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After a long cycle of build-up in capacity in the 2000s, shipyards hit a new peak in global output in 2010. Since then, the impact of reduced vessel ordering on shipbuilders worldwide has been a key issue for the industry, and it’s clear that global output has dropped significantly and shipyard capacity has diminished. But how far can those shipyards still active look ahead today?

Looking Forward

‘Forward cover’ is one basic indicator of the volume of work that shipyards have on order, calculated by dividing the total orderbook by the last year’s output (in CGT). Unsurprisingly, after a period of extremely low ordering in 2016, forward cover has shortened. Currently, global forward cover stands at 2.3 years having declined throughout 2016, as the orderbook shrank by 25% in CGT terms. Global forward cover was as low as 2.1 years at the start of 2013 (but delivery volumes in 2012 were 37% higher than in 2016) and peaked at 5.6 years in 2008.

Looking around the shipbuilding world, yards in Korea currently have the lowest level of cover at 1.5 years. European yards, meanwhile, bucked the trend in 2016, increasing their forward cover on the back of cruise ship orders (and falling production volumes) to 4.2 years.

Less To Go Round

Fewer fresh orders have also led to a greater number of yards ending the year without receiving a single contract. During 2005-08, the number of yards to take at least one order was on average equivalent to 87% of the number of yards active (with at least one unit on order) at the start of the year. In 2009-15, with ordering generally lower, the figure averaged 49%. In 2016 this fell further to 28%, with just 133 yards receiving an order. In China, 48 yards (26 of which were state-backed) won an order in 2016 compared to 284 yards in 2007. In Japan, 22 yards took an order in 2016 compared to 60 as recently as 2015. In Korea, 11 shipyards took an order last year.

Out Of Work?

Whilst many yards have tried to cope with the lower demand environment by slowing production or working outside their traditional product range, the statistics clearly point to huge challenges. In 2016, 117 yards delivered the final unit on their orderbook. The peak production level of these yards, many of them smaller builders, totals around 4m CGT. However, 163 yards are scheduled to deliver their current orderbook by the end of 2017 (although in reality slippage may mean some of the work runs on past the end of the year). Statistically, this represents 43% of the number of yards active at the start of the year. Although these yards have been reining back capacity and outputting less in recent years, the peak production level of this set of yards totals as much as 12m CGT. Offshore builders of course face huge pressures too, with about half of those active scheduled to deliver their final unit on order this year.

Global shipyard output and capacity have fallen significantly since the peak years. However, many remaining yards still don’t need to look too far ahead to see the end of their current workload. The shipbuilding industry will be hoping to see a return to a more active newbuilding market sooner rather than later.

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In 2016 the shipping industry saw significant supply side adjustments in reaction to continued market pressures. For shipbuilders this meant a historically low level of newbuild demand with fewer than 500 orders reported in 2016, and the volume of tonnage on order declined sharply. Meanwhile, higher levels of delivery slippage and strong demolition saw fleet growth fall to its lowest level in over a decade.SIW1256

Pressure Building Up

2016 was an extremely challenging year for the shipbuilding industry. Contracting activity fell to its lowest level in over 20 years with just 480 orders reported, down 71% year-on-year. Domestic ordering proved important for many builder nations and 68% of orders in dwt terms reported at the top three shipbuilding nations were placed by domestic owners last year. Despite a 6% decline in newbuild price levels over 2016, few owners were tempted to order new ships, especially with the secondhand market offering ‘attractive’ opportunities. Only 48 bulkers and 46 offshore units were reported contracted globally last year, both record lows, and tanker and boxship ordering was limited. As a result, just 126 yards were reported to have won an order (1,000+ GT) in 2016, over 100 yards fewer than in 2015.

A Spot Of Relief

However, a record level of cruise ship and ferry ordering provided some positivity in 2016. Combined, these ship sectors accounted for 52% of last year’s $33.5bn estimated contract investment. European shipyards were clear beneficiaries, taking 3.4m CGT of orders in 2016, the second largest volume of orders behind Chinese shipbuilders’ 4.0m CGT. Year-on-year, contracting at European yards increased 31% in 2016 in terms of CGT while yards in China, Korea and Japan saw contract volumes fall by up to 90% year-on-year.

Further Down The Chain

In light of such weak ordering activity, the global orderbook declined by 29% over the course of 2016, reaching a 12 year low of 223.3m dwt at the start of January 2017. This is equivalent to 12% of the current world fleet. The number of yards reported to have a vessel of 1,000 GT or above on order has fallen from 931 yards back at the start of 2009 to a current total of 372 shipbuilders.

