With the ClarkSea Index around $9,000/day, and many if not most of the major shipping markets under severe pressure, it’s hard to escape the conclusion that the shipping markets are a tough place right now, with limited pickings to share between owners. However, everything’s relative, and from one angle the size of the ‘pie’ might just be bigger than it seems…

How Big’s The Pie?

Last week the ClarkSea Index stood at $8,743/day, and during 2016 as a whole the index averaged $9,441/day, taking into account earnings in the tanker, bulkcarrier, gas carrier and containership sectors, across a selection of over 21,000 units at the start of the year. Estimating the aggregate annual earnings for the basket of vessels in question, that works out at $72.5 billion in full year 2016. To put this in context against the boom years of the 2000s, in 2007 the ClarkSea Index averaged $33,061/day across a basket of over 15,000 ships, generating aggregate earnings of $189.1bn, over two and half times more than in 2016.

In terms of average earnings levels, 2016 actually compares more equally to 1992, 25 years ago, when the ClarkSea Index averaged $9,786/day, or 1999 when it averaged $9,855/day. But of course the fleet has grown since those days and, in dwt terms, the basket of ships in the index in 2016 was 159% bigger than in 1999 and 219% larger than in 1992. Aggregate earnings in 1999 reached $43.6bn and in 1992 were $36.1bn. 2016’s total was 66% and 101% larger respectively. In today’s challenging markets it is food for thought that the earnings stream is still that much bigger than at similar earnings levels in the past.

A Bigger Bake

And furthermore, there’s a wider world of shipping outside the scope of the ClarkSea Index basket which is (hopefully) generating income too. If, for instance, the 2016 earnings of the ClarkSea Index basket were extrapolated on a $/dwt basis (it stood at $48/dwt) across the whole of the 1.7bn dwt world cargo fleet, the overall earnings of that wider fleet would have come to $85bn. That’s roughly the size of the economy of Ukraine!

Rising Cost Of Ingredients

However, having said all this, it’s not just about earnings. Costs need to be taken into account too. Using a weighted index of OPEX across the ClarkSea Index basket and subtracting it from aggregate earnings would imply an overall net cash flow in of $23.4bn in 2016 (this compares to around $150bn in 2007 and 2008). Helpfully, in recent decades fleet expansion has outweighed growth in OPEX so the net cash flow pie has grown compared to previous downturns too.

A Slice Of The Action

So, whilst market conditions are as challenging as any seen in the last few decades, the revenue ‘pie’, though hardly tasty yet, is at least significantly larger than it was last time that earnings were at a similar level. For the industry that means a larger pie to be shared around. In today’s difficult markets that could be helpful, but of course you have to get a big enough slice. Have a nice day.

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In the first film in the Bridget Jones series, 32 year old single Bridget soon ends up in the middle of a love triangle with the sensible Mark Darcy and charming Daniel Cleaver. The second sequel, released last year, sees Bridget finding herself unexpectedly expecting a baby. But Bridget Jones hasn’t been the only one battling tricky relationships and a rising headcount, as tanker owners will attest.

Happy Couple

The tanker market has certainly had some tumultuous times of late. Crude tanker earnings picked up in 2014, averaging nearly $27,000/day, and surged to an annual average of around $50,000/day in 2015. Things started to cool off into 2016, but in the full year average earnings were still fairly healthy at just under $30,000/day. They say two’s company; and these positive conditions did seem to have been brought about by the fortuitous lining up of two key factors.

Firstly, limited tanker ordering in the years after the global economic recession led to a spell of very muted growth in the tanker fleet. By the start of 2015, tanker fleet capacity was just 3% larger than at the start of 2013 (in the same period, the bulkcarrier fleet grew 10%). Secondly, the oil price crash in mid-2014 kick-started a period of unusually firm growth in seaborne oil trade. The ensuing low oil price environment supported healthy refinery margins and a build-up in oil inventories in key regions, whilst price pressures also dampened US oil production and boosted US crude imports. Overall, seaborne crude oil trade grew on average by a healthy 3.5% p.a. in 2015-16.

