Archives for category: Overview

The development of the global merchant fleet is affected by a very broad range of interwoven supply and demand factors, including shipping and commodity cycles, investor sentiment, regulatory concerns, yard capacity and so on. Another factor is shore-side infrastructure projects, which can be tricky to disentangle from the wider web, though this influence is a little clearer on, for example, the LNG carrier sector…

For the full version of this article, please go to Shipping Intelligence Network.

It is over a year now since the opening of the new, expanded locks at the Panama Canal. The new locks have had a significant impact on a number of areas of shipping, including the gas carrier sector, but the main focus of the project in Panama was always the container trade, and the Asia-US East Coast route in particular. In that regard, how do things look a little over one year on?

Old For New

The new locks at the Panama Canal opened for transit on 26th June 2016, and the impact on the box shipping sector has been largely in line with expectations. The key area of impact was always going to be the Transpacific trade, and the Asia-US East Coast route in particular, the largest volume trade through the canal. Following the opening, the Asia-USEC route immediately saw swift upsizing of ‘Old Panamax’ containerships, being replaced by ‘Neo-Panamax’ units, with operators aiming to benefit from the economies of scale offered by running larger vessels through the canal. Regular deployment of ‘Old Panamaxes’ on the Asia-USEC route via the canal has fallen from 156 units in June 2016 to 30 today.

The total of ‘Old Panamaxes’ on the broader Transpacific trade now stands at 76, including some still operated via Suez to the USEC and from Asia to the USWC. However, there are around 35 ‘Old Panamaxes’ idle, and in total (based on a wide definition of 3,000+ TEU and ‘Old Panamax’ beam) 101 have been scrapped since start 2016. Having said all that, there are still many of these units deployed elsewhere, with, on the same definition, over 450 outside the Transpacific.

Bigging It Up

Looking upwards, the initial impact last summer was a speedy upsizing of tonnage to ‘Neo-Panamaxes’. This, as expected, basically jumped the class of sub-8,000 TEU ‘wide beam’ ships; just 22 of those serve Asia-USEC today. Instead it focussed immediately on the 8-11,999 TEU ships, and today there are 93 of those deployed on the Asia-USEC. And now even units as large as 12,000+ TEU are getting in on the act, with 9 deployed Asia-USEC, taking total deployment of new ‘wider beam’ units there to 124.

Switching Off?

This is all against a backdrop of robust growth on the Transpacific, with peak leg eastbound trade up by 8% y-o-y in Jan-May 2017. However, there hasn’t been any early sign of ‘cargo switching’ with flows proving ‘sticky’, even if USEC infrastructure constraints are diminishing (lifts at the 5 leading USEC ports as a share of lifts at the 5 major USWC ports is steady at c.80%). And interestingly the additional capacity on the Asia-USEC trade from the surge in upsizing has eroded the average Asia-USEC/Asia-USWC spot box freight rate ‘premium’ only gently, from 94% in 1H 2016 to 76% in 1H 2017.

More Time Required?

So, plenty of questions remain. Will the Panamaxes finally fully depart the trade? Will a ‘cargo switch’ eventually evolve? How will the freight market trend? One year may have passed but it appears more time is needed to assess in full the longer-term impact of the new Panama locks on box shipping. Have a nice day.

Graph of the week

The shipping industry has long provided investors with opportunities for asset play, reflecting the volatility in prices and relative shifts in the value of certain classes or ages of ships. Recent months have been no exception, with changes in tempo clearly evident in some shipping sectors. What can conducting a quick survey of the classic asset market indicators tell us today?

Classical Repertoire

One classic indicator (see SIW 1175) of the state of the asset market in any particular sector is the ratio of the 5 year old price to the newbuild price of a similar ship. On the basis of a 25 year lifespan, a 5 year old vessel depreciating evenly would be worth around 80% of the newbuild price. The level of this ratio can demonstrate how keen investors are to purchase assets on the water today.

