Archives for category: national fleet

The car carrier sector has for some time been seen as one of the fastest growing parts of world shipping. Rapidly growing seaborne trade volumes have driven the requirement for a robustly expanding supply of vessels at the large end of the car carrier fleet. But it hasn’t always been a smooth ride, and today it’s not clear whether the sector has enough drive to remain in the fast lane.

In The Fast Lane

In the period from 1996 to 2007, seaborne trade in cars expanded from an estimated 8.1 million to 22.5 million units, growing by a compound annual growth rate (CAGR) of 9.7%. This compares very favourably to almost any other part of world seaborne trade. Overall seaborne trade registered a CAGR of 4.0% over the same period.

Fittingly for the car sector, there have been a range of drivers. New centres of car production have emerged (particularly in the developing world), broadening the global network of seaborne car transportation, in some cases extending the average haul as well as increasing trade volumes. Meanwhile, new car consumers have been generated by economic growth in developing economies, particularly in Asia. In China, for instance, European cars prove popular driving long-haul car trade. Since 1996 Asian car imports have expanded by an estimated 287% (and exports from Japan, Korea and China by 97%).

Brakes Off…And On

The PCC (Pure Car Carrier, including Pure Car & Truck Carrier) fleet has responded eagerly to the challenge. The fleet has grown from an overall capacity of 1.35m vehicles at end 1996 to 3.76m vehicles today, total expansion of 175%. Today, there are 768 car carriers in the fleet, and 569 of them have capacity of 4,000 cars or more (74% of the fleet) with another 62 on order (55 above 4,000 cars). The average vessel size has jumped from 3,380 car units at end 1996 to 6,810 today.

So far so good, until the downturn when seaborne car trade really suffered. Volumes fell by 35% in 2009 (compared to 4% for seaborne trade as a whole) as western car buyers pulled on the handbrake. Since then volume growth has not been quite so speedy. 2010 saw a partial bounceback but growth of 5-7% in 2011-13, has been followed by a projected 2% this year, on the back of relocation of production limiting export growth from key exporters, new tax legislation in importing regions, sluggish European recovery and political disruption in several emerging importer nations. This has left a question mark over when growth might get back into top gear.

The Road Ahead

Still, PCC capacity growth for the next few years looks fairly moderate with the orderbook standing at 11% of the fleet. Trade is provisionally projected to grow by 5% in 2015, making up for some of the shortfall this year. But the bigger question is whether we can expect trade growth to maintain the robust levels seen historically in the longer term. Perhaps the road ahead isn’t as clear as it once was? Each year, in our Car Carrier Trade & Transport report, we look at the trends in detail, and this year’s report will be available on Shipping Intelligence Network in the next few weeks. Have a nice day.

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Whilst there hasn’t been much to shout about for many shipping sectors in 2014, total investment in secondhand sales has been fairly firm. In the first nine months of the year, recorded investment in sale and purchase transactions has almost exceeded last year’s total already, with a reported $19bn having changed hands. This week we take a closer look at the nature of recent secondhand investment activity.

In The Past

Investment in secondhand transactions peaked in 2007 when a reported $47bn changed hands across 1,860 recorded transactions. The subsequent global economic crash meant more restricted access to finance, and market uncertainty influenced a wider spread between buyers’ and sellers’ price ideas; by 2009 investment in secondhand transactions had fallen to just $15bn. Whilst 2010 and 2011 saw increased secondhand investment, markets remained under pressure, and in 2012 total reported investment fell again to $14bn. In 2013, however, there was a growing sense of optimism that market conditions would eventually improve and activity firmed towards the end of the year. As a result a reported $20bn was invested in secondhand sales through the course of 2013, and already in 2014 over $19bn has been reported invested in secondhand purchases. Our secondhand price index started to firm in Q4 2013, but at start October it stood just 3% up year-on-year, so the rise in the level of investment evidently reflects other factors.

Mixing It Up

Between 2005 and 2009 around three-quarters of reported secondhand investment was in the bulker and tanker sectors. However, since start 2010 this figure has dropped to two-thirds. One trend has been a greater proportion of transactions in the gas sector, with the majority of activity in the LPG sector where recent record earnings have grabbed the attention of investors. The increased level of activity in often higher value specialised sectors has helped support increased investment levels, and the average reported transaction value rose by 27% in 2013 and by a further 32% in 2014 to date.

In With The New

Sales since start 2013 have also often been for younger units, with the average age of sale the lowest for a long time last year at 12.3 years; it stands at 10.3 years this year so far. Resale activity has also increased; sellers have been keen to reduce exposure to large orderbooks in some sectors, whilst limited availability of early slot space at yards has driven resale activity in others.