Delivery Record

However, a resurgence in contracting (1,278 tankers were ordered in 2013-15, up from 577 in 2010-12) has seen tanker fleet growth accelerate, to around 6% in 2016. The tanker supply surge has continued, with deliveries in January 2017 reaching an all-time monthly record of 6.7m dwt. With these new additions, tanker fleet capacity has already grown by 1.1% since the start of 2017, a similar rate of growth to that seen in full year 2014, with more tonnage delivered last month than in some whole years in the 1980s. In full year 2017, tanker fleet growth looks set to reach around 5%.

Troubling Trio

Another tricky element could also now be materialising on the demand side. Compliance by major oil exporters with agreed production cuts seems to have been high so far. The wider impact of these cuts on the tanker market is certainly far from clear, but there is the potential for improved oil price levels to support US oil output and undermine crude imports. At the same time, oil inventory drawdowns in some regions remain a key risk

Finding Mr Right

So, they say three’s a crowd, and the tanker market could be facing up to some real tests if the three factors of fast supply growth, changes in oil production and inventory drawdowns come together. Bridget Jones would be the first to tell you that finding the right way forward when the future’s uncertain and numbers are multiplying is tricky at the best of times, but rarely have shipowners not been up for a challenge. Have a nice day.

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Expectations at the start of the year that 2016 would be a tough one for the oil industry, and in particular for offshore, were on the whole fulfilled. Overall upstream E&P spending globally fell for the second successive year, and was down by in the region of 27% year-on-year in 2016. Cost-cutting has been a key focus, whether that be through pressure on the supply chain, M&A activity, job cuts or other means. OIMT201701

Lower Spending

Offshore spending has been particularly reined back on exploration activity such as seismic survey and exploration drilling, although 2016 saw weakness spread further to areas such as the subsea or mobile production sectors which had initially shown some degree of protection from the downturn. This was not helped by a 32% year-on-year decline in sanctioned offshore project CAPEX in 2016, despite a small number of encouraging project FIDs, such as that for Mad Dog Phase 2 in the Gulf of Mexico in Q4.

Dayrate Weakness

Dayrates and asset values in those offshore sectors with liquid markets showed further signs of weakening in 2016. Clarksons Research’s index of global OSV termcharter rates declined by 27% in 2016, whilst that for drilling rigs was down by 25% year-on-year. Potential for further falls are, in general, limited, given that rates levels in many regions are close to operating expenses. Owners are doing what they can to control the supply side: just 81 offshore orders were recorded in 2016: for context, more than 1,000 offshore vessels were ordered at the height of the 2007 boom. Slippage has also remained evident, either due to mutually agreed delays with shipyards, or owing to owners cancelling orders. Offshore deliveries were 34% lower y-o-y in 2016.

Despite the severe industry downturn, the oil price actually firmed during the year. Brent crude began 2016 at $37/bbl, before briefly dipping below $30/bbl. However, the price ended 2016 at $55/bbl, helped by a slow firming in mid-year, and then more rapid gains after the 30th November announcement of a concerted oil production cut by OPEC countries.

This is clearly positive news for oil companies’ cashflow, and marks the abandoning of Saudi Arabia’s policy of targeting market share by accepting low prices as a means to hinder shale oil production in the US. However, US onshore companies were already feeling more comfortable with slightly improved prices in Q3 2016. Early surveys of intentions for E&P spending suggest that onshore spending in the US could increase by more than 20% in 2017. It is likely that offshore spending will decline further in 2017.

Some Way To Go

Nonetheless, it is important to stress that the offshore sector is far from dead. The expected multi-year downturn is occurring. However, important cost-control and consolidation has taken place. IOCs continue to consider strategic investments such as Coral FLNG or Bonga Lite. This shows that these companies are planning for better times. Decline at legacy fields will help to correct the supply/demand balance. Meanwhile, optimism is building in the renewables and decommissioning markets, with for example, announcements even in the first few days of 2017 that China is to make an RMB2.5 trillion investment in renewables over five years, whilst another North Sea decommissioning project plan has been submitted.

