Archives for category: VLCC

Investment 101 could be summarised as: buy low, sell high and make lots of money in between. That sounds simple, and with the benefit of hindsight, it can look it too. But as anyone who follows shipping knows, this is easier said than done. Modelling returns on shipping investments in the decade since the financial crisis helps to emphasize this point, and shows how good timing always makes the difference.

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

The last few years have marked a particularly challenging period for the shipbuilding industry, with contracting activity generally remaining limited and many yards facing difficulties. However, focusing on those builders which have been able to take contracts reveals one interesting angle, with the volume of orders per yard heading upwards, driven by both longer term trends and more recent changes.

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

In an industry as volatile as shipping, having the right ship at the right time can bring significant rewards, but the other end of the cycle can be deeply painful. As any surfer knows, to ride the waves good timing is vital, but notoriously tricky. For shipowners, tracking movements is also key; assessing the markets is paramount but carefully watching how the cost base is changing is clearly important too…

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

 

Looking at the ratio between newbuild and secondhand prices is a classic method of examining the state of various shipping sectors. But the metrics can be just as revealing at the older end of the market. Trends in the ratio between scrap values and secondhand prices for elderly vessels can shine further light on the health of the shipping markets, and can also have implications for fleet dynamics.

Health Check

Particularly stark signs of the current ill health of the key shipping sectors are apparent in the market dynamics for older units. With global steel prices determining ship scrap values (effectively the ‘floor’ for elderly secondhand vessel prices), the ratio of prices for older ships to estimated scrap values varies in line with market conditions. When markets are weak, investors may attribute little premium to the short-term earnings potential of elderly vessels, and secondhand prices for these ships can fall close to the scrap value.

On Life Support?

In the bulker sector, the ratio between assessments of 15 year old prices and scrap values has fluctuated dramatically. At end August 2016, amidst a depressed earnings environment, the price for a 15 year old Capesize stood at $8.0m, only 1.3 times the estimated Capesize scrap value of $6.2m, with the 20 year old price close to scrap value. These ratios have fallen in recent years as the market outlook has deteriorated, but even a 15 year old/scrap price ratio of over 2.0 in mid-2014 was a far cry from 2005-08 when 15 year old Capesize prices averaged more than 5 times scrap value, with ‘boom’ bulker earnings inflating asset values.

A similar trend has emerged in the containership sector. With charter rates largely in the doldrums since start 2012, the 15 year old price for a 2,000 TEU boxship has remained close to scrap value. Particular stress is also evident in the ‘old Panamax’ sector, with the price for a 15 year old 4,400 TEU ship now assessed at $5m, in line with estimated scrap values. In contrast, ratios in the tanker sector have generally risen in recent years. The 15 year old VLCC price was 3.5 times scrap value in early 2016, up from 1.3 times in early 2015. However, the ratio has recently dropped in line with weaker tanker earnings.

Elders On The Edge

As well as illustrating market trends, these ratios also influence fleet developments. Weaker markets and lower price ratios typically lead to more ships being scrapped rather than sold secondhand, as the ‘market mechanism’ helps to reduce oversupply. Across the bulker and containership sectors, over 70% of transactions of vessels 15+ years old since start 2012 have been accounted for by demolition sales, compared to just 11% in 2005-07. Increasingly young vessels are also being scrapped as a result.

Looking Poorly?

So, price ratios for older units can prove a useful indicator of the state of the markets. For assets generally expected to have a lifespan of 25 years or more, the historically low ratios of even 15 year old vessel prices to scrap values in some sectors is a clear and sobering reminder of the challenges still being faced.

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Down the years, shipbuilders have always entered and exited the business as cycles have progressed, but over the past decade developments have been dramatic. Back in 2007, 220 shipyards secured at least one order for a unit of 20,000 dwt or above in size, but in 2015 just 101 yards were successful in doing so. What have been the characteristics of such acute changes in the shipbuilding landscape?

Following The Plot

 ‘Fatal Attraction’ was an 1980s thriller movie in which a weekend affair resulted in a tricky predicament. Having had its fling with investors, it could be said that the shipbuilding industry has also found itself in severe distress. At the climax of the newbuilding investment boom in 2007, 220 yards took an order (for a vessel of 20,000 dwt or above), up 80% on the number in 2005. However, the global economic downturn ended the ‘affair’ and the number of yards to take an order fell 45% in 2009. Chinese state subsidies reignited old flames in 2010, when 190 yards attracted an order (62% were located in China) and countercyclical ordering helped support around 130 yards in 2013 and 2014, but the general trend has been a steady fall in the number of shipyards successful in attracting orders in the recent investment environment.

Character Development

In 2015, 1,083 orders (20,000 dwt and above) were placed at 101 yards globally, and of the yards who took an order in 2007, only 80 (36% of the total) were successful in doing so last year. Shipbuilders who ‘left the scene’ in this period included many Chinese yards (87), generally focussed on the bulker sector, as well as a number of European yards (17) finally ceding to Asian competition.

The solid line on the graph represents the number of yards taking 20 or more orders each year. This number has fluctuated less than the total number of yards taking orders, reflecting the more consistent part of the industry, including established Korean yards and ‘top tier’ Chinese state yards (27 different yards have appeared in this grouping since 2010). The dotted line shows yards who have received five or less orders each year, and reflects the more vulnerable end of the business, making up 51% of yards who took an order in 2007, but accounting for an average of 37% of the total between 2013 and 2015. 62% of yards in this grouping who took a contract in 2007 have not received an order since 2012.

