by an estimated 3% in the full year to 181m TEU. Volumes on the key Far East-Europe trade returned to positive growth and the rate of expansion on intra-Asian trades accelerated back to more robust levels. However North-South volumes and trade into the Middle East remained under severe pressure from the impact of diminished commodity prices, though volumes into the Indian Sub-Continent grew strongly.

Meanwhile, containership capacity growth slowed significantly in 2016, reaching just 1.2% in the full year. Deliveries fell dramatically to 0.9m TEU (from 1.7m in 2015) and demolition accelerated rapidly to a new record of 0.7m TEU.

Still A Surplus

However, given the level of surplus built up in the post-Lehman years, and in particular the impact of the delivery of substantial capacity, much of it in the form of new ‘megaships’, the improved supply-demand balance seen last year was not enough to generate any significant improvement in market conditions. At the end of 2016, around 7% of total fleet capacity stood idle. The financial collapse of major Korean operator Hanjin was a further illustration of the acute distress facing both operators and owners.

Getting To Grips?

So, further recalibration still appears to be necessary to generate better markets. However, 2016 might also be seen as the year in which the sector finally started to lay real foundations for a better future. Demolition hit a new record, and financial distress and regulatory requirements are expected to drive further recycling. The ordering of newbuild capacity dropped to just 0.2m TEU in 2016, a dramatic halt.

Meanwhile, further significant steps in the consolidation of the sector were taken in the form of merger and acquisition activity involving major operators; the top 10 now deploy 70% of all boxship capacity, a figure set to rise to around 80%. Building blocks only these factors may be, but many will hope that at last container shipping is starting to build towards something more positive than the gloomy conditions that perpetuated in 2016.