Bigger And Bolder

Units reported sold on the sale and purchase market in 2014 have also been generally bigger. The average unit reported sold has been 43% larger in dwt terms than the average across 2005-13. This has also supported investment levels.

So there you have it. Should secondhand activity continue at a similar pace, 2014 may just see the largest volume of investment since the crash. Whilst prices have firmed a little year-on-year, other factors have been the more important drivers, with secondhand activity looking broader, younger and bigger. Have a nice day.

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Eleven years ago in 2003, when China opened its doors and the steel boom got underway, the shipping community was suddenly presented with an ‘Aladdin’s Cave’ of cargo. Unlike Japan and Korea, China had not locked in the fleet of ships it would need. So the escalating imports of iron ore soon turned into a gold mine for shipping. With so much cargo and a limited fleet of ships, Capesize rates surged.

Unexpected Riches

Shipping has always done well out of “miracle” economies, but the Chinese growth surge which followed was special. In the next decade, Chinese industry, especially steelmaking, grew faster than anyone could possibly have predicted. In 2003 the Chinese government thought steel production would reach 300mt in 2010. Actual output in 2010 was 627mt. The effect on trade was profound. China’s seaborne imports quadrupled, reaching 2 billion tonnes in 2013, by far the most any country has ever imported in a year. The freight boom this triggered between 2003 and 2008 was also arguably the best in the industry’s history.

Even after the Credit Crisis in 2008, China kept expanding, with just one short-lived wobble in 2009. This growth helped cushion shipowners from a 1980s style meltdown that might otherwise have hit the bulk and container markets.

Unavoidable Evolution

But in the real world, economies move on and there are many signs that change is underway. China is a very big country, and some provinces are still poor, but across the economy activity is slowing. Industrial production growth fell to 6.9% year-on-year in August and the dollar value of export trade, which for many years grew at about 20-30% pa, only managed 8% in 2013.

The real change this year has been in steel and construction. Official statistics suggest that floor space under construction is down 17% year-on-year and house completion is down about 30% this year. Some Beijing analysts are predicting much lower house building over the next two years. Although iron ore imports are up by 18% year-on-year, steel production is only growing at 5%. Not a good omen. Meanwhile steel prices have slumped another 5-10% and steel exports are up 37%. All signs of market weakness.

Value-Added Production

Of course these trends could be cyclical, but China is a very different economy from 10 years ago. A new generation has grown up with computers, smartphones, cars, fashion and confidence. Environmental concern, which triggered the impending ban on high sulphur coal imports, illustrates the way these changes can trickle through into trade.

New Trend, Old Story

So there you have it. China’s sprint for growth is easing off and it is projected that imports will grow 5% this year. This is way below the 10-20% pa of the boom years. It happened to Japan and Europe in the 1960s and to South Korea in the 1980s and 1990s. So does that mean ‘Aladdin’s Cave’ is empty? Such a big cave with so many dark corners, makes it hard to say, but it’s a serious issue for investors. Have a nice day.

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In the early 1990s when shipping emerged in a fragile state from the traumas of the 1980s, raising finance was a problem. The shipping banks had taken a battering in the 1980s, and the US financial crisis had taken out the American banks. ‘Basel 1’ made getting a loan over $25m difficult, syndications were rare and the capital markets were unapproachable.

$200 Billion? No Way

Against this background, estimates that the shipping industry would need to raise $200 billion to finance investment during the 1990s seemed an impossible mountain to climb. In fact these estimates of future investment requirement, based on the need to replace the ageing fleet and allow for expansion of the key tanker, bulkcarrier and containership fleets, proved to be on the low side. During the decade investments in new ships added up to about $340 billion. And of course, miraculously, the money appeared. Syndications, club deals, capital market transactions, the German KG market and a few new banks filled the gap.

$1.4 Trillion? No Way

But history repeats itself and today the old problem of “where will the money come from?” is back on the agenda with a vengeance. This time the numbers are bigger. On our rough estimate, the cost of financing the shipping industry over the decade from 2014 to 2023 could be around $1.4 trillion. That’s a massive step up from the 90s (the chart shows investment from 1990 to 2013, with estimates to 2025). But the business has changed dramatically since the early 1990s when it was mostly about tankers, bulkcarriers and containerships. In the coming decade only half the investment (about $760 billion) is to finance the replacement and expansion of these core fleets.

