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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 shipping markets have in the main been pretty icy since the onset of the global economic downturn back in 2008, but 2016 has seen a particular blast of cold air rattle through the shipping industry, with few sectors escaping the frosty grasp of the downturn. Asset investment equally appears to have been frozen close to stasis. So, can we measure how cold things have really been?

Lack Of Heat

Generally, our ClarkSea Index provides a helpful way to take the temperature of industry earnings, measuring the performance of the key ‘volume’ market sectors (tankers, bulkers, boxships and gas carriers). Since the start of Q4 2008 it has averaged $11,948/day, compared to $23,666/day between the start of 2000 and the end of Q3 2008. However, earnings aren’t the only thing that can provide ‘heat’ in shipping. Investor appetite for vessel acquisition has often added ‘heat’ to the market in the form of investment in newbuild or secondhand tonnage, even when, as in 2013, earnings remained challenged. To examine this, we once again revisit the quarterly ‘Shipping Heat Index’, which reflects not only vessel earnings but also investment activity, to see how iced up 2016 has really been.

Fresh Heat?

This year, we’ve tweaked the index a little, to include historical newbuild and secondhand asset investment in terms of value, rather than just the pure number of units. This helps us better put the level of ‘Shipping Heat’ in context. In these terms, shipping appears to be as cold (if not more so) as back in early 2009. This year the ‘Heat Index’ has averaged 36, standing at 34 in Q4 2016, which compares to a four-quarter average of 43 between Q4 2008 and Q3 2009.

Feeling The Chill

Partly, of course, this reflects the earnings environment. The ClarkSea Index has averaged $9,329/day in the year to date and is on track for the lowest annual average in 30 years. In August 2016, the index hit $7,073/day, with the major shipping markets all under severe pressure.

All Iced Up

The investment side has seen the temperature drop even further. Newbuilding contracts have numbered just 419 in the first eleven months of 2016, heading for the lowest annual total in over 30 years, and newbuild investment value has totalled just $30.9bn. Weak volume sector markets, as well as a frozen stiff offshore sector, have by far outweighed positivity in some of the niche sectors (50% of the value of newbuild investment this year has been in cruise ships). S&P volumes have been fairly steady, but the reported aggregate value is down at $11.2bn. All this has led to the ‘Shipping Heat Index’ dropping down below its 2009 low-point.

Baby It’s Cold Outside

So, in today’s challenging markets the heat is once again absent from shipping. And, in fact, on taking the temperature, things are just as icy as they were back in 2008-09 when the cold winds of recession blew in. This year has shown that after years out in the cold, it’s pretty hard for things not to get frozen up. Let’s hope for some warmer conditions in 2017.

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It has been well documented that newbuild orders have slowed substantially in 2015, with 857 contracts recorded at yards in the first three quarters of the year, down 45% from 2014 on an annualised basis. However, it’s also clear that builders in the big three shipbuilding countries have experienced differing fortunes. Looking beyond the aggregate trend, what has driven the divergent outcomes?

Hardened Times

In 2015 so far, the newbuilding market has seen subdued ordering activity. In the first three quarters, shipyards globally took orders equivalent to 24.3m CGT (compensated gross tonnes, a measure of shipyard ‘work’ or capacity). This compares to a total of 43.9m CGT in full year 2014. However, the big three builder countries have experienced significantly different fortunes. Chinese yards have been hit extremely hard, with new contracts in CGT terms down by 49% on an annualised basis. New contracts at Japanese yards, meanwhile, have dropped by a more moderate 14%, whilst ordering in Korea has fallen by 7%, not too bad when global contracting is down by 26%.

Exposed To A Changing Mix

What explains the difference? Many factors are at play but foremost is the ‘product mix’ – the type of units ordered. And even more so, it’s the mix in the context of the ‘exposure’ or track record that each builder nation has in the key vessel sectors. The graph illustrates ordering in selected sectors in the major builder countries alongside their ‘exposure’.

The bulker sector lies at the heart of Chinese yards’ fortunes this year. Global bulker orders of 2.6m CGT (152 units) are down by 77% on an annualised basis (to 11% of orders globally). In 2014 China took 9.2m CGT of bulker orders, but in 2015 ytd has taken only 0.5m CGT. This accounts for 8% of total Chinese orders of 6.3m CGT this year, but over the previous five years bulkers have accounted for 57% of contracting in China (and 39% of contracts globally). China’s exposure to bulkers comes at a price now that the product mix has shifted.

