Archives for category: Technology

“Look after the pennies and the pounds look after themselves” goes the saying, a mantra the shipping industry has a long taken to heart. In this week’s Analysis, we review trends in ship operating expenses (OPEX) that have taken the total cost base of the shipping industry through the $100 billion barrier for the very first time.

Watching The Pennies!

Of all global industries, perhaps few have had the extreme cost focus of shipping over the past 30 years. During the 1980s recession, any operating “fat” was largely removed with the growth of open registries and a drive to outsourcing. This helped shipping, alongside its near “perfect” competitive economic model, deliver exceptionally cheap and secure freight, in turn a key facilitator of globalisation.

Nice And Lean…

OPEX response since the financial crisis has been relatively modest. Our average OPEX index (using the ClarkSea “fleet” mix and information from Moore Stephens) shows just a 1% decrease in OPEX since the financial crisis to $6,451/day in 2016. By comparison, the ClarkSea Index dropped 71%, from $32,660/day in 2008 to $9,441/day in 2016 (a record low). In part, this modest, albeit painfully achieved, drop reflects upward pressures from an expanding fleet and items such as crew and ever- increasing regulation. However it also reflects the already lean nature of OPEX.

$100 Billion And Counting…

Our estimate for aggregate global OPEX for the world’s cargo fleet has now breached $100 billion for the first time, up from $98 billion last year and $83 billion in 2008. The largest constituent remains crew wages ($43 billion covering 1.4 million crew across the fleet). By comparison aggregate ship earnings for our cargo fleet fell from an eye watering $291 billion in 2008 to $123 billion in 2016!

Cutting The Fat…

One sector that has seen dramatic cost reduction has been offshore. Estimates vary, but 30% seems a reasonable rule of thumb for reductions in OPEX since 2014. While painful, this has been part of a process of making offshore more competitive against other energy sources (offshore contributes 28% of oil production, 31% of gas, and 16% of all energy) and one of the factors behind the increase in sanctioning of offshore projects.

Getting Smarter…

So shipping is one of the leanest industries around but is always under pressure to do more! It seems clear that squeezing cost in the traditional sense, offshore aside, will be pretty challenging — UK media reported on the docking of the 20,150 teu MOL Triumph, highlighting it was manned by only 20 crew! Getting smarter, collecting and using “big data” and technology and automation are all gaining traction. The industry’s fuel bill (accounted for outside of OPEX) is clearly a big target.

This will all require new technology, skills and perhaps new accounting approaches. Plenty of food for thought but it seems like just going on another severe diet won’t work this time. Have a nice day!

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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!

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There are distinct signs that the offshore wind sector is emerging from a period of relative quiet. For the first time in several years, the number of final investment decisions (FIDs) is on the rise, while technological advances and ongoing research are making progress in improving the cost efficiency of offshore wind generated power. So, how does this potential translate into the offshore vessel sector?

Wind-ing Up Investment

Over the last few years, interest in the offshore wind industry has been on the rise, mainly due to a number of high-profile FIDs and an increase in investment levels. This theme has so far extended into 2016, which is shaping up to be the most successful year for the industry yet. At €14bn, the investment value of new FIDs reached for European projects during 1H 2016 was already greater than full year 2015 levels. The majority (74%) of this investment has stemmed from the UK, consolidating its place as the industry leader. For example, DONG reached an FID for the first gigawatt scale wind farm, Hornsea Project 1 in February 2016. DONG also gained development approval for Hornsea Project 2 later in the year. More broadly (as shown by the Graph of the Month), other countries have also made headway. A total of 3.5GW of capacity has started-up offshore Germany, Netherlands, Belgium and China since end-2014, 2.4GW of which was off Germany.

Owners Get Wind Of Demand

Increased investment levels in the offshore wind industry are likely to spur demand for related vessel types. Initial interest earlier in the 2000s focussed on turbine installation jack-ups, but more recently the focus has been on accommodation solutions, particularly those equipped with a motion-compensated gangway to allow “walk-to-work” access. At the start of October, there were over 25 traditional accommodation vessels with a known track record of working within the renewable sector. A class of vessels specifically tailored for the offshore wind industry has also been gaining interest. These so-called Service Operation Vessels (SOVs) are designed to offer accommodation, maintenance and manoeuvrability in one ship-shaped unit. At the start of October 2016, there were 12 such vessels in service and an additional 11 units on order.

Blowin’ In The Wind

Despite a slowdown in newbuild investment in Wind Turbine Installation Vessels (WTIVs) following a peak of 13 units contracted in 2010, future demand could be generated by turbine upsizing and a move to deeper waters, driving a requirement for larger vessels. Since the start of 2005, the average turbine rotor diameter has increased by 39% to 110m, while the average water depth of wind farms under construction (45m) is 66% greater than the water depth of active farms (27m) as of start October 2016. There has already been one WTIV newbuild order placed in 2016 for China, plus one for Japan.

To some degree, the perception of greater offshore wind activity is only relative to the challenging backdrop in the offshore oil and gas market, and risks do still exist. However, there is no denying that investment in the wind sector is on the increase. This will ultimately result in a rise in total installed capacity and is already encouraging investment in specialist vessels to support the offshore wind industry.