New Investment Era

The other half consists of sectors which, in the early 1990s, had little impact (partly, perhaps, because there weren’t many statistics). Two market segments which look likely to generate a lot of value-added over the coming decade are LNG tankers and cruise ships. These are not newcomers; they have been around for years. But the changing world economy seems likely, in different ways, to boost investment in these segments very substantially, and together they account for about 20% of the projected investment.

The other big segment of potential investment for the shipyards is offshore. In the early 1990s that was, like the proverbial dodo, an extinct entity, with little business on offer. But the relentless pressure on energy supplies, both oil and gas, and the focus on mobile facilities, suggests this might account for as much as 30% of future shipyard investment.

Spend, Spend, Spend

So there you have it. Shipping needs the investment, but where will the money come from? Most analysts agree there’s a tidal wave of cash sloshing around the world, looking for a home with a good story. Unfortunately shipping’s financial story remains a bit patchy, but the reassuring lesson of the 1990s is that there’s always someone who will find a way to do the business. Who will it be this time? Well, that’s the trillion dollar question. Have a nice day.

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In the well-loved sitcom Absolutely Fabulous, Jennifer Saunders, Joanna Lumley and company provide an apt demonstration that even totally dysfunctional families can muddle through pretty well in the end, and have fun doing it. Could these comedy characters be a possible role model for regulating the shipping family?

Step Change For Regulators

As shipowners struggle with a long recession, escalating fuel costs and tricky credit, it’s easy to see why changing regulations seem like yet another chaotic burden in an already dysfunctional world. And, to be fair, the regulatory framework has made life harder in the last decade. Regulation of emissions, carbon footprint and ballast water have propelled regulators into the heart of shipping economics, leaving many owners struggling with hard choices about how to meet the new rules.

A Real Little Scrubber

Sulphur emissions illustrate how tricky things have become. Ideally regulations have a well-defined timescale and global adoption, but the sulphur regulations have neither. Although the timetable cuts the 3.5% global sulphur cap for marine fuel to 0.5% in 2020, the implementation date could be 2025 if the IMO’s distillate fuel study indicates supplies may not be available. And the global cap is not global either. The “Emission Control Areas” (ECAs) in North America, the Baltic and the North Sea have different rules. From next January ships trading in ECAs face a 0.1% sulphur cap.

Unquantifiable Options

More complexity is added by the options for getting down to 0.1%. One is to use eye-wateringly expensive distillate fuel; another is LNG; and the third is to install a “scrubber”. Since distillate fuel costs about 50% more than MFO, that’s unattractive, but LNG is unlikely to be much cheaper and scrubbers can cost in the region of $2-4m each.

Undecided Or Indecisive?

Luckily, the immediate decision is not too difficult because most ships will not spend long in ECAs. For example, a ship trading between Rotterdam and New York sails about 3,400 miles on the high seas, and around 20% of the distance is in ECAs. However, with more diverse trading the average over the year should be less, say 10%? From January 2015 a bulker sailing 300 days a year at sea, with 10% in ECAs, would spend an extra $0.2m a year on distillate fuel. Is it worth fitting a scrubber to save $0.2m pa? For bulkers no, but for ferries, offshore units and the like trading full time in ECAs, it might be. But when the global sulphur cap drops to 0.5% in 2020 the annual fuel bill will jump by over $2m, which would pay for a scrubber in a year or two, so that’s when the big step change in scrubber installation will happen. Unless, of course, the IMO defers to 2025.

Fabulous Future, Darling

So there you have it. Fuzzy regulations, but for most the economics are not too tricky. Intra-ECA ships should scrub up soon, global traders “wait-and-see”, and Transatlantic traders follow the ‘Ab Fab’ strategy – mix up a distillate cocktail and have a bit of fun! Have a nice day.

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The global AHTS and AHT fleet varies in power output greatly from a diminutive 850 bhp to a substantial 35,024 bhp. The range in size may be over 34,000 bhp, but 93% of the fleet falls between 2,500 and 16,500 bhp. Throughout this publication we divide the AHTS and AHT fleet into six subsectors based on power and supply capability. August’s Graph of the Month splits the fleet down into 16 categories revealing a more detailed profile of the AHTS and AHT fleet.

Shack To Chateau

When the fleet is broken down into 1,000 bhp sectors one of the trends visible is the dominance of vessels with between 4,500 and 5,499 bhp in the current fleet. These vessels account for 24% of the current fleet (703 units) of 2,895 vessels. Some of this peak can be attributed to a few AHTS designs. For example, there are 398 vessels with between 5,150 and 5,250 bhp. All but 90 of these are Chinese built and the majority in yards within China’s Fujian province, in particular Fujian Southeast. The vessels are primarily Conan Wu and Khiam Chuan’s 59m designs. Most are powered by two Caterpillar 3516B engines, providing c.5,200 bhp.