Final Link In The Chain

Adjustments to the supply side in response to challenging market conditions in 2016 have also been reflected in a slower pace of fleet growth. The world fleet currently totals 1,861.9m dwt, over 50% larger than at the start of 2009, but its growth rate slowed to 3.1% year-on-year in 2016. This compares to a CAGR of 5.9% between 2007 and 2016 and is the lowest pace of fleet expansion in over a decade. A significant uptick in the ‘non-delivery’ of the scheduled start year orderbook in 2016, rising to 41% in dwt terms, saw shipyard deliveries remain steady year-on-year at a reported 100.0m dwt. Further, strong demolition activity helped curb fleet growth in 2016 with 44.2m dwt reported sold for recycling, an increase of 14% year-on-year.

End Of The Chain?

So it seems that the ‘market mechanism’ has finally been kicking into action. A more modest pace of supply growth might be welcome news to the shipping industry but further down the chain shipbuilders are suffering. Contracting levels plummeted in 2016 and the orderbook is now significantly smaller. Even with the ongoing reductions in yard capacity, shipbuilders worldwide remain under severe pressure and will certainly be hoping for a more helpful reaction in 2017.

Strong demolition has been a prominent feature of the shipping industry this year, as challenging market conditions continue to drive a significant supply-side response in a number of sectors. Across the total shipping fleet, demolition could reach one of the highest levels on record in full year 2016, but which markets in particular have taken the biggest hits?

Revving Up

2016 has been an extremely difficult year for the shipping markets, with conditions in most sectors under pressure. Reflecting this, demolition has remained at elevated levels, and in January to November, 841 vessels of 41.3m dwt were scrapped. Demolition so far this year has already exceeded last year’s total of 38.9m dwt, and whilst scrapping volumes have picked up in most sectors, some markets have played a more important role in this year’s tally than others.

Bulker Beat

Amidst continued depressed earnings, bulkcarriers have accounted for the lion’s share of tonnage scrapped this year. Bulker scrapping set a new record in 1H 2016, and while demolition has slowed in recent months, 385 bulkers of 27.7m dwt have been scrapped in the year to date. Bulker demolition has been historically firm since 2011, but the pace of scrapping in most bulker sectors this year has still exceeded the 2011-15 average, with Capesize and Panamax recycling this year around 1.4 times this level.

Boxship Bumps

Meanwhile, containership demolition has also made headlines this year, with increasingly young vessels being recycled. In dwt terms, boxship scrapping has totalled 7.9m dwt so far in 2016, but recycling volumes are already over triple that of full year 2015, with scrapping on track to reach a record 0.7m TEU this year. The pace of demolition of ‘old Panamaxes’ has been running at more than twice the five year average, whilst scrapping has accelerated firmly in the 3,000+ ‘wide beam’ sectors, with 6,000+ TEU boxships also scrapped for the first time.

Big Hits On The Bodywork?

By contrast, despite the softening in crude and product tanker market conditions this year, tanker scrapping has remained relatively subdued, at less than half of the five year average. However, while gas carrier scrapping remains limited in numerical terms, with just 18 ships recycled so far this year, LPG carrier demolition is on track to reach around double the five year average after earnings fell swiftly to bottom of the cycle levels. Meanwhile, car carrier scrapping has soared to 27 units of 0.14m ceu. This is already the second highest level on record, and on an annualised basis is four times above the 2011-15 average.

So, while total demolition this year is still falling short of 2012’s record 58.4m dwt, 2016 looks set to see yet another year of very firm recycling, eight years after the onset of the downturn. In some sectors, this strong scrapping is providing a helpful brake on fleet expansion. Furthermore, with bruising market conditions having clearly taken their toll, many owners are likely to be looking to the demolition market for a little while yet.

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As in many sectors of economic activity, provision of just the right amount of capacity is a tricky business, and the shipbuilding industry is no exception. As a result, in stronger markets the ‘lead time’ between ordering and delivery extends and owners can face a substantial wait to get their hands on newbuild tonnage, whilst in weaker markets the ‘lead time’ drops with yard space more readily available.

What’s The Lead?

So shipyard ‘lead time’ can be a useful indicator, but how best to measure it? One way is to examine the data and take the average time to the original scheduled delivery of contracts placed each month. The graph shows the 6-month moving average (6mma) of this over 20 years. When lead time ‘lengthens’, it reflects the fact that shipyards are relatively busy, with capacity well-utilised, and have the ability, and confidence, to take orders with delivery scheduled a number of years ahead. For shipowners longer lead times reflect a greater degree of faith in market conditions, supporting transactions which will not see assets delivered for some years hence. Longer lead times generally build up in stronger markets. Just when owners want ships to capitalise on market conditions, they can’t get them so easily. But lead times shrink when markets are weak; just when owners don’t want tonnage, conversely it’s easier to get. The graph comparing the lead time indicator and the ClarkSea Index illustrates this correlation perfectly.

