Archives for posts with tag: Aframax

Eight years ago, the onset of the financial crisis following the demise of Lehman Brothers heralded a generally highly challenging time for many of the shipping markets, which today remain under severe pressure. But even within the relatively short period of history since then, different sectors have fared better or worse at various points along the way. This week’s Analysis examines the cumulative impact…

What Was The Best Bet?

So how would a vessel delivered into the eye of the financial storm in late 2008 have fared? The Graph of the Week compares the performance of three standard vessel types. It shows the monthly development of cumulative earnings after OPEX from October 2008 onwards for a Capesize bulkcarrier, an Aframax tanker and a 2,750 TEU containership.

A Capesize trading at average spot earnings would have generated around $37m in total, benefitting from market spikes in 2009-10 and 2013. But with Capesize spot earnings hovering near OPEX in recent times, the cumulative earnings have not increased much since mid-2014. For a hypothetical vessel delivered in October 2008 (and ordered at the average 2006 newbuild price of $63m) those earnings would equate to close to 60% of the contract price (note that if the vessel was sold today, this would result in a net loss of c. $8m, taking into account the earnings after OPEX, newbuild cost and sales income but not finance costs).

Totting Up Tanker Takings

By contrast, Aframax tanker earnings hovered close to OPEX for several years after the downturn, with far fewer spikes than in the bulker sector. However, the 2014-15 rally in the tanker market allowed the Aframax to start playing catch-up, and cumulative Aframax earnings between October 2008 and September 2016 reached around $31m. This represents around 50% of the value of a newbuild delivered in 2008 (with a newbuild price at the 2006 average of $63m), not too far from the ratio for the Capesize.

Bad News For Box Backers

Containerships haven’t really seen similar spikes, with the charter market largely rooted at depressed bottom of the cycle levels since 2008, battling with a huge surplus created by falling consumer demand and box trade in the immediate aftermath of the crash. With earnings close to operating costs for much of the period, a 2,750 TEU unit generated cumulative earnings after OPEX of just $6m from October 2008, around 10% of the average newbuild price in 2006 ($50m). The timecharter nature of the boxship business would also have potentially reduced owners’ upside when improved rates were on offer, and there was an ongoing chunk of capacity idle too.

The Stakes Are Still High

So, despite persisting challenging conditions overall, some of the shipping markets have seen significant ups and downs since 2008. Though boxships have seen limited income, interestingly similarly priced tanker and bulker newbuilds delivered heading into the downturn might have offered roughly comparable accumulated returns on the outlay. With conditions currently weak across most sectors, owners today would surely love to see any form of accumulation again.

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Seven years into the recession, the tanker market is blazing away, with VLCCs earning over $50,000/day and Aframaxes not far behind. It’s an amazing development which leaves investors pondering whether this is, in Churchill’s famous words, “not the beginning of the end, but maybe the end of the beginning”. Analysts now wonder if it’s worth the risk of going out on a limb and calling “turning point”.

Potential Paradigms

Whatever the outlook, it’s worth pausing to enjoy the moment – and, perhaps, reflect that nothing like this happened in the 1980s. So something has obviously changed, but over the long-term it’s hard to see what it is. Since 2007, the tanker fleet has grown much faster than seaborne oil trade. We know from experience that when there’s an underlying surplus, spikes rarely last more than a few months and paradigm shifts making “this time different” are rarer than hen’s teeth, if not impossible.

Disappointing Demand

Let’s start with the crude oil trade, which fell by 6% from 38.4m bpd in 2007 to about 36.3m bpd in 2014. OECD oil demand has declined since 2007, with North America down 8%; Europe down 12% and Japan down 13%. So there’s not much joy there. Add an extra 4.6m bpd of oil production in North America and seaborne crude imports dropped by 2.1m bpd. Of course, non-OECD imports have increased, as has products trade, but overall the oil trade has only increased 2.8%, from 55m bpd in 2007 to 56.5m bpd in 2014. A tonne-mile approach pushes the growth up to 7.9%, but that’s still only 1.1% pa.

The Flighty Fleet

Meanwhile the tanker fleet has been buzzing. At the end of 2007, when the credit crisis was just getting started, it was 383m dwt, but since then it has grown by one third (126m dwt) to 509m dwt. Of course, macro statistics are always a bit fuzzy, but an increase of less than 10% in trade and 33% in ships tells a pretty clear story that there is probably lots of ‘surplus’ tonnage tucked away.

