Archives for category: Overview

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.

SIW1244

Back in 1951, in his ‘farewell’ speech, US General Douglas MacArthur famously noted that “old soldiers never die, they just fade away”. In the containership market today, the aged soldiers are to be found in the ‘old Panamax’ sector. Charter rates rest at rock-bottom rates and the fleet is in steady and perhaps terminal decline, with scrapping at record levels. Is the battle now lost?

Old Workhorses

In the 1990s and into the 2000s, Panamaxes (as they were correctly known then) were the classic ‘workhorse’ of the containership fleet. Designed with dimensions to transit the (now old) locks at the Panama Canal, in their heyday they proved extremely popular with the number of units of 3,000 TEU and above able to pass through the canal peaking at 969 in 2012, boasting back in 1996 a 32% share of containership fleet capacity. At the peak of the charter market in 2005, the one year timecharter rate for a 4,400 TEU Panamax reached $50,000/day. Although designed with canal transit in mind, Panamaxes became deployed widely. At the start of 2016, 17% were deployed on the Transpacific (mainly through the canal to the USEC) but 17% were deployed elsewhere on the mainlanes and 28% on north-south trades.

Battling On

These old soldiers have battled away bravely. In the 2000s ‘wide beam’ ships, of similar box capacity but with shallower draft, came into prominence but the ‘old Panamaxes’ held their own. The last orders for vessels of over 3,000 TEU of ‘old Panamax’ dimensions were actually placed in 2012. Even with heavy scrapping in 2013, the ‘old Panamaxes’ received a spur when increased numbers began to be deployed on parts of the intra-regional trade network, with their share of deployment there rising to over 30% in 2014, supporting a relative pick-up in earnings, with the one year charter rate for a 4,400 TEU vessel bouncing back from rock-bottom levels to over $15,000/day by early summer 2015.

Beating A Retreat

However, this may have been the last hurrah for the ‘old Panamaxes’. In June 2016 the new locks at the Panama Canal opened, allowing much larger ships to transit on the key Asia-USEC trade. Over 150 ‘old Panamaxes’ were deployed on that trade back then and today the total is down to about 70. Slow growth on north-south trades isn’t helping either, denying an easy retreat from the battlefield. This has led to the onset of major scrapping, with 55 sold for demolition this year, and 217 since the start of 2012. Rates have crashed (to levels below those for smaller ships) and asset prices have also hit the depths with a 10 year old at $6m, basically down to scrap value.

Leaving The Battlefield?

So, although plenty of ‘old Panamaxes’ are out there battling on, things are only going one way at the moment. The fleet has fallen from 969 units in 2012 to 796 at the start of October. If vessel deployment opportunities globally increase, a ‘rising tide’ might even support some of these ships, but in general a decline now appears to have set in. Like old soldiers, they may not all die at once, but it does look like many more ‘old Panamaxes’ are still set to fade away. Have a nice day.

SIW1244

Checking The Basket

Annual projections of seaborne trade can be useful demand side indicators. However, often it is difficult to get a real understanding of short-term trade trends. A year ago (SIW 1189) we looked at a ‘basket’ approach, which took monthly seaborne trade flows for a range of commodities, to help show year to date global seaborne trade trends. Although monthly data can be difficult to use, is not comprehensively available, and is generally subject to a lag of several months, the same monthly ‘basket’ approach examined a year ago remains a helpful indicator of short-term seaborne trade trends.

Promising Contents?

The graph shows the ‘Trade Index’ (see description for details) up to June 2016. Clearly monthly data can be very volatile; in January the index stood at -1%, but four months later it reached 7%. Furthermore, the index has picked up compared to 2015 average levels, averaging 2.1% in Q1 2016 and 4.3% in Q2. Some of this trend is accounted for by a rise in dry bulk trade which fell last year, with China’s dry bulk imports growing 6% y-o-y in 1H 2016, following a 2% drop in 2015 (although risks remain over the sustainability of this improvement). An increase in box trade growth has also been apparent, with expansion in Asia-Europe trade back in positive territory and growth in intra-Asian trade picking up.

Elsewhere, seaborne crude and products trade, which were two of the fastest growing elements of total seaborne trade in 2015, expanded firmly in 1H 2016. This was underpinned by robust growth in crude imports into China (16%), India and the US, despite the disruptions to Nigerian crude exports in recent months.

Half Full Or Half Empty?