Nevertheless, the supply/demand imbalance in many offshore vessel sectors will take time to recalibrate. However, the weakness of 2016 also put in place many longer term trends which could lay the groundwork for an eventual change in market fortunes.

Last year saw a huge amount of change in the under pressure container shipping sector. In particular, the ongoing consolidation of the sector in one form or another grabbed the headlines. To put this into context, it’s interesting to see how the level of consolidation relates to other parts of shipping, how it has developed over time and how it might progress looking forward.

Solid In A Fragmented Field

It’s quite clear that the shipping industry is a fairly fragmented business. On the basis of start 2017 Clarksons Research data, 88,892 ships in the world fleet were spread across 24,267 owners. That works out at less than 4 vessels per owner. Although 145 owners with more than 50 ships accounted for almost 12,000 of the vessels (and 29% of the GT), it’s still not that consolidated. The liner shipping business however is one the more consolidated parts of shipping, as well as being home to some of the industry’s larger corporates. At the start of the year, the 5,154 containerships in the fleet were owned by 622 owner groups, about 8 ships per owner, but, perhaps more pertinently, were operated by 326 carriers, about 16 ships per operator. Each of the top 8 operators deployed more than 100 ships. But despite the less fragmented nature of the sector, recent market conditions have led to another round of consolidation in the box business.

All Change At The Big End

The three largest operators (by deployed capacity) at the start of 2017 were European: Maersk Line (647 vessels deployed) followed by MSC (453) and CMA-CGM (454). Of the remaining carriers in the top 20 all but three were based in Asia or the Middle East. However, what’s really interesting is that out of the 20 largest carriers back in late 2014, 4 are now gone. CSAV was acquired by Hapag-Lloyd, NOL/APL by CMA-CGM and the two major Chinese lines merged. And of course in late summer 2016, the financial collapse of Hanjin Shipping marked the sector’s biggest casualty in 30 years.

Long-Term Liner Trends

Against this backdrop, the graph shows  that the latest wave of box sector consolidation is actually part of a long-term trend. Back in 1996 the top 10 carriers deployed 45% of capacity and at the start of 2017 that figure stood at 70%. The coming year is set to see Hapag-Lloyd complete its merger with UASC, and Maersk Line’s planned acquisition of Hamburg-Sud is also awaiting necessary approvals. The second half of last year also saw the three major Japanese operators declare their intention to merge containership operations in a joint venture due to be established this year and start operations in 2018. The ‘scenario’ based on these changes would see the top 10’s share at 79%, nearly twice as much as 20 years ago.

Tracking The Top Table

So, the container sector is one of the more consolidated parts of shipping, and both the long-term trend and recent developments point towards ongoing consolidation. Many hope this will help the recalibration of market fundamentals and eventually support improved conditions. In the meantime, we’ll be publishing the ranking of the top containership operators every month, so watch this space.

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Once upon a time, before the Chinese economic boom captured so much of the attention of the world of shipping, the US was a more important demand source for seaborne trade. Its share of global imports is lower today, but the US still plays a key part in world seaborne trade. What’s the detail behind this backdrop and how might the big changes in US politics impact the trends?

In A Chinese Theatre

Looking back, in 2006, North American container imports accounted for 18% of world box trade, whilst 22% of global seaborne crude oil trade went to the US. In 2016, these figures were 13% and 12% respectively. Some of this change is relative: rapid growth in China and developing Asia has clearly reduced the US share of global trade. Nevertheless, US imports have actually fallen in many of the major categories of seaborne trade. The volume, however, is still highly significant, so changes in US trade patterns are of major importance. The import trades shown on the graph alone account for around 6% of global seaborne trade.