Stretching The Lead

Never was this clearer than in the boom of the 2000s. Demand for newbuilds increased robustly as markets boomed. The ClarkSea Index surged to $40,000/day and yards became more greatly utilised even with the addition of new shipbuilding capacity, most notably in China. The 6mma of contract lead time jumped by 49% from 23 months to 35 months between start 2002 and start 2005. By the peak of the boom, owners were facing record average lead times of more than 40 months. In reality, as ‘slippage’ ensued, many units took even longer to actually deliver than originally scheduled.

Shrinking Lead

The market slumped after the onset of the financial crisis, with the ClarkSea Index averaging below $12,000/day in this decade so far. Lead times have dropped sharply, with yards today left with an eroding future book. The monthly lead time metric has averaged 26 months in the 2010s, despite support from ‘long-lead’ orders (such as cruise ships) and reductions in yard capacity. Of course, volatility in lead time recently reflects much more limited ordering volumes.

Taking A New Lead

So, ‘lead times’ are another good indicator of the health of the markets, expanding and contracting to reflect the balance of the demand for and supply of shipyard capacity. They also tell us much about the potential health of the shipbuilding industry. In addition, even if shorter lead times indicate the potential to access fresh tonnage more promptly, unless demand shifts significantly or yards can price to attract further capacity take-up quickly, they might just herald an oncoming slowdown in supply growth. At least that might be one positive ‘lead’ from this investigation. Have a nice day.

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This week, the Bank of England put into place its action plan following the UK referendum on 23rd June, which indicated the British population’s preference to leave the European Union. While the political dust has yet to settle, shipping market observers have had time to form their views on the impact of ‘c’ on the industry. This week’s Analysis attempts to put the UK and the EU’s role in shipping in context.

Holding On

Once upon a time, of course, Britannia ‘ruled the waves’ and Great Britain, with its colossal maritime heritage (remember the British Empire?) was one of the world’s leading lights in ship ownership and shipbuilding. Today the story is a little different. UK owners account for just 2% of the global fleet in GT terms. The EU as a whole, however, remains a significant player, with 36% of world tonnage. While market share has shifted to the Asia-Pacific (39%), EU owners have held their own, led by the world’s largest owner nation in Greece, which has not been subject to its own ‘Grexit’ just yet.

Sailed East

Historically, Europeans were leading shipbuilders too, but in the modern era shipbuilding is dominated by Asia. In 2015, EU builders took 1.9m CGT of new orders (over 1,000 GT), 5% of the global total, and today account for 8% of the orderbook in CGT, whilst China, Korea and Japan together account for 84%. Europeans are now largely builders in the niche markets, dominating the cruise sector and maintaining a focus on small ships. Within the EU, the UK’s contribution is limited, with just two merchant vessels over 1,000 GT built since 2011.

Big Bloc

In terms of trade, the UK, given its status as the world’s 5th largest economy, accounts for a significant volume of imports and exports. However, in a global context these account for a relatively modest share. The UK’s imports account for an estimated 2% of global seaborne trade and its exports 1%. The EU, meanwhile, is much more significant, as befits its role as the world’s largest trading bloc, accounting for an estimated 16% of seaborne imports and 12% of exports.

Service Culture

One area where the UK and Europe maintain importance is as service providers. The UK is the world’s 14th largest flag and EU flags account for 18% of world tonnage. Lloyd’s Register in the UK is still a leading class society and along with DNV-GL and BV, the EU’s heavy-hitters, class 44% of the world fleet. Furthermore, London still remains one of the world’s pre-eminent maritime business hubs at the forefront of legal services, insurance and shipbroking too!

Wider, Still & Wider

However ‘Brexit’ plays out, it won’t go without notice. In fleet ownership or trade terms, the UK alone is not so significant (though the EU as a whole is). Perhaps the more important impact might be the wider fallout of uncertainty (or worse) surrounding one of the world’s largest economies. Meanwhile, the UK will be hoping that London can retain its role at the centre of commercial maritime affairs. Leaver or Remainer, have a nice day.

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In the recent passing away of Muhammad Ali, the world lost perhaps its greatest ever heavyweight boxer. Amongst his many famous catchphrases was “Float like a butterfly, sting like a bee!”. This week’s Analysis takes a look at something else that floats – the world’s major shipping fleets. How do the largest shipowning nations perform when it comes to punching above their weight?

Greeks Bearing Goods

SIW 1223 pointed out that Greek owners as a whole command a powerful ‘sting’ when one compares their share of the world fleet to their country’s share of global seaborne trade. Greek owners, the classic ‘cross-traders’, punch substantially above their weight, accounting for 16% of the tonnage (in GT terms) in the world fleet whilst Greece accounts for below 1% of world seaborne trade. And as a whole, the top 10 owner nations are highly potent, accounting for 70% of global tonnage, twice as much as their estimated share of world seaborne trade in tonnes (35%). Stinging like a bee indeed!