Anyone Well Set?

Boxships and tankers have accounted for 61% of global ordering in the ytd, and Korean builders’ exposure to these sectors (23% and 28% respectively in 2010-14) has stood them in good stead. These types have accounted for 71% of the total 8.8m CGT of contracts placed in Korea in the ytd, with the major yards more focussed on boxships and medium-sized builders on tankers. In Japan, meanwhile, product switching has helped. Japanese builders have historically been highly exposed to bulkers (64% in 2010-14, and 29% even in 2015 ytd) but an increased focus on tankers and boxships (23% and 29% in 2015 ytd respectively), and support from domestic ordering, has allowed them to plug into today’s product mix, taking  6.0m CGT of orders in the ytd.

Monitoring The Exposure

So, aggregate building trends tell part of the story but product mix developments can be critical too. As every good trader knows, understanding your exposure is important. Sometimes this can be managed, and sometimes not, but it generally explains a lot. Have a nice day.

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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!

For many of the markets covered by Shipping Intelligence Weekly, the first part of 2015 was relatively kind. Rates for crude and product tankers were riding high, boxship charter rates picked up for the first time in years and VLGC rates have hit levels above 2014 averages. Even Capesizes have recently shown signs of life. But spare a thought for the offshore sector, the hardest hit by the oil price decline.

Price Drop

Back in the downturn of 2008/09, most commodity and shipping markets felt the negative impact and the offshore markets were no exception, with dayrates dropping by an average of around 35% (see graph).  Moving forward to the current time, however, the 50% decline in oil prices since mid-2014 has brought some relief for merchant vessels, in the form of cheaper bunkers, and stimulated oil demand, helping trade. But cheaper oil has meanwhile put heavy pressure on the offshore sector, where field operators already faced cashflow problems as field developments ran late and over-budget. The response has been sharp cuts in exploration and production (E&P) budgets. It is estimated that spending on offshore E&P will fall by 19% this year.

Investment Cuts

This means investment decisions on new projects have been deferred, whilst expenditure to enhance recovery from existing fields has also slipped. Accordingly, drilling demand has fallen, just as deliveries of new jack-up and floating drilling rigs have accelerated. Rates for ultra-deepwater floaters are now almost 50% below their late 2013 peak, at around $300,000/day. This reflects the reduced demand in frontier areas for exploration and appraisal drilling, not helped by the corruption investigations in Brazil. Meanwhile, jack-up drilling rig rates have been equally hard hit, with shale gas production killing demand in one of their traditional major markets, the shallow water Gulf of Mexico. Utilisation of jack-ups is below 80%, and rates have fallen more than 35% to around $100,000/day.

Less Support For Vessels

This has had rapid knock-on consequences. The 5,365 vessels and 1,133 owners in the OSV market are also exposed to the downturn in exploration drilling and operational field maintenance. Fewer active rigs harms the AHTS market for rig towage and positioning, whilst PSVs rely on the growth in active offshore installations (drilling rigs, plus mobile and fixed production platforms) to add to demand. Rates for OSVs are down in all regions, by over 35% on average in terms of the index on the graph. PSVs have a further problem of a robust supply growth to contend with (and close to 40% of the fleet on order for the largest units over 4,000 dwt).

Of course, markets are cyclical, and the offshore sector had its moment in the sun during 2012/13, at a time when several of the merchant shipping markets were in the doldrums. Although the current oversupply in world oil markets of around 1.5m bpd is a clear short-term hurdle, projected demand trends suggest that higher oil prices remain a likely prospect in the long-term, and the improvement in other sectors suggests that there will eventually be light at the end of the tunnel for offshore too. It’s just that it could be a little way off yet. Have a nice day.
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On 14th August 1948, Don Bradman, Australia’s greatest cricketer of all, walked out for his last test match innings, at the Oval in London. Over 52 test matches, his average score was an astonishing 99.9 runs. All he needed was 4 runs for a test match average of 100 (sorry non-cricketers, you’ll have to check it out on Wikipedia). But he was bowled out second ball by leg spinner Eric Hollies.

Two Simple Rules

The moral of this sad story is that however experienced you are, two basic rules apply. Keep your eye on the ball and watch out for spinners that behave erratically. That seems to apply pretty well to today’s tanker market. The fantastic revival of tanker earnings started in October 2013, was interrupted by the summer dip in 2014, then picked up in October 2014. Since then it has not looked back, with crude tanker earnings generally averaging $40-$50,000/day. There is a little weakening right now, but sentiment appears to be confident for the winter.

