Archives for category: timecharter

In the high jump ‘the scissors’ was one of a number of techniques eventually superseded by Dick Fosbury’s ‘Flop’, which saw the American athlete win the gold medal at the 1968 Olympics in Mexico City. The container shipping market has seen a bit of ‘flop’ of its own in recent years but today a return to the ‘scissors’ appears to be providing some helpful support at last…

The Flop

It has been clear to market watchers that containership earnings have spent most of the period since the onset of the global financial crisis back in 2008 at bottom of the cycle levels. The Analysis in SIW 1,245 illustrated how cumulative earnings in the sector in that time proved a bit of a flop, and notably so in comparison to those in the tanker and bulker sectors. However, it’s fair to say that things have started to look a little bit better recently.

Jumping Back

The first building block was that the freight market appeared to bottom out in the second half of last year, with improvements in box spot rates on a range of routes backed by careful management of active capacity. In the first quarter of 2017, the mainlane freight rate index averaged 64 points, up 42% on the 2016 average. However, containership charter rates remained in the doldrums into 2017, with the timecharter rate index stuck at a historically low 39 points at the end of February, before the market picked up sharply during March taking the index to 47 (though since then market moves have been largely sideways). This change in conditions was partly supported by liner companies moving quickly to charter to meet the requirements of new alliance service structures, but how much were fundamentals also driving things?

Well, the start of some upward movement at last was to some extent in line with expectations, with demand growth expected to outpace supply expansion this year, and no doubt accelerated charterer activity helped too. However, the market received additional impetus from recent sharp shifts in supply and demand.

Doing The Scissors

The lines on the graph (see description) show y-o-y growth in box trade and containership capacity; this is where the scissors come in. In 2015, capacity growth reached 8%, and remained ahead of trade growth until Q4 2016 when the lines crossed. In 2017, with capacity declining by 0.1% in Q1, backed by historically high demolition, and trade growth, notably in Asia, pushing along nicely, a big gap between the two lines has opened up. Demand is projected to outgrow supply this year (by c.4% to c.2%), but not by quite as much as seen so far. Full year expectations may be a little more restrained, but it’s still a helpful switch.

Going For Gold

So, in the case of the recent changes in containership earnings, maybe a bit of extra heat from the charterers’ side helped, but it looks like fast-moving fundamentals have offered some support too. Perhaps it all goes to show that old methods can sometimes be as good as new ones, and right now boxship investors should be happy to forget the ‘flop’ and focus on the return of the ‘scissors’.

SIW1269:Graph of the Week

Last week’s Analysis highlighted the rejection of the ‘P3’ container shipping alliance plans by the Chinese authorities, and how it might relate to the movement of trade by national fleets or otherwise. This week the focus is shifted to examine how liner shipping, ‘P3’ or no ‘P3’, fits within the pattern of consolidation in the key volume shipping sectors.

How Does It Stack Up?

In reality shipping is a relatively fragmented business. Over 88,000 vessels constitute the world fleet across almost 24,000 shipowners, with an average of less than 4 ships per owner. Limiting the analysis to 10,000 dwt and above, the average is still less than 7 ships. When talk of the ‘P3’ first hit the container shipping news, concerns were raised about the potential level of consolidation in shipping. Does that really stack up?

In Bulk, But Not Consolidated

As the graph shows, there has been consolidation of ownership, but over the last 20 years it has actually been fairly gradual. Today the Top 20 tanker owners account for 30% of the tanker fleet compared to 26% in 1994. In the bulker sector the Top 20 owners account for 22% today compared to 15% twenty years ago. In general, larger entities such as industrials have increased their share of the bulk fleets. Both sectors saw a fair amount of consolidation between 1994 and 2004, before a drop in the share accounted for by the Top 20 owners since then. The downturn post-2008 looks to have led to some fragmentation as the distressed position many traditional owners found themselves in created opportunities for new entrants (and new money).

Ticking The Boxes?

Containership ownership, meanwhile, has always been dominated by large, fairly corporate, ‘liner’ companies and some substantial charter owner interests. With ‘strings’ of containerships needed to operate scheduled services, ownership has been consolidated amongst fewer entities, and in 1994 and 2014 the Top 20 owners accounted for just under 60% of overall capacity, a much higher share than in the bulk sectors.

Concentrated Liners

However, liner operation (rather than boxship ownership) is where volume shipping is most highly consolidated. Large liner companies have historically been afforded some protection, first by the conference system and then by the approval of a network of alliances, reflecting the capital intensive nature of running box shipping services and the associated infrastructure. Today the Top 20 lines operate 77% of container capable capacity globally, up from 66% in 2004 and 37% in 1994. This is clearly a highly consolidated part of shipping, ‘P3’ or no ‘P3’ (itself a proposed alliance, not a merger of operators).

Overall, shipping remains quite fragmented despite some gradual consolidation. However, liner shipping, with its heavy operational demands, is generally much more concentrated. It’s certainly not quite Coca-Cola and Pepsi, but even without the ‘P3’ alliance this is where volume shipping is by some distance already at its most consolidated. Have a nice day.