Location, Location, Location

The AHTS fleet is skewed in its deployment as well as its size. NW Europe is a key area for AHTS deployment. However, in overall number terms, the region accounts for only 6.3% of the world’s AHTS fleet deployment, mostly the largest sized vessels. The Asia Pacific region and the Middle East/Indian Sub Continent account for 32% and 22% of deployment respectively, totalling 1,597 vessels. These regions are the primary areas of deployment for Asian built and designed small AHTSs, such as those c.5,200 bhp, reflecting the benign environments in these regions.

AHTS Under The Hammer

The current orderbook stands at 188 vessels as of the 1st of August (6.5% of the fleet), 101 of which are slated for delivery within the rest of this year. Significantly, 89% of the orderbook is to be built at Asian yards, including many of the largest units. The remaining vessels are built at yards in Europe, South America, India and the United States. The >16,500 bhp category contains 17 units on the orderbook, nine of which are to be built in Asia. This category contains the largest share of orders at non-Asian yards (67%).

The shape of the orderbook profile indicates the trend in demand for larger AHTSs, not only in the very largest vessels but also in the small to medium sized vessels. The 4,500 to 5,500 bhp size range remains the largest in the orderbook; however the curve has shifted along the axis indicating a newer preference for larger vessels c.6,500 bhp. For example, 85% of the existing AHTS fleet built at Fujian Southeast is 6,000 bhp.

Splitting the AHTS fleet to a greater extent reveals the key trends affecting the fleet today. Though the largest units get much of the limelight, units suited to benign environments in Asia are far more numerous. Meanwhile, upsizing is occurring across many parts of the fleet, both amongst the largest units and the smaller ‘commodity’ AHTS vessels.

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In the classic movie The Seven-Year Itch, hero Richard Sherman is left sweltering in his Manhattan flat as wife and kids head for the beach. A daunting prospect, until Marilyn Monroe turns up in the flat below. That’s where the fantasy starts as Richard exercises his “seven-year itch” in an amusingly unlikely relationship with the charismatic Monroe.

Shipping’s Seven-Year Fantasy

2014 has been a hot summer in Europe and shipping investors have been getting the seven-year itch themselves. Although the Lehman Brothers collapse in September 2008 triggered the meltdown in rates, the seeds of the crash were sown exactly seven years ago on 10th August 2007. On that date the European banks became so suspicious of each other that the interbank market seized up. To celebrate, seven years later shipping investors are busy indulging their seven year itch with the residents of the flat below – not Monroe, but the equally attractive Asian shipyard representatives. 174m dwt of orders in 2013 and 66m in 1H 2014 show what a good time they’ve been having.

Cashing In At The Top

But how did the investors’ last big fling in August 2007 (273m dwt of orders were placed in full year 2007) turn out? Surely this was a bit of a disaster? Actually things did not turn out quite as badly as seemed likely when the market crashed. For example, a Suezmax resale costing $105m in August 2007 would have made around $57m trading since then, after OPEX (see chart). If this cash was used to pay down the vessel, the balance in August 2014 is $48m, compared with a market value of around $41m. Of course this does not take account of waiting, slow steaming and mishaps. But even allowing for these, it’s not the disastrous story veterans of the 1980s expected.

Off To A Good Start

Getting an investment off to a good start is vital and that’s what helped the 2007 investments shown in the chart. The accumulated cash flow of six August 2007 resale purchases shows that 50% of the cash was generated in the first year; 25-30% over the next 18 months; and very little in the last 4 years. For example the Cape generated only $6m between Dec 2010 and August 2014.

But the good news is that thanks to financial easing and near zero interest rates, residual values have remained firm. In 1985 a Panamax bulker delivered at a cost of $25m had a market value of around $8m. Today a Panamax bulk carrier ordered a couple of years ago at a cost of $29m has a resale value of $31m – it’s actually made money. So although the cashflow has been reminiscent of the 1980s, asset values this time round are a very different story.

7 Years On – Is the Cycle Over?

So there you have it. What looked like a disastrous shipping recession has turned out to be surprisingly benevolent, at least compared with the traumas of the 1980s. With shipyard credit available on a grand scale and not much in the secondhand market it’s a no-brainer – head east and you’ll find Marilyn standing over a subway ventilator. But don’t forget this is only a summer fantasy – the wife and kids will be back soon. Have a nice day.

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