Change Of Tempo

The graph shows the 5 year old to newbuild price ratio for a Capesize and a VLCC. The ratio is clearly volatile, and recent trends in the Capesize sector are illustrative of how conditions in shipping asset markets can change rapidly. Since the start of 2009, the Capesize ratio has fluctuated within a wide range from 50% (reached in early 2009 and again in early 2016) to 110% (although this was still well below the peak of 160% in mid-2008 at the height of the boom). The ratio has also moved significantly even in the last few weeks, as Capesize secondhand prices have risen robustly. At the end of February 2017, the 5 year old Capesize price stood at $25m, 60% of the newbuild price. By the end of March, the 5 year old price had risen to $33.5m, 80% of the newbuild price and the highest ratio since autumn 2014, indicating the improved appetite for tonnage in the bulker market.

New World Or Old Classics?

While these trends in asset price ratios can indicate the market’s view on the relative value of newbuild and secondhand tonnage, changes in the ratio can sometimes subsequently impact on decision making by investors. When the ratio falls to low levels (the Capesize ratio remained below 70% from Jan-15 to Feb-17), secondhand purchases can often appear more attractive than newbuildings, whilst higher ratios can sometimes eventually stimulate newbuild interest.

Orchestrating Opportunities

Even more starkly, the volatility in price ratios reinforces the opportunities for asset play in the shipping markets. To take an example, a 5 year old Capesize vessel one year ago could have been picked up for about $23.75m. Trading the vessel on a 1-year timecharter (around $8,000/day at the time) and selling the unit as a 6 year old, for say $31.5m, would have generated a return of almost $8m after OPEX (34% of the original outlay).

Still Making Overtures?

So, even after a prolonged downturn, the classic indicators show a shipping market still volatile and open for asset play. Recent shifts, especially in the bulker sector, offer an excellent example. Whilst the outcome is always highly difficult to predict, there still appear to be opportunities for those willing to take a chance, hoping to hit the right note. Have a nice day!

SIW1267:Graph of the Week

The introduction of new environmental regulations is leading the shipping industry to look for ways of reducing its emissions of harmful gases. This week we focus on two separate but related issues: the way in which vessels are powered, and the type of fuel that they use. New technologies are being adopted, with certain ship types leading the way…

Electric Therapy

The majority (96%) of active merchant vessels are powered by mechanical systems in which a form of fuel oil powers a main engine (usually a 2 or 4-stroke diesel) which is connected to the propeller. Most other vessels are “diesel-electric”, in which the power generated by the (4-stroke) main engine(s) is converted to electricity before being transferred to propeller(s) or thruster(s) via electric motors.

By optimising the loading of the engines, diesel-electric systems can lower fuel consumption and emissions. These systems are well established in sectors such as offshore, tugs and passenger, where manoeuvrability, variation in power demand and engine noise are important considerations. For larger cargo vessels, where demand for power is generally higher and more consistent, conventional mechanical systems remain more efficient and cost-effective. Our Graph of the Week shows that against a backdrop of reduced contracting in the larger cargo sectors, electrically-driven ships have assumed a greater share of the newbuilding market, accounting for 22% of reported newbuilding contracts so far this year.

Battery Charged

The next step for electric power may be more widespread adoption of batteries in main propulsion systems. There are 22 vessels in service and 14 on order that use batteries, mostly alongside either conventional diesel or dual-fuel generating sets. As well as reducing emissions when using battery power, these can enhance efficiency by optimising engine loads and transferring surplus power to or from the batteries as required. For smaller ferries intended for short routes, all-electric propulsion systems are feasible.

Gas Treatment

LNG has been identified as a cleaner fuel capable of reducing vessel emissions in line with new regulations. Clarksons Research’s World Fleet Register currently identifies 542 merchant ships in the fleet and on order capable of using LNG fuel. 351 of these are LNG carriers, which can use cargo boil-off to fuel a choice of turbine, dual-fuel diesel electric or dual-fuel 2-stroke main engines. In other sectors LNG fuel has taken longer to gain market share, but there are signs that where ship designs and the supply of bunkers allow, it is becoming more popular. Out of the 130 contracts recorded so far in 2017, 21 are for vessels capable of using LNG fuel. These include 4 Aframax tankers, the largest vessels other than LNG carriers to adopt dual-fuel 2-stroke engines.

More efficient power systems and cleaner fuels are two examples of how the shipping industry is responding to the challenges set by new environmental regulations. Alongside other developments in vessel design and operating practices, shipping is steering towards a more efficient and cleaner future. Have a nice day!

SIW1266:Graph of the Week

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.