A Logical Disconnect?

Such a surplus should surely “cap” rates. But clearly this is not happening, so what’s going on? There are a few explanations. Firstly, seasonality; global oil demand was 2.1m bpd higher in Q4 2014 than in Q2. Assuming most of that is translated into trade, that’s a 4% increase which, over a short period is enough to get things started. Add to that the surge in speculative cargoes held at sea, and demand is motoring. Finally, throw in the reluctance of owners to speed up, and the limited growth in the crude tanker fleet in recent years, and the recent rates look more convincing.

Cyclical Or Structural?

So, simple numbers don’t always give you the whole answer, but there’s never any harm in looking at the big picture. If the simple interpretation is right, things might ease off. But the real dilemma is probably the underlying surplus. Are today’s speeds the ‘norm’ for the future? With bunkers at $300/tonne, the answer is “maybe”. But given time, it could well become a key question. Have a nice day.

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Next week sees the 100th anniversary of the opening of the Panama Canal, which has played a significant role in the history of shipping and seaborne trade. Whole classes of ships have been defined by their ability (or not) to transit the canal. Today, there are still almost 900 containerships in the fleet referred to as ‘Panamax’ and another 3,000 or so capable of passing through the current locks.

What’s The Plan?

The completion of the new Panama Canal locks remains behind schedule, with the opening date now pushed back to 2016. Despite this, the potential impact remains a hot topic. The project was partly driven by the desire to capture greater revenues from the container sector by enticing larger boxships and increased volumes of trade through the canal. The most relevant trade lane in volume terms (by far) is that from Asia to the US East Coast, an estimated 3.6m TEU in 2013 (though an increasing part of this is actually being moved via the Suez Canal).

How Big?

The new canal dimensions will dramatically alter the number of boxships that can potentially transit. As the graph shows, at the start of 2H14, 3,833 of the boxships in the fleet (75%) could transit the current Panama locks (the Panamaxes up to around 5,100 TEU, about 140 of which are actually deployed on Asia-USEC services, and other smaller vessels). An additional 1,111 ships in the fleet (22%) will be able to transit the new canal. On order, 355 of 454 units (78%) will be able to transit the new canal. In terms of ‘cut off point’, most vessels of up to and around 13,000 TEU will be able to transit.

With the vast majority of the world’s boxships able to transit the new canal, how far might upsizing of services via Panama go? Larger ships will offer potentially lower costs per box for today’s cargo, but might also encourage cargo switching from USWC to USEC services (about two-thirds of Asia-US cargo today arrives via the west but a significant share is actually destined for the eastern US).

Switch Up Or Not?

Firstly, the answer may lie with the ports. In order to receive the very largest ships capable of transiting the new locks, there is still a significant amount of infrastructure work to be completed at the USEC ports. Compounded by other issues that carriers face at US ports, the consensus seems to be that carriers may upsize services to the USEC via Panama to around 9-10k TEU first before going further. Secondly, in terms of cargo switching, the move from USWC to USEC is not as clear as it may seem. Logistics supply chains put in place by major retailers, with distribution centres based in the US interior, are likely to be fairly sticky and not instantly so sensitive to unit cost savings in the shipping part of the chain (which may or may not cover the cost of much additional inland transportation).

So, the majority of containerships will be able to transit the new Panama locks when they open. However, the initial impact of the new dimensions on container shipping may not be as obvious or instant as it seems. Project delays or not, it is likely to take some time for the full extent of the impact to be felt.

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Price indicators can tell market-watchers many things. In the volatile shipping markets they can provide a helpful window on both the health of today’s markets and expectations of future conditions. In the case of the latter, they may not be correct but it’s always interesting to take a look. So, how do price indicators help us gauge the state of play?

The Price Is Right?

In a “normal” market, or at least when owners have the expectation of one, the price of a 5-year-old ship should theoretically be about 75-80% of the price of the newbuilding, reflecting that merchant ships have a 20-25 year economic life and depreciate accordingly, other things being equal. The Graph of the Week shows the 5 year old to newbuild price ratio for a Capesize bulkcarrier, a VLCC tanker and a 2750 TEU containership for the last 10 years.