A Mexican Stand-Off

Looking forward, one key aspect is the clear scenario in which US policy under the new administration becomes more protectionist. The US is withdrawing from the mooted Trans-Pacific Partnership and there is the possibility of punitive tariffs. The focus is manufacturing: attempts to ‘re-shore’ production which once upon a time would have taken place in the West. This could have a negative impact on certain import trades. The US accounted for 23% of all car imports by sea in 2016. Tariffs could harm this trade, as could a more aggressive approach against alleged dumping of cheap Asian steel products (the US imported more than 30mt of steel in 2016, 8% of the global seaborne trade). Meanwhile, efforts to promote US products could imperil the c.4% pa compound growth rate of eastbound transpacific container trade since 2010, although more jobs in manufacturing might also support increased US consumer activity.

Spaghetti Western

Another key aspect relates to energy. The US economy was once driven by cowboys; more recently shale oil has taken a key role. This has reduced energy imports, the US’s largest import category. Crude and products imports fell 45% in the last decade, whilst LNG imports dropped by 86%. Pro-energy industry policies of the new administration may have some further negative effects on hydrocarbon imports, though the set-up of US refineries means that some heavy crude imports are needed to ensure a balanced refinery slate. Conversely, oil industry-friendly policies could encourage exports, although additional LNG exports will partly depend on continued expansion of high-CAPEX liquefaction capacity.

 

Coming Up Next?

So, the backdrop is that seaborne trade is less dependent on the US than it once was, with some volumes that used to “Go West” increasingly heading to Asia. But, US seaborne trade does remain highly significant, and key elements appear potentially exposed to shifts in aspects of US policy. Though there may be pros as well as cons, looking ahead it’s clearly going to be important to watch closely for the impact of the big change in the US.

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This month marks the 25th anniversary of the publication of the very first edition of Shipping Intelligence Weekly. So, this week we take a look back to 1992 and compare the shipping industry then to its profile today. If this reveals anything it’s that whilst many things change dramatically, in an industry like this some things don’t appear to change too much at all…

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Wonderful World Of Trade

Seaborne trade provides the platform upon which the shipping industry operates. Back in 1992 world seaborne trade stood at an estimated 4.6 billion tonnes and in comparison current projections suggest that in 2017 it will reach 11.3 billion tonnes. That’s 2.5 times bigger than 25 years ago (see table). Iron ore trade is projected to be 4.3 times larger than back in 1992, LNG trade 4.5 times larger and container trade a mighty 6.3 times more voluminous. The 2017 seaborne trade estimate represents about 1.5 tonnes per person on the planet. That’s quite some performance all round and keeps the world of shipping turning.

My How Big You’ve Grown

Meanwhile, shipping capacity has also expanded equally rapidly. The fleet has grown by a multiple a little greater than that registered by trade over the 25 year period. At the start of 2017 the global fleet totalled 1.86 billion dwt compared to 621 million dwt at the start of 1992. That’s a multiple of 3.0 times larger. Of course, over the period there have been changes to vessel productivity, not in the least the moderation of service speeds in many sectors in the post-Lehman downturn.

What Things Cost These Days

Alongside these significant changes, the value of shipping assets has seen more mixed trends. A 5 year old VLCC was 8% cheaper at the start of 2017 (in current terms) than at the start of 1992 but such is the state of play in the bulkcarrier market that a 5 year old Capesize is 43% cheaper. Adjust these for inflation and the values look even lower. On the other hand the scrap value of ships is higher than in 1992 on the back of an 81% higher $/ldt ship steel scrap price.

Economic Activity

Despite the recent commodity price downturn, raw materials overall are substantially more expensive than back in 1992.  Brent crude stood at $54.8/bbl at the start of 2017 compared to $18.2/bbl in early 1992 and iron ore at $76.3/tonne compared to $33.1/tonne. Bunker prices (380cst Rotterdam) have increased from $69.0/tonne to $312.5/tonne.