No Alternate Ending?

On a more positive note, despite the fall in the number of yards to take a contract in 2015, six of the 18 yards to take 20 or more orders took their largest number of contracts since 2007 last year. For the first time this decade the largest number of these yards were in Japan (7).

Nevertheless, the environment clearly remains severely challenging. In 1H 2016, 97 orders were reported placed (for units 20,000 dwt or above) across just 27 yards. Though there may be some late reporting, and optimism from some quarters that 2H 2016 could see increased contract volumes, changes to the industry landscape appear to have been stark (and for some ‘fatal’). Over the second half of this year, market observers should continue to watch the drama closely

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Put The Heating On

The ClarkSea Index provides a useful way to take the temperature of industry earnings, measuring the performance of the key market sectors. Since Q4 2008 it has averaged $12,289/day, compared to $23,656/day between the start of 2000 and the end of Q3 2008. However, earnings aren’t the only thing that can provide ‘heat’ in shipping. Investor interest in vessel acquisition has often added ‘heat’ to the market environment in the form of investment in newbuild and secondhand tonnage. To account for this, this analysis revisits the quarterly ‘Shipping Heat Index’, which reflects not only vessel earnings but also investment activity.

Frosty Conditions

In 2014 the Shipping Heat Index averaged 65 points, supported by investment activity early in the year in spite of the difficult earnings environment. But in 2015 the average dropped to a distinctly cooler 62 points, with an increase in earnings this year offset by a more significant decline in investment activity. The main driver of the increase in earnings has been a single sector (tankers). Whilst this has boosted tanker investment, weak earnings in the bulker sector (where investment has been most significant in the last few years) has led to a slump in bulker investment. Secondhand bulker sales have increased, but contracting is down by around 70%.

Slightly Less Chilled

The trend did vary across the year, and the Shipping Heat Index actually trended gently upwards across the first three quarters of 2015 to reach 68.6 points in Q3. The modest uptick in Q3 was driven by an improvement in bulker earnings (though they remained at historically weak levels), as well as gas carrier earnings. Additionally, boxship ordering surged in Q3, with 106 units contracted, up from an average of 33 orders in the previous four quarters.

Ice, Ice, Baby

However, for the first time since Q4 2008, the Shipping Heat Index fell below the Earnings Index in Q4 2015. Although the ClarkSea Index has still been supported by firm tanker earnings (VLCC average spot earnings have topped $100,000/day, the highest levels since July 2008), contracting and S&P activity has been limited largely due to reduced appetite for bulkers and boxships, with the challenging earnings environment eventually dragging the ‘heat’ into more icy conditions.

A Chilling Tale?

So, a chilling tale indeed. Shipping investors, generally a quite optimistic bunch, can often create a nice degree of heat even when it’s icy out. But even these hardy players can eventually get dragged down by the cold. Let’s wish for something warmer next year. Merry Christmas.

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As Norway celebrates 50 years of Nor-Shipping, it’s a good time to think about where shipping might be in another 50 years. In 1965 several shipping innovations were becoming reality. The first VLCC was near completion, Malcolm MacLean was finalising arrangements for the first transatlantic container service, Japan was emerging as the leading shipbuilding nation and sea trade was 1.7 billion tonnes.

Amazing Performance

When we look at the growth of sea trade since 1965, two things are apparent. The first is the speed of growth, as sea trade grew faster than the world economy. Between 1950 and 2015 world GDP grew by 3.7% per annum, but sea trade grew by 4.7%. Trade is now almost 11 billion tonnes a year, which works out at around 1.5 tonnes of imports for every man, woman and child in the world.

The second point is the bumpy trajectory (see graph). There was a spell in the 1970s and 1980s when trade did not increase significantly for a decade, thanks to a deep recession in the world economy and a sharp decline in the volume of oil traded by sea. This is a timely reminder that the shipping industry operates in a volatile environment.

The Next 50 Years

Looking ahead, the shipping industry faces a daunting task. One problem is judging how fast trade will grow. If global sea trade just increases in line with growth in population, which is heading for 10 billion in 2065, imports would reach 15 billion tonnes in that year (Scenario 1). But the imports per capita trend trebled from 0.5 tonnes per person in 1965 to an estimated 1.5 tonnes in 2015. If the upward trend continues, imports might reach 2.2 tonnes per capita by 2065 and trade 22 billion tonnes (Scenario 2). But today although the OECD countries import around 4 tonnes per capita, non-OECD imports are around 1t per capita. If they were to reach OECD levels, global sea trade would hit a total of 37 billion tonnes in 2065 (Scenario 3). Bewildering Forecast Range

So in 50 years’ time trade could be anything between 15 and 37 billion tonnes. And there are other scenarios, for example the phasing out of fossil fuels which could radically alter even this wide range. In terms of investment, on a very rough calculation, this means the industry could be spending between $1.5 and $4.5 trillion on new ships over the 50 years at today’s prices. How will shipping handle this? Since 1965 the focus has been on bigger ships, tight overheads, and an aggressive market offering little reward for innovative investment. But as the non-OECD driven world develops, with tougher targets for fuel and emissions, changes will be needed, and maybe a rethink.

Maritime Magic Carpet

So, if shipping is to play as big a part in the global economy in the next 50 years as it did in the last, it needs a new injection of maritime magic. The digital revolution, now global, offers shipping companies a unique opportunity to integrate the management of their high cost assets, improving productivity and offering new ways to manage them that tighten up the whole transport chain. Who knows, maybe that’s just the magic that’s needed. Have a nice day.

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