Bulk Better, Box Bottom

Well, today’s VLCC price ratio is right on the 75% mark, having dropped as low as 58% in late 2011. What does that tell us about expectations? Crude oil trade is a mature business with 1% growth expected in 2014, but VLCC fleet expansion is projected to be sub-2% this year, so that’s a better balance than for a while. On the dry side the Capesize price ratio (which once hit 160% as owners sought to get their hands on tonnage at the height of the boom) is flourishing at 90%. That might be a good representation of expectations, with sentiment seemingly fairly positive, Capesize fleet growth expected to slow to 4% in 2014 and iron ore trade expansion projected to motor on at 10% this year.

The ratio for the 2750 TEU containership is much lower, standing at 51%, almost as low as the 44% seen in 2009 (though it’s higher in some of the larger boxship sizes). Given the size of the surplus generated by the 9% downturn in trade in 2009, the box sector remains a bit further behind the curve than the bulk sectors. And here the difference in potential fuel efficiency between new designs and older ships is starker, pressuring the secondhand asset price further.

Downturn Downtime

So the ratios today seem fairly well aligned with market perceptions. But how have they fared since the onset of the downturn? Since September 2008, the Capesize ratio has spent just 33% of the time below the 75% line. The VLCC ratio has spent 65% of the time below 75% but only 29% of the time below 65%. So, in those sectors the impact on asset pricing could have been worse.

Was It So Bad?

The downturns in the 1970s and 1980s were far harsher on asset prices. In the late 1970s the ratio for both a Panamax bulker and for an Aframax tanker dipped as low as 40%. Interest rates were much higher, and the banks were much quicker to foreclose on “distressed” assets. This time, despite the slump in 2008, the price ratios haven’t suffered so dramatically (in the bulk markets at least) and investor appetite remains. However, part of that is a reflection of today’s expectations and time will tell how well investors have forecast future market developments. Have a nice day.

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SIW1093In recent years large crude tankers are down having taken a good kicking, and today punters don’t seem to like the look of them. However, a survey of earnings in each major sector during the five years since the 2008 crash tells a slightly different story, which is worth looking at closely.

Method In The Madness

To calculate an “earnings ratio” for each ship type since October 2008, average monthly earnings were divided by estimated operating expenses (OPEX). The result is a percentage showing earnings as a multiple of OPEX. For example 300% means that the average earnings was three times operating costs, a good result. 100% would mean that the average earnings equalled operating expenses, with no “free cash”. This ratio was calculated for the 10 ship types shown on the graph and ranked with the biggest ratio at the top.

Who Would Have Thought It?

Top of the list with 300% are Capesizes. Investor sentiment backs this up, even if five years ago Capes looked like they were on the slipway to oblivion, with an enormous orderbook and doubts over Chinese steel demand. But the most interesting feature of this survey is that two of the top four places in the ranking go to types that popular sentiment does not appear to care for. Those primetime underdogs, VLCCs, come fourth, with a 223% earnings ratio and Suezmaxes are even higher in second place with 243%.

The middle ground is occupied by Aframaxes and Panamax bulkers, with ratios of 190% and 179%. Not such a bad result. Finally at the bottom of the table are the products tankers at 140%-160% and the containerships. MR products tankers have been recent favourites with investors, with more positive fundamentals today, but these figures (although precise earnings can be hard to track due to complex trade patterns) reflect some tougher periods in the last five years.

What’s The Message?

Technical issues aside, there are four points. Firstly, over the five years everyone made a bit of cash, mostly in the earlier years. Secondly there is a striking correlation between the earnings performance and size. Three of the top four performers are all over 100,000 dwt, with some midsize vessels in the middle ground. Thirdly, big tankers generally did little worse than bulkers, maybe due to the smaller orderbook. Finally, the worst performers were container charter ships, illustrating the danger of relying on “trickle-down” income from beleaguered liner companies.

Love Hate Relationship

So there you have it. Big tankers have performed relatively well since the crash, but now they’re on the rack of market sentiment and falling US imports. Of course the next few years could be a different story; with only 10.5% of the fleet on order and fewer contracts then deliveries, there’s not much wrong with future supply. The problem is on the demand side, but is that really as bad as it looks? You decide. 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.