Demanding Wicket

Against the background of a 2% fall in seaborne crude oil trade in 2014, US fracking and a lacklustre world economy, this earnings surge was a surprise. But there were some mitigating factors. Low oil prices are boosting demand and the IEA has revised up its forecast for growth in global oil demand in 2015 to 1.6m bpd.

Growth on long-haul trades has also helped. Between 2011 and 2014 Caribbean tonne-mile exports increased by 36%, largely due to increased shipments to China and India. That sounds good, but many VLCCs repositioned with a backhaul e.g. West African crude for Europe, and maybe a Transatlantic fuel oil cargo. Although handling fuel oil is time consuming, especially when it involves STS (ship to ship), this undermined some of the “tonne-mile” effect. And so did cargo-leg speeds, which appear to have edged upwards over the last year. But while the part played by demand may not seem entirely clear, there has still been a notable improvement in crude trade volumes this year, with seaborne shipments to major importers estimated to have increased by 4% year-on-year in 1H 2015.

It’s Supply, Stupid?

When we turn to supply, the picture becomes clearer. Until the summer of 2013, the crude tanker fleet was growing at 15-20m dwt pa. That’s about 5-6% per annum growth, well above demand growth. But by October 2013 growth had fallen to 2%, producing a nice year-end spike. The tanker supply slowdown kept on going and by July 2014 the crude tanker fleet was declining. Admittedly the growth has
edged up so far in 2015, but only to around 1-2% per annum.

Nasty Spinner In Sixteen?

So there you have it. Tanker investors have scored well in the last year, but, like Don Bradman, they must remember rule two and watch out for the spinners. Although fleet growth is sluggish, the crude tanker orderbook for 2016 could produce a “googly” as it pushes fleet growth back up to 6% (depending on demolition). Even with positive demand, tanker investors are going to have to keep their eye on that ball and hope it breaks the right way. Have a nice day.

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Bulkcarrier owners could be forgiven for feeling just a little bit dizzy at the moment. The unprecedented growth in China’s steel industry over the last decade has for years provided an adrenaline-infused experience in dry bulk trade. But with both Chinese steel production and iron ore imports registering a decline in the first half of 2015, is the playtime over?

Down To Earth With A Bump

It’s no surprise that the recent wobbles in China’s economy have been leaving dry bulk’s thrill-seekers with a nasty headache. Construction activity has slowed, and total steel use dropped by 5% y-o-y in the first five months of the year. Steel production has declined by a less severe 1% y-o-y, but this is still an unpleasant change of direction for those accustomed to average output growth of more than 10% per annum over the last ten years.

Round The Roundabout Again

Yet these worries over China’s steel industry are not new. According to China’s annual estimates, steel output growth in 2014 slowed to 1%, from 14% in 2013. However, iron ore imports increased in 2014 by a massive 15% to 914mt. Almost heroic growth in Australian iron ore production flooded the global iron ore market with cheap ore, displacing some higher-cost domestic Chinese ore production. Ambitious production expansion in Australia is still underway, and exports from the country are up 9% so far this year, but total Chinese seaborne imports are down 1%. So what has changed?

Balance Shifts On The See-Saw

This year seems to have proved a tipping point in the iron ore market. Weak Chinese demand is contributing to record low iron ore prices (dipping below $50/tonne in April). In 2014, the rapid drop in prices boosted China’s overall import demand, but no such positive effect is visible this year. Instead, the extent of the price drop has squeezed out a number of small iron ore miners across the world, and Chinese imports from many smaller suppliers have been depressed this year. And while Chinese miners have clearly reduced domestic production, there are questions over how much more capacity (particularly state-owned) will be cut.

Swings In Need Of A Push?

The unsettling thought for the dry bulk market is that the excitement of the Chinese ride could be coming to an end. Despite the price drop, most major ore miners are forging ahead with expansion plans. If China’s steel usage has peaked, miners will be fighting for market share in a shrinking demand arena. And if Chinese ore output proves resilient to price pressures, this could leave those expecting a resumption of firm iron ore trade growth with only a severe case of vertigo.

While global growth in low-cost ore production could still boost imports later this year, there is certainly no longer a consensus that China’s steel industry has considerable long-term growth potential. Faced with this ominous scenario, bulker owners will be hoping that the current weakness in China’s iron ore imports is only a temporary downward swing. Time will tell, but for some the playground which once spurred great excitement might be starting to lose its appeal.

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