SIW1128

SIW1104Last week our review of the bulk sectors speculated on when the ‘fat lady’ might sing to mark a turn towards better times. In 2013, the same old song played in the liner shipping sector. Global container trade, led once again by intra-Asian volumes, grew by 5.0%, whilst fully cellular capacity expanded by 5.5%. But whilst fundamental growth rates were roughly in kilter, the industry was still dealing with the capacity surplus created by the downturn, even if widespread slow steaming across the liner network continued to absorb significant amounts of surplus capacity.

Down The Scales

Across 2013 container freight remained volatile as liner companies continued to battle hard with capacity management in the face of significant containership deliveries of 1.3m TEU. Although at points in the year service withdrawals enabled liner companies to push through rate increases on a temporary basis, the SCFI index averaged 1,078 across the year compared to 1,254 in 2012, and liner profit margins remained restricted (or negative), with those able to drive fuel efficiency and work on their cost structure faring the best.

Same Old Song

The charter market remained in the doldrums with little separating timecharter rates across a range of sizes and earnings pushed down towards operating costs. The timecharter rate index increased marginally from an average of 43 in 2012 to 46 last year, but that’s still way below historical averages, and increasingly unpopular Panamaxes suffered further. With continued idling of boxships, and cascading of larger vessels into the traditional charter market arena, 2013 offered little respite for charter earnings (or asset prices).

New Tunes?

So, when will the liner sector dance to a different tune? Well, the orderbook, despite substantial ordering of 1.8m TEU in 2013, looks more manageable than previously at 22% of the fleet, and in many sizes is very thin indeed. Meanwhile, the fleet below 4,000 TEU has been shrinking since 2012. On the demand side, trade growth in 2014 could increase to surpass capacity expansion once again, with the Far East-Europe and Transpacific trades at last returning to positive trade growth territory in the second half of 2013.

Elevated levels of demolition (0.43m TEU in 2013) are also helping, and the likely slowdown in cascading in the medium-term should eventually offer the charter market some protection at last. But don’t expect a rapid change of key; there are plenty of risks out there, and current surplus and idle capacity will take some time to work through before the liner sector can sing a happier song.

SIW1096The timecharter is a method of vessel employment familiar to anyone involved, even in passing, with the shipping industry. Since 1990, Shipping Intelligence Weekly has recorded activity levels for period chartering in the major bulk cargo markets. But in 2012 and 2013 so far, for the first time in a decade, liquidity in the tanker timecharter market has exceeded dry bulk. So what’s going on?

The Graph of the Month shows the pattern of ‘period’ fixture activity recorded for reported timecharters of one year or more in duration (i.e. excluding short period fixtures). This shows that, in terms of tonnage and vessel numbers, period fixing of bulk carriers soared through the boom years of the mid-2000s, before declining sharply. In 2012, 197 bulker fixtures over one year were recorded, totalling just 20.1m dwt. This means just 1% of dry bulk fleet capacity was newly fixed on a long timecharter in 2012, down from 14% in 2007.

Liquid Fixture Activity

Timecharter fixing of tankers (over 1 year) has been much more consistent, fluctuating around 130-150 fixtures per year in the mid-2000s, and 13-17m dwt. This is a consistent 4-5% of the fleet newly fixed each year, a share which has held true since the mid-90s.

A Product of MRs

Of course, weakening dry bulk sentiment was the key to the falling volume of bulker period fixtures. Tanker fixtures, meanwhile, have been bolstered by a large upturn in interest for MR product tanker period charter: 82 such fixtures were recorded in 2012 and 72 in 2013 so far. The positive picture for clean trades as US exports grow and new Saudi refineries start-up has generated a great deal of interest.
This compares to back in 2004, when Aframaxes represented 35% of tanker period fixing and growth in Baltic crude exports was making the shorter-haul Atlantic crude markets look much more positive than they do post-recession. Similarly, in the bulker sector, 144 Capesizes were fixed for over a year in 2008, whilst the average period fixed amongst reported fixtures reached 3.8 years in 2007. In the less heady days of 2013, only 26 new longer period Capesize fixtures have been reported, for an average of 1.5 years. And only 17 uncoated Aframaxes have been newly fixed (9% of all tanker period fixtures): all but two for periods of a single year. The continued fragility of demand and sentiment in these sectors means few charterers have the confidence to fix for longer period, unlike in the products market.

Back in the Day

So, for the time being, the market for longer period chartering of tankers is more liquid than that for bulkers, helped primarily by interest for product tankers. How long this will last is something only time will tell. Of course, this level of activity is nothing compared to the early 1970s, when an estimated 105m dwt of tanker tonnage was on period charter, predominantly to oil companies. This was around 80% of the fleet owned by independent shipowners, or 45% of the total tanker fleet. How times have changed! Have a nice day.