Elsewhere only $1.24 of shipping’s universal currency is now needed to buy one pound sterling, compared to $1.83 back in 1992, but USD borrowing (6-month LIBOR) is much less dear at 1.3% rather than 4.2%. The world economy is still growing more quickly than back in 1992, projected at 3.4% in 2017 compared to 2.3%, and is over 3 times bigger at about $79 trillion. The size of the Chinese economy has rocketed from $0.5 trillion to $12.4 trillion, and the world’s population has expanded from 5.5 to 7.4 billion.

Nothing Changes?

Last of all, some things never seem to change. At the start of 1992 the ClarkSea Index of vessel earnings stood at $11,700/day. At the start of 2017 it stood just 5.2% lower at a remarkably similar $11,092/day. In between the index once tipped over $50,000/day; that’s a cyclical business for you! Now let’s see what changes the next 25 years throw up. Many happy returns SIW!

There have been plenty of record breaking facts and figures to report across 2016, unfortunately mostly of a gloomy nature! From a record low for the Baltic Dry Index in February to a post-1990 low for the ClarkSea Index in August, there have certainly been plenty of challenges. That hasn’t stopped investors however (S&P not newbuilds) so let’s hope for less record breakers (except demolition!?) in 2017.SIW1254

Unwelcome Records….

Our first record to report came in August when the ClarkSea Index hit a post-1990 low of $7,073/day. Its average for the year was $9,441/day, down 35% y-o-y and also beating the previous cyclical lows in 2010 and 1999. With OPEX for the same basket of ships at $6,394/day, margins were thin or non-existent.

Challenges Abound….

Across sectors, average tanker earnings for the year were “OK” but still wound down by 40%, albeit from an excellent 2015. Despite a good start and end to the year, the wet markets were hit hard by a weak summer when production outages impacted. The early part of the year also brought us another unwelcome milestone: the Baltic Dry Index falling to an all time low of 291. Heavy demolition in the first half and better than expected Chinese trade helped later in the year – fundamentals may be starting to turn but perhaps taking time to play out with bumps on the way. The container market (see next week) had another tough year, including its first major corporate casualty for 30 years in Hanjin. LPG had a “hard” landing after a stellar 2015, LNG showed small improvements and specialised products started to ease back. As reported in our mid-year review, every “dog has its day” and in 2016, this was Ro-Ro and Ferry, with earnings 50% above the trend since 2009. Also spare a thought for the offshore sector, arguably facing an even more extreme scenario than shipping.

Buy, Buy, Buy….

In our review of 2015, we speculated that buyers might be “eyeing up a bottoming out dry cycle” in 2016 and a 24% increase in bulker tonnage bought and sold suggests a lot of owners agreed. Indeed, 44m dwt represents another all time record for bulker S&P, with prices increasing marginally after the first quarter and brokers regularly reporting numerous parties willing to inspect vessels coming for sale. Tanker investors were much more circumspect and volumes and prices both fell by a third. Greeks again topped the buyer charts, followed by the Chinese. Demo eased in 2H but (incl. containers) total volumes were up 14% (44m dwt).

Order Drought….

Depending on your perspective, an overall 71% drop in ordering (total orders also hit a 35 year record low) is either cause for optimism or for further gloom! In fact, only 113 yards took orders (for vessels 1,000+ GT) in the year, compared to 345 in 2013, with tanker orders down 83% and bulkers down 46%. There was little ordering in any sector, except Cruise (a record 2.5m GT and $15.6bn), Ferry and Ro-Ro (all niche business however and of little help to volume yards).

Final Record….

Finally a couple more records – global fleet growth of 3% to 1.8bn dwt (up 50% since the financial crisis with tankers at 555m dwt and bulkers at 794m dwt) and trade growth of 2.6% to 11.1bn tonnes (up 3bn tonnes since the financial crisis) mean we still finish with the largest fleet and trade volumes of all time! Plenty of challenges again in 2017 but let’s hope we aren’t reporting as many gloomy records next year.
Have a nice New Year!