Taking a wider view, even since the financial crisis there have been clear peaks in the index. The peak in early 2011 was partly on the back of strong growth in Chinese dry bulk, oil and gas imports and box exports from Asia. The index picked up again in 2012, supported by several months of strong growth in iron ore and coal trade to Asia. The next peak was in late 2013, when once again coal imports into Asia grew robustly and expansion in intra-Asian and Asia-Europe box trade was very strong. Today, you might conclude, if you’re a ‘basket half full’ type, that we’re heading steadily upwards again. But, if you’re a ‘basket half empty’ person, you might note that the peaks each time have been short-lived and have been getting lower.

Is There Something In It?

So, our index appears to be on the up,  although still at a relatively moderate level in historical terms, and with a volatile track record behind. There’s something in the ‘basket’ for both the optimist and the pessimist! Have a nice day.

 

 

During July 2016, the containership fleet reached a landmark 20 million TEU in terms of aggregate capacity. To many it only seems like yesterday when the boxship fleet passed the 10 million TEU mark, back in April 2007. It took less than 10 years to double in capacity to reach the new milestone. Sprightly fleet growth indeed, but how rapid is it when compared to other parts of the world fleet?

Compound Crazy

Albert Einstein once called the impact of compound growth the ‘most powerful force in the universe’, and containership fleet capacity is a great example of this power. Total boxship capacity doubled from 5m TEU in size (in April 2001) to 10m TEU (in May 2007) in 6.2 years, and since then it has doubled in size again from 10m TEU to an astounding 20m TEU across just a further 9.3 years.

This rapid growth of the containership sector is a fairly well known story. In many respects the box sector is still a youthful part of the shipping world; since the inception of container shipping in the 1950s, the fleet has grown quickly from humble origins as trade has flourished. At the same time the fleet has upsized at a phenomenal rate. The average size of containerships in the fleet stood at 1,807 TEU in April 2001 and increased to 2,425 TEU in May 2007. Today, with behemoth boxships of over 19,000 TEU on the water, the average size of units in the fleet is 3,832 TEU, and the average size of those on order is even larger at 8,030 TEU.

Maturing Slowly

In contrast, some other shipping sectors can seem more ‘mature’, growing at a gentler rate. Tanker fleet capacity took almost 21 years to double to reach its current size of 540.9m dwt. In relative terms, the trade is indeed fairly mature, with average growth in volumes of 2.2% per annum over the last 20 years in combined crude and products trade. But interestingly, this is a sector now seeing rapid capacity growth, with an uptick in trade growth in recent years driving tanker ordering. In the last 19 months tanker fleet capacity has grown by 6.5%.

Bulk Bulge

However, the bulkcarrier fleet comfortably illustrates that the boxship sector has not been alone in experiencing rocketing growth. Although the vessels themselves may not have seen the same upsizing as boxships, bulker capacity expansion has been extraordinarily fast in recent times. Astonishingly, it took just 8.6 years from January 2008 to double to its current capacity of 784.1m dwt (though it had taken around 21 years before that to double previously). Nevertheless, bulker capacity expansion has slowed now, as dry bulk trade growth has hit the buffers.

Boom Time

So, the latest instance of a rapid doubling of fleet capacity is not a one-off. The explosion of boxship capacity has indeed been rapid, but in a world where shipbuilding output was hitting all-time highs not long ago, such growth has been a wider phenomenon. The overall world fleet has increased by 55% in dwt terms in the period since the onset of the global financial crisis in September 2008 alone. That’s a robust compound annual growth rate of 5.1%! Have a nice day, Einstein!

SIW1236 Graph of the Week

With seaborne transportation accounting for the vast majority of the world’s international trade, the importance of the shipping industry to the mechanics of the world economy is generally fairly evident. But putting it into context in actual annual value terms, how does the magnitude of the shipping business compare to the size of some of the world’s economies?

Big Traders

There are a number of ways to attempt to put the annual impact of the shipping industry into the context of the wider world economy. One is to examine the value of seaborne trades. Seaborne iron ore trade totalled 1.3bn tonnes in 2015. At an annual average ore price of around $50/t, that equates to a value of $68bn. That’s about the size of the GDP of Kenya. However, that’s dwarfed by seaborne crude oil trade. At 37.4m bpd last year, at an average oil price of around $52/bbl, that’s an annual value of $717bn, almost equivalent to the GDP of Turkey (the world’s 18th largest economy). On the container side, taking port handling as an interesting metric, last year there were an estimated 664m TEU lifts at the world’s box ports. Average handling charges vary significantly, but if they worked out at $150/TEU that’s an economy of just under $100bn, almost the size of the GDP of Angola.

