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SIW1097

The annual Clarksea Index forecasting competition involves readers sending their forecast of the Clarksea Index for the first week of November next year. The following November we see who was closest, and also work out the average of the entries which gives a pretty good idea of market expectations.

What Happened – Not Very Nice

Bluntly, this has been the worst year since 1990 when CRSL started compiling the earnings indices which contribute to the Clarksea Index. Over the 12 months, weekly earnings averaged $9,610/day; lower than the 2001/02 average of $9,780/day, and dipping below $10,000/day for the first time since then. Of course, the Index moved around a bit (see chart), with a nasty dip in the spring of 2013 when the Index fell to $7,574/day, a plateau over the summer when the Index fluctuated in the $9-10,000/day band, then a recovery in the autumn. But the recovery did not make up for the weak spring, and the average remained doggedly below $10,000/day.

What the Forecasters Said

Of course the whole point of the exercise is to see what our readers expected. The target date for last year’s entrants was 1 November 2013 and on that date the actual value of the Clarksea Index was $10,993 a day, up 20% on the actual value of $9,111/day on 2 November 2012 when the forecasts were made. If the predictions made by entrants are a guide, this still rather gloomy outcome will not have surprised anyone. The av-erage of the forecasts was $10,843/day. An astonishingly accurate average prediction, possibly the most accurate ever. The spread was also narrow, with a standard deviation of only $2,128/day. A handful of optimists saw rates edging up to $15-16,000/day, while two deep pessi-mists clocked in at $7,500/day, a number which did actually crop up for a few weeks in February. But the vast majority of predictions were in the $8-10,000/day band. So the market did not have great expectations.

It Wasn’t Always Awful

Just as a reminder of how good it can be, when we ran the competition in 2004, the average Index over the twelve months was $29,965/day and the actual value on the target date was $29,554/day. That means that shipping investors earned 3.1 times as much cash in 2004/5 for doing precisely the same thing. A reminder that shipping is a feast and famine busi-ness. But the predictions ranged from $10,000/day to $50,000/day, so there was greater uncertainty about whether the good times would last.

Where Now, Where Next?

So there you have it. A miserable year, but one entrant produced a super accurate forecast of $11,001/day. Just $8 away from the actual outcome. Congratulations to Colin Davis of Houlihan Lokey, the 2013 winner. Your champagne is on its way. But in shipping, each year brings a new market. Investors seem to sense recovery, but what do you think? Why not let us know? Have a nice day!
(Readers can enter the 2014 index competition by returning the form attached to the e-mail copy of SIW or located on Shipping Intelligence Network.)

SIW1075In the 1880s the risks of carrying oil by sea were already well known. In 1881 the Nordenskjöld, an early tanker design, exploded whilst loading kerosene, killing half the crew. But the Glückauf, built in 1886, dealt with this problem. With its single hull transverse bulkheads and separate cargo compartments, it pioneered the tanker design which lasted a century.

Winners and Losers

Unfortunately in 1893 the Glückauf (“Good Luck”) grounded in fog on the US East Coast, and spent the remainder of its life on the beach as an elegant tourist attraction. But its basic design was still in use by another tanker which went aground in US waters in March 1989 – the Exxon Valdez. This time there were fewer tourists, but lots of journalists to witness the spill. US Congress acted promptly, passing the Oil Pollution Act (1990), which phased out single hull tankers from US waters in 2010.

Sinking of the Single Hull

OPA(90) was followed by a new Annex to IMO’s MARPOL Convention, with a schedule phasing out single hulls and precise design requirements for the new double hulls replacing them. There was much concern about the merits of the double hulls and that single hull VLCCs on order would be phased out at 15 years. So what happened?

Road Less Travelled

Actually it all went surprisingly well. When the last single hull VLCC had been delivered in 1996, there were 376 in service. Today there are only 3. But only 243 were actually scrapped. Sixty were converted into floating oil production and storage facilities (see graph) and some of the older VLCCs proved particularly suitable for FPSO conversion, attracting better prices than obtainable in the secondhand market.