Heavy Hitters

Aside from the Greek owners, the top 10 contains a couple of other owner nations who hit particularly hard. In GT terms, Norwegian owners are the world’s seventh largest with about 4% of the fleet. This is about 8 times more than Norway’s share of world seaborne trade. Not far away, Danish owners (with one very prominent owner in particular) account for 3% of all tonnage, whilst Denmark accounts for less than 1% of trade.

Powerful Punchers

But these owner nations aren’t the only power punchers. A number of shipping’s other traditional big hitters also punch well above their weight. Japan accounts for 4% of world seaborne trade but as the second largest owner nation, 13% of the fleet (a ratio of 3.3). Meanwhile, German owners account for 8% of the fleet and Germany 2% of seaborne trade (a ratio of 3.8). Italian and Singaporean owners also seem to punch above the trading weight of their respective countries.

Down The Weights

But not everyone in the heavyweight division offers such a stinging punch. China, the ultimate trading powerhouse, accounts for 16% of seaborne trade, but despite being the world’s third largest owner nation, accounts for only 11% of the world fleet (a ratio of 0.7). The US accounts for 5% of world tonnage but 6% of trade (a ratio of 0.8), while South Korean owners only just punch their weight with 4% of the world fleet and Korea accounting for 4% of volumes.

Tale Of The Tape

Nevertheless, despite the fact that three of the world’s largest owner countries don’t hit too far above their weight, as a whole the top shipowning nations account for twice as much of global tonnage ownership as they do in terms of total world seaborne trade. The modern seaborne transportation system, the framework of asset ownership and the global nature of the shipping industry has afforded owning communities this opportunity. If you want to pick a fight in terms of ship ownership, be careful to watch out for the weight of the punch of your opponent! Have a nice day.

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Generally, shipping industry watchers spend much of their time monitoring events out to sea: how fleets are evolving, trade volumes growing and freight rates performing. But occasionally it can be worth pointing the telescope in the other direction, and spending time considering how events on land can affect the industry. One such major land-based change has been the development of US shale oil and gas.

What No-One Saw Coming

Back in 2009, few would have dared predict that new fracking technologies would allow the US to add 10m boepd of unconventional output across a five year period. This is roughly the same net volume as was added to global offshore output between 2000 and 2015. The offshore markets have been amongst the hardest hit by the oversupply, and cuts in investment will make it harder to add to the 46.9m boepd set to be produced offshore globally in 2016. Since the oil price slump, rig rates have dropped by more than 50%, OSV rates by more than 35%, and today more than 300 rigs and 1,400 OSVs are laid up.

Shale In The Sights

One of the main factors which helped shale fracking to become widespread was the rapid recovery of the oil price after the 2009 downturn. This, of course, also helped the offshore sector have its day in the sun, before the downturn. But shale’s growth also had an impact on other shipping segments. US LPG exports grew at a CAGR of 71% in 2010-15. The growth of shale gas even led to proposals for the first transatlantic exports of ethane derived from it, and orders for ‘VLECs’ vessels followed.

The rise of shale gas also changed the LNG trade fundamentally. In 2010, US LNG imports were expected to be a major growth area. Today, the US has 117mt of under-utilised LNG import infrastructure (imports were just 1.86mt in 2015). Some projects have been converted to liquefaction, and up to 250mt of export capacity was mooted. One new project, Sabine Pass, is now exporting.

Telescoping Tank Capacity

Growth of US shale substantially reduced US import demand for light crudes. This primarily affected imports from West Africa. The transatlantic trade on Suezmaxes and Aframaxes fell from 1.8m bpd in 2010 to 0.3m bpd in 2014. But a 1975 ban on US crude exports prevented tanker exports of surplus oil, much of which is light grades for which US refineries were not ideally configured. US Jones Act tankers and tank barges benefited, as limited fleet supply for upcoast voyages sent coastal timecharter rates as high as $140,000/day in mid-2015, but there was no similar effect on international trade.

The US government has now eased the export restrictions, but this has come as lower oil prices have hit the rig count and output onshore. The lower oil price has caused shale to go into decline. Yet it has provided a nice boost for tanker trades, as low oil prices have stimulated oil demand from transportation and industry.

So, developments in the mid-west of America have had major ramifications for energy shipping and offshore markets globally. This is set to continue as the industry waits to see how shale responds to the slight oil price gain over Q2 2016. This only goes to demonstrate the need to keep this related land-based industry under surveillance. Have a nice day.

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