Of course the value of global seaborne trade must be huge. The WTO estimates the value of all global trade at $16.5 trillion, and almost 85% by volume moves by sea. Seaborne trade is probably a little skewed to relatively cheaper goods but even allowing for, say, 50% of the total value, that’s still over $8 trillion, heading towards the size of China’s economy!

Adding The Value

Another way to put shipping’s magnitude into context is to take a look at the value of the assets. Between 2007 and 2015 the average annual level of investment in newbuildings was $127bn. That’s bigger than the GDP of Hungary. Alternatively, taking the value of the fleet today, $904bn, and allowing for, say, another 15 years of trading (the average age by tonnage is around 10 years), would equate to a per annum value of $60bn, still bigger than the economy of Panama.

Call In The Revenue

But perhaps the clearest way to mirror GDP is to check the annual earnings of the vessels, just as GDP measures economic production. In 2016’s challenging market conditions, the ClarkSea Index has averaged $9,733/day (which would total aggregate earnings of $77bn in a full year across the c.22,000 vessels in the main volume sectors), but back in 2007 it averaged over $33,060/day (across over 15,600 vessels). Across a year that’s earnings of $189bn. Almost as big as the economy of shipping’s favourite investor nation, Greece!

A Big Whole

Shipping is just one of a wide range of economic activities on the planet. Sometimes its impact can be hard to put into context. But in terms of ‘economic magnitude’, elements of the shipping industry can be as big as the whole of one of the world’s larger economies, especially in a good year. Have a nice day!

SIW1231 Graph of the Week

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.

SIW1225

With the Test cricket season in England just starting, there’s plenty of attention on batsmen facing up to tricky deliveries. In the world of shipping, however, much of the supply-side discussion so far this year has opened up with a focus on the severe lack of contracting or the increased levels of demolition, whilst the examination of ship deliveries has remained down the order…

Testing Times

The delivery run-rate is a vital supply-side lever. As part of the ‘market mechanism’, when the earnings environment gets tough deliveries will typically moderate to adjust, either in the long-run as a result of reduced ordering or in the short-term as scheduled deliveries are delayed or cancelled. In this way, market conditions mitigate against the addition of further capacity, attempting to rebalance supply with demand, and a range of drivers come into play. Testing market conditions incentivise owners to attempt to delay or cancel existing orders. Difficulties in finalising finance also put pressure on the completion of deliveries, and in addition yards can also run into problems in perilous markets, impinging on their ability to deliver capacity on time or at all.

On The Back Foot

One way of measuring the stress on deliveries is to look at ‘non-delivery’ due to slippage (delay) or cancellation of orders, comparing actual deliveries to the start year scheduled orderbook. In 2015, in dwt terms, non-delivery of the shipping orderbook stood at 35%. With the sector under extreme pressure, bulkcarrier non-delivery stood at 42% in 2015, and is running at 56% in the year to date. In another sector under pressure, containership non-delivery stood at 13% last year but has since then increased dramatically. In offshore, where market conditions are the worst since the 1980s, non-delivery in unit terms last year stood at 42% and in the year to date stands at 60%. Clearly non-delivery is a significant supply side lever, and in the year to date, across all types it stands at 51% (in dwt).

Deliveries Fast Or Slow

So even though overall deliveries as a whole are projected to grow marginally by 5% in 2016 to 102m dwt, the impact of non-delivery is clear. Across the full year it is projected that 40% of the start year orderbook won’t get delivered. World fleet growth looks set to slow to around 2.7% (from 3.3% in 2015), compared to the 6.4% that would have been the case if the start year orderbook had been delivered to schedule in full this year. The missing 67m dwt of projected ‘non-delivered’ capacity is more than 25% larger than the full year demolition projection, so in the here and now delivery dynamics are having at least as big an impact as the recycling of tonnage.

Balancing The Attack?

So although in general the majority of ships on order still get delivered in the end, it is crucial to track delivery trends. This year every 10% of orderbook ‘non-delivery’ is equivalent to about 1% of growth in the world fleet. That clearly matters, and with the orderbook not necessarily a great guide to supply growth in difficult market conditions, deliveries, as well as ordering and demolition trends, remain essential to understanding the development of the market mechanism.

SIW1222