Archives for category: economic

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 car carrier sector has been yet another part of the shipping industry to have faced challenging conditions this year. The focus has largely been on demand side difficulties, with growth in global seaborne car trade appearing to have gone into reverse gear. It has been a rather bumpy ride, and today’s car carrier market indicators still seem to be flashing up plenty of warning signals.

Going Slow

Growth in global seaborne car trade has struggled to return to the robust levels seen prior to the global economic downturn, when car trade was one of the faster growing parts of seaborne trade. Given the strong link between economic growth, consumer demand and car sales, the car carrier sector has been highly exposed to sluggish world economic performance in recent years, and global seaborne car trade has still not yet returned to its 2008 peak of 21.3m cars, with average growth of just 1.4% p.a. in 2013-15. This year has seen further pressure on seaborne volumes, with car trade projected to have dropped 4% to 19.8m cars.

The key driver of this fall has been considerably lower imports into developing economies following the commodity price downturn. Car sales in these countries have dropped sharply, and seaborne car imports into the Middle East, Africa and South America are set to drop by more than 10% this year. While imports into North America and Europe, still the two largest markets for imported vehicles, have grown moderately (by 2% and 4% respectively), this has not been enough to offset declines elsewhere. Other factors have also dented volumes, with expansion of car output closer to demand centres leading to a disconnect between global car sales, which have continued to expand, and seaborne trade volumes.

Warning Lights

Largely as a result of the downturn in demand, car carrier market conditions have deteriorated further this year. Most car carriers still operate under long-term agreements, but guideline charter rates have fallen back to subdued levels, with the one year rate for a 6,500 ceu PCTC falling to $16,000/day in recent weeks, down 30% from the start of the year. Vessel idling has risen, utilisation of active capacity is under pressure, and waiting time between fixtures has increased, whilst a trend towards shorter-term and spot fixtures has also been apparent.

Making The Turn

In response to these pressures, owners have stepped up supply-side action. Scrapping has increased, and is projected to reach 0.2m car equivalent capacity this year, over four times the 2015 level and the highest since 2009, with fleet capacity projected to have declined by 0.3% in full year 2016. Meanwhile, only two ships have been ordered this year, after 42 contracts were placed in 2015.

Route Planning

Yet the road ahead still seems far from clear for the car carrier sector, with demand seeming unlikely to shift up a few gears in the short-term. In our annual Car Carrier Trade & Transport report, we look at the latest trends in detail. This year’s report is now available on the Shipping Intelligence Network. Have a nice day.

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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

Container shipping is 60 years old next week. From its origins in the first seaborne transportation of containers on board Malcolm McLean’s Ideal-X on 26 April 1956, containerized shipment has become the glue that holds together today’s globalised economy. This week’s Analysis takes a look at how the container sector exploded into the centre ground of the world’s shipping business.

Lighting The Candles

The man acknowledged to have been container shipping’s true pioneer, Malcolm McLean, a trucking magnate, used a converted tanker to move the first containerized cargo by sea from New Jersey to Houston, 60 years ago, back in 1956. Four years later, Sea-Land introduced the first Transatlantic service, and in 1969, in the UK, Overseas Container Lines launched its first service. Landmarks indeed, and the benefits have been widely felt ever since. Containerization enabled the standardization of port handling equipment, increased speed of cargo handling, and flexibility of location of stowage and unpacking which all changed the way that manufactured goods are shipped around the world. It also improved cargo security, and facilitated intermodal integration to provide an inter-connected transportation system.