Another 70 obsolete VLCCs were converted into Ore Carriers. In the 2000s the dry bulk market was booming and short of capacity, so with Capesizes changing hands for up to $100m, the extra capacity seemed a bargain. Since these are now prime demolition candidates (5 of the 70 scrapped already), today they are helping to balance the market again!

Still All at Sea

So the show is almost over. There are 52 single hull tankers left over 40,000 dwt. Two are in storage and 22 laid up. The remaining 28 are operating into Brazil (2), China (2), India (7), Indonesia (3), West Africa (8), and the Far East. Until 2009 the scrapping age was around 25 years, but since the recession started it has slipped back down towards 20 years.

Method in the Madness

So there you have it. The market did a slick job of managing the single hull phase. The newer VLCCs provided cost effective platforms for the offshore structures and a well-timed top up for the over-stretched dry market. Meanwhile the transition to double hull tankers was pretty painless too, illustrating the industry’s adaptability. Anybody fancy a Capesize conversion? Have a nice day.

SIW1073imagelBulk investors are on the war path and there’s some serious business being done. Last year orders for tankers and bulkers slumped to 36m dwt, even lower than in the late 1990s when bulk orders averaged 44m dwt a year. With only 13m dwt of tankers and 23m dwt of bulkers ordered, analysts could relax. But this year orders have doubled again, with 24m dwt contracted in the first four months.

Love Bulkers, You Cheap Chicks

Despite all the pain in the dry bulk market (and the products tanker euphoria) the serious money is still on bulk carriers, with 15m dwt ordered compared with only 9m dwt of tankers. Capes still top the charts with 57 ships ordered of 10.4m dwt. With earnings so far this year only $9,000/day, surely this does not make sense. Or does it? It all depends on how good future dry bulk trade turns out to be and what cheap deals investors are managing to squeeze out of the hungry shipyards.

Bouncy Bulk, Slumpy Oil

On the cargo side, the story is all about the way trade trends have developed since 2002 (see graph). Between 1986 and 2000 the oil (including products) and dry bulk trade followed a similarly subdued growth trend. Both increased from 1.4-1.5bt to 2.2bt in 2001. Then in 2002 everything changed. Dry bulk trade took off and oil trade lost what little momentum it had. As a result by 2012 the dry bulk trade had grown to be around 50% bigger than oil trade, with an aver-age growth trend of 6% pa.

Slippery Oily Waters

As dry bulk trade accelerated oil trade growth slowed, and by 2012 it had grown by less than 600mt, around 2% pa. The problem was mainly the North Atlantic economies, still a major force in the oil trade importing over 16 mbpd of crude oil in 2012, 43% of the global total. But the 2000s started badly for them and things got worse after 2006 when the oil price rocketed over $100/barrel, boosting the North Atlantic’s domestic supplies from unconventional sources and undermining global demand, leaving the oil trade looking shaky.

All the Dried Eggs in One Basket

Meanwhile the dry bulk story is just China. The dotted line, showing dry bulk trade less Chinese imports, demonstrates that without China dry bulk would be in the same predicament as oil. So how robust is the Chinese story going forward? Of course it’s a very big country, but iron ore imports are getting into the high risk zone. Luckily in the last couple of years coal has stepped in to provide a bonus bulk boost. China has lots of coal, but in the wrong place and quality is not brilliant. In four years imports have jumped by over 200mt.

Big Country, Big Bulk, Big…

So there you have it. Maybe there is method in the madness of diving into the Capesize market at this rather delicate moment in the re-cession. Of course it might be boredom, as investors get fed up with vacillating. Or perhaps, despite everything, big bulk is still beautiful. Have a nice day.

SIW1068imagelIn recessions companies with cash flow problems are under the micro-scope. Cash is king; survival of the fittest is the rule; and to the victor go the spoils. Although shipowners under pressure wake with a heavy heart, their colleagues with big balance sheets and small obligations are not necessarily any happier. For them recessions are for building future businesses, and that can be almost as stressful as bank-ruptcy.

Where’re the Bargains, Bosun?