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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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In the 1989 film Back to the Future II, Marty McFly and Doc Brown travelled forwards in time to 21st October 2015. While the film’s view of future technology has in many cases proved surprisingly accurate, today’s lack of hoverboards, flying cars and pizza hydrators suggests some were way off the mark. Such mixed success will likely seem very familiar to anyone attempting shipping market predictions today.

This Is Heavy, Doc

It is well documented that the incredible volatility in the shipping markets makes them very difficult to predict, even to seasoned market watchers, and so it can often be easier to try to predict the fundamentals. While Back to the Future II successfully predicted the broad trend towards the more widespread role of technology in everyday life, even the ‘big picture’ macro trends in the shipping industry can be hard to get totally right.

Not much seems ‘bigger picture’ than the world economy, and here forecasters have certainly revised their opinions over time. Taking the IMF’s views as a reasonable benchmark, it is clear how the projection for world economic growth in 2015 has moderated, from 4.0% in April 2014 to 3.1% in October 2015, as the outlook for global expansion has softened. The world also notoriously got it wrong on the oil price outlook. Throughout much of 2014, most expectations for oil prices in 2015 were for an average of above $100/bbl. But the crash in prices in late 2014 led to a major adjustment in future expectations, with most forecasters now projecting average prices in full year 2015 of around $60/bbl or below.

Time Circuits, On!

Pinning down forecasts for the big shipping aggregates can also be hard. Views of world seaborne trade in 2015 have recently changed significantly. In early 2015, the expectation for growth this year was 4.0%. However, following dramatic changes in imports of coal and iron ore into China, as well as a gradually more depressed outlook for container trade, the latest forecast for world seaborne trade growth in 2015 stands at 2.5%.

Speeding Up To 88mph

Even on the supply side, it can be hard to forecast with absolute precision. In early 2014, the estimate for growth in the world cargo fleet in 2015 (in terms of GT) stood at 3.5%. In early 2015, this rose to 4.2% as the likely outlook for deliveries and demolition changed, but with scrapping accelerating and then slowing again the outlook has changed once more. Today, the projection for growth in the cargo fleet is 3.9%, hopefully a fairly accurate figure with three-quarters of the year gone.

You Mean We’re In The Future?

So, what does this all tell us? Macroeconomic trends are notoriously hard to predict. Today, with the consensus outlook increasingly fragmented, the margin of error in forecasting seaborne demand is also significant. And even then the supply side can be tricky to pinpoint too. So, while forecasts of the fundamental balance do provide a helpful indication of expectations for future market trends, these should always be handled with caution. Marty and Doc might well be amongst the first to agree that the future doesn’t always turn out how you might expect. Have a nice day.

SIW1193

‘VWGate’ has raised a flag for managers and technicians in the transport business. ‘Efficiency’ used to be left to the market, but the intrepid twins, consumer health and climate change, have changed all that. Shipping boasted of being the most ‘efficient’ transport mode, but the twins took a look at what was coming out of the funnel and the rest is history (as is anyone not paying attention to emission regulations).

Performing Bare

The shipping industry has been squeezing diesel technology for fifty years and faces similar problems to the VW engine designers. The technical cupboard appears fairly empty, so the opportunities for improving performance look slim. The challenge is to find another way to measure and improve performance.

Declining Productivity

The starting point is operational performance and a surprising ‘big picture’ statistic is that tanker performance in terms of tonne-miles/dwt has fallen 25% in the last decade and is 44% lower today than in 1974 (see graph). This is partly due to the shipping cycle, but a more important reason may be the change in the way oil transport is organized.

In 1974 the system appeared to be super-efficient. ‘Productivity’ of 42,000 ton-miles/dwt was over 75% of the ‘theoretical maximum’ (estimated at about 55,000 tonne-miles/dwt). Until 1973 freight was generally about half the CIF cost of oil and transport was closely managed by the oil majors who controlled most of the fleet. But in the 1980s things changed. Oil cost over $30/bbl and freight was no longer of strategic importance for oil majors. Furthermore, more oil was shipped by traders with no interest in logistics; freight was just a cost (later they discovered that by owning ships they could ‘double dip’ on their cargoes). Progressively the oil majors drew back from managing logistics and took ships from the spot market, a strategic decision which the ‘Exxon Valdez’ incident in 1989 reinforced.

Inefficient Market Hypothesis

The ‘efficiency’ of tanker transport (in terms of cargo-miles per unit of vessel capacity) never recovered from the dis-engagement of the oil majors. Productivity slumped to 25,000 tonne-miles/dwt in the 1980s recession and only increased to 31,000 tonne-miles/dwt when the market recovered in 1997. At the peak of the ‘super-boom’ in 2004 the fleet operated at only 33,000 tonne-miles/dwt. Today it is back down to 24,000 tonne-miles/dwt. As owners celebrate booming rates, the intrepid twins must be wondering what the industry is up to. Tankers are delivering almost half as much oil transportation (on a tonne-mile/dwt basis) as they were 40 years ago (with the spot market more concerned with managing ‘productivity’ in the context of the earnings environment).

Back To The Future

Not many other industries could say that they have halved ‘efficiency’ and lived to tell the tale. Of course you could just bury the figures and carry on as usual (which seems to have been VW’s strategy). Or you could start thinking about what to do about it. Is 1970s-style logistics a lost art? Freight may not be a big deal for cargo interests, but meeting regulatory targets should be. Have a nice day.

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