Pass The Parcels

Today, containerized transport links up just about every corner of the world, even if cargo might need to be ‘transhipped’ from one vessel or service to another to reach its final destination. Reflecting this, the ‘liner network’ has seen rapid increases in volumes. Across the last 40 years the compound annual growth rate in global container trade volumes stands at 9%, and this year world box trade is projected to surpass 180m TEU. As the graph shows, following the first 20 years of container shipping history, the next 20, 1977-1996, saw the addition of an estimated 41m TEU of box trade per annum, and the most recent 20 years have seen the addition of a further massive 136m TEU of annual loaded container trade.
The network has also provided cheap ‘per unit’ shipping. With around 400 flat screen TV sets in one box, every $100/TEU of freight cost equates to just $25 cents per unit. Given the type of vessels introduced, per TEU costs of operating ships have dropped too. Across 1976-96, 3m TEU of capacity was delivered, with an average ship size of 1,673 TEU. In 1997-2016, 20m TEU was delivered with an average size of 4,363 TEU, taking today’s fleet capacity to 19.9m TEU

Icing On The Cake

So, whilst growing up, container shipping has been busy connecting the world via the liner network for the movement of goods in a speedy and secure fashion. Whilst partially separating vessel ownership and operation, it has enabled cheap door-to-door transportation of manufactured goods, and the connection of consumers with the lowest cost production locations, facilitating the great outsourcing boom and enabling multi-location processing. Supply chains have been optimised and specialist port infrastructure has been established and connected to the distribution network. All in all, containerization has been one of the greatest facilitators of change in the world economy in the last century. Happy birthday to you, container shipping!

SIW1218

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.

SIW1217

The volatility of the shipping markets has always presented opportunities and pitfalls for investors (see SIW 1210). Getting the timing right is key, and newbuilding decisions can prove especially difficult given the need to look further forwards into the future – always a tricky task. The challenging state of many shipping markets suggests that owners have struggled to find the right balance when planning ahead.

Changeable Winds

Accurately forecasting future shipping market developments is clearly fraught with difficulties. Owners making newbuild investments may be renewing their fleets, or building for dedicated business, but for those ordering more speculatively, the investment might reflect expectations of future demand and market conditions.

These trends are hard to predict. Economic and political developments, amongst many others, can shift quickly and change trade patterns. Combined with supply factors such as newbuild pricing or finance availability, it is easy to see how the volume of tonnage ordered can be misaligned with the requirement.

Clouds Gathering

Comparing historical contracting to the volume of ‘required’ deliveries shows that investment has frequently ‘overshot’ the need for additional ships. In 2003 for example, global contracting totalled 117m dwt. Assuming that these ships take two years to be delivered, trends in 2005 could indicate whether this level of ordering was lower than or surplus to requirement. Global demolition totalled 6m dwt in 2005, and world seaborne trade grew by 4.5%, which based on estimated fleet productivity in 2003, could have required an extra 42m dwt of tonnage to transport. So ordering in 2003 may have been 70m dwt greater than the estimated volume of deliveries needed in 2005. The surplus was even greater in 2007, when 275m dwt was ordered, but with seaborne trade dropping by 3.7% in 2009, there was no ‘requirement’ for any additional tonnage to be delivered that year.

Gusts From The East

Since 2000, more years than not have seen ‘excess’ ships ordered. After the financial crisis hit, surplus capacity led to weaker markets and changes in productivity, such as slow steaming. Ordering in 2009-12 was closer to estimated ‘requirement’, but surged to 178m dwt in 2013, with hope in some sectors that the bottom of the cycle had been reached.

Yet 2015 saw seaborne trade growth slow to 2.1%, led by trends in China. With 39m dwt scrapped in 2015, and an estimated 36m dwt needed to ship the additional trade volumes, ordering in 2013 could have ‘overshot’ by 100m dwt, exerting further supply pressures.

An Unsettled Climate

The story clearly varies across sectors, but shipping investors seem an optimistic bunch, and are now being let down by underperformance of seaborne trade. At times, this optimism has raised demand for shipyard capacity, but has still created a surplus, with lower ordering in 2014-15 still possibly excess to requirement based on current projections. In such a changeable climate as shipping, it’s clear that checking the forecast is vital, but it seems that getting a clear view ahead is hard.

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