It is a fundamental truth of shipping that market troughs are about change, when the strong take over the weak. In a world of financial easing, however, things are not so easy. Before companies or assets change hands cheaply, someone has to “take a haircut”. That happened big time in the 1980s but the 2013 recession has a very different financial background. In the early 1980s, high interest rates (LIBOR 16+%) put enormous pres-sure on businesses and bankers. If a customer is not paying interest, foreclosure is almost inevitable. Now there is little interest pressure (LIBOR 0.43%) and no banker wants to force a distress sale and drive asset values down if they don’t have to.

Today’s Droopy Prices

Because current financial pressures are so different from the 1980s, asset prices are behaving different-ly. To illustrate this, the graph shows the price of a 5-year-old Panamax as a % of the new price (solid line) and the same for an Aframax (dotted line). In a “normal” market, the price of a 5-year-old ship should be about 75% of the price of the newbuilding, reflecting that merchant ships have a 20-25 year economic life and depreciate at 4-5%pa, other things being equal.

Not so Droopy as the 1980s

The graph suggests that second-hand prices have been very droopy since 2008. The 5-year-old Panamax has halved in value from 140% of the newbuilding price to a current value of 74% and the Aframax is down from 100% to 60%. So, anyone looking at the way prices have collapsed might well conclude that today’s ships are cheap. In fact, they are not nearly as cheap as in the 1980s recession. In 1981, a 5-year-old Aframax was 72% of the new building price; it slumped to 40% in 1982 and stayed there, on and off, until 1986. Now that really is distress pricing. By these standards, far from being bargains, today’s Panamax is still priced at a pretty normal level and though the Aframax looks more reasonable, it is still not super-cheap.

Lies, Analysis and …

So there you have it. We have hit the bottom of the recession, but the banking crisis means asset prices are not behaving in the same way as they did 30 years ago. Then, banks were foreclosing left, right and centre. Today, banks are staring with apprehension at their balance sheets and wondering where to go next. In the meantime the can gets kicked down the road and deals are done “on market”, probably with a little help from sophisticated structuring. Are ships cheap? Well, there’s only one answer – “no comment”. Have a nice day.

SIW1064imagelIn 2012 US sales of electric and hybrid cars doubled, and we are told that before long more and more of us will be driving electric cars. The motor industry’s response to rising fuel costs and environmental legislation has been to develop new technology aimed at reducing emissions and fuel consumption. Sound familiar? What about electrically-powered ships?

Shock to the System

In electrical propulsion systems the power generated by the engines is converted to electricity before being transferred to the propeller(s) via electric motors. In conventional ships the engine is connected mechanically to a propeller either directly or via a reduction gearbox.

Vessels powered by electric systems are already well established in certain sectors. Our Graph of the Week shows that following a dip in 2008-09, contracting numbers for these ships have quickly recovered to levels seen during the height of the shipping boom. In 2011-12 464 new electric ships were contracted compared with 453 in 2006-07. Last year 1 in 8 new vessel contracts was for an electrically-powered ship.

Current Trends

Electric power is well suited to dynamically-positioned offshore development and support vessels, where manoeuvrability is a key factor and there is a large variation in the demand for power between transit and station-keeping. Increased demand for higher-spec units within these sectors, for example to explore and develop oil and gas fields in deeper waters, has helped to boost the share constituted by electric vessels.

Lower noise and vibration and the greater flexibility in terms of engine size and location makes electric-power well suited to cruise and seismic survey ships, while dual-fuel diesel electric systems are widely used on modern LNG carriers. Vessels that operate on short voyages and close to shore such as ferries and dredgers are also equipped with electrical propulsion, while higher torque at low speed can make these systems suitable for vessels operating in icy conditions, for example.

Against the backdrop of much lower contracting in the larger “volume cargo” sectors, the outlook for a number of specialised sectors has remained more robust, and this changing product mix is reflected in the growing share of electric ships seen in the graph.

What’s the Charge?

Cost and power limits mean that until now electric propulsion has not been a viable option for large vessels with heavy cargoes. However, with the market placing a greater emphasis on fuel efficiency, a number of innovative designs are being seen incorporating hybrid mechanical/electric propulsion, waste heat and exhaust gas recovery, alternative fuels and high voltage shore connection being adapted for larger cargo ships. Could this be the start of a long-term trend towards the increasing electrification of the whole fleet? Maybe the future is electric?