Archives for posts with tag: BoxShips

In the high jump ‘the scissors’ was one of a number of techniques eventually superseded by Dick Fosbury’s ‘Flop’, which saw the American athlete win the gold medal at the 1968 Olympics in Mexico City.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

The shipping markets have in the main been pretty icy since the onset of the global economic downturn back in 2008, but 2016 has seen a particular blast of cold air rattle through the shipping industry, with few sectors escaping the frosty grasp of the downturn. Asset investment equally appears to have been frozen close to stasis. So, can we measure how cold things have really been?

Lack Of Heat

Generally, our ClarkSea Index provides a helpful way to take the temperature of industry earnings, measuring the performance of the key ‘volume’ market sectors (tankers, bulkers, boxships and gas carriers). Since the start of Q4 2008 it has averaged $11,948/day, compared to $23,666/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 appetite for vessel acquisition has often added ‘heat’ to the market in the form of investment in newbuild or secondhand tonnage, even when, as in 2013, earnings remained challenged. To examine this, we once again revisit the quarterly ‘Shipping Heat Index’, which reflects not only vessel earnings but also investment activity, to see how iced up 2016 has really been.

Fresh Heat?

This year, we’ve tweaked the index a little, to include historical newbuild and secondhand asset investment in terms of value, rather than just the pure number of units. This helps us better put the level of ‘Shipping Heat’ in context. In these terms, shipping appears to be as cold (if not more so) as back in early 2009. This year the ‘Heat Index’ has averaged 36, standing at 34 in Q4 2016, which compares to a four-quarter average of 43 between Q4 2008 and Q3 2009.

Feeling The Chill

Partly, of course, this reflects the earnings environment. The ClarkSea Index has averaged $9,329/day in the year to date and is on track for the lowest annual average in 30 years. In August 2016, the index hit $7,073/day, with the major shipping markets all under severe pressure.

All Iced Up

The investment side has seen the temperature drop even further. Newbuilding contracts have numbered just 419 in the first eleven months of 2016, heading for the lowest annual total in over 30 years, and newbuild investment value has totalled just $30.9bn. Weak volume sector markets, as well as a frozen stiff offshore sector, have by far outweighed positivity in some of the niche sectors (50% of the value of newbuild investment this year has been in cruise ships). S&P volumes have been fairly steady, but the reported aggregate value is down at $11.2bn. All this has led to the ‘Shipping Heat Index’ dropping down below its 2009 low-point.

Baby It’s Cold Outside

So, in today’s challenging markets the heat is once again absent from shipping. And, in fact, on taking the temperature, things are just as icy as they were back in 2008-09 when the cold winds of recession blew in. This year has shown that after years out in the cold, it’s pretty hard for things not to get frozen up. Let’s hope for some warmer conditions in 2017.

SIW1250

Strong demolition has been a prominent feature of the shipping industry this year, as challenging market conditions continue to drive a significant supply-side response in a number of sectors. Across the total shipping fleet, demolition could reach one of the highest levels on record in full year 2016, but which markets in particular have taken the biggest hits?

Revving Up

2016 has been an extremely difficult year for the shipping markets, with conditions in most sectors under pressure. Reflecting this, demolition has remained at elevated levels, and in January to November, 841 vessels of 41.3m dwt were scrapped. Demolition so far this year has already exceeded last year’s total of 38.9m dwt, and whilst scrapping volumes have picked up in most sectors, some markets have played a more important role in this year’s tally than others.

Bulker Beat

Amidst continued depressed earnings, bulkcarriers have accounted for the lion’s share of tonnage scrapped this year. Bulker scrapping set a new record in 1H 2016, and while demolition has slowed in recent months, 385 bulkers of 27.7m dwt have been scrapped in the year to date. Bulker demolition has been historically firm since 2011, but the pace of scrapping in most bulker sectors this year has still exceeded the 2011-15 average, with Capesize and Panamax recycling this year around 1.4 times this level.

Boxship Bumps

Meanwhile, containership demolition has also made headlines this year, with increasingly young vessels being recycled. In dwt terms, boxship scrapping has totalled 7.9m dwt so far in 2016, but recycling volumes are already over triple that of full year 2015, with scrapping on track to reach a record 0.7m TEU this year. The pace of demolition of ‘old Panamaxes’ has been running at more than twice the five year average, whilst scrapping has accelerated firmly in the 3,000+ ‘wide beam’ sectors, with 6,000+ TEU boxships also scrapped for the first time.

Big Hits On The Bodywork?

By contrast, despite the softening in crude and product tanker market conditions this year, tanker scrapping has remained relatively subdued, at less than half of the five year average. However, while gas carrier scrapping remains limited in numerical terms, with just 18 ships recycled so far this year, LPG carrier demolition is on track to reach around double the five year average after earnings fell swiftly to bottom of the cycle levels. Meanwhile, car carrier scrapping has soared to 27 units of 0.14m ceu. This is already the second highest level on record, and on an annualised basis is four times above the 2011-15 average.

So, while total demolition this year is still falling short of 2012’s record 58.4m dwt, 2016 looks set to see yet another year of very firm recycling, eight years after the onset of the downturn. In some sectors, this strong scrapping is providing a helpful brake on fleet expansion. Furthermore, with bruising market conditions having clearly taken their toll, many owners are likely to be looking to the demolition market for a little while yet.

SIW1250

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.

SIW1245>

Last week’s Analysis examined the key impacts of the opening of the new locks at the Panama Canal across a range of shipping sectors. This week, with the new locks up and running for commercial business, the focus falls on the containership sector, with the capability to allow the transit of larger boxships one of the key aims of the canal expansion project.

Wide Boys Welcome!

At the ‘old’ locks, containerships accounted for a large share of the transits, and an even larger share of the overall toll revenue on the back of high value box cargo transits most notably from Asia to the US East Coast. Based on the official ‘New Panamax’ dimensions, the new locks will allow containerships of up to around 13,500 TEU (dependent on the precise design) to transit. Only 207 boxships in today’s fleet will be too large to pass through. The amount of TEU capacity able to pass through the canal will rise from 37% to 85% of the fleet.

Bigger And Better?

Subsequently, a key impact on container shipping is the potential for upsizing of ships operating on the Asia-USEC trade. It looks likely that operators will upsize from ‘old Panamaxes’ initially to units around or above 8,000 TEU, with a number of carriers having already put new service plans in place. Even larger ships may eventually follow when port and infrastructure projects on the USEC are completed. Whether that is then followed by ‘cargo switching’ from Asia-USWC-‘landbridge’ to Asia-USEC ‘all water’ services on the basis of lower seaborne unit costs for now remains to be seen.

Another impact is on the structure of the containership sector. A new, more appropriate segmentation is needed. Along with the new vessel indicators and profiling described last week, Clarksons Research data will also provide fresh segmentation of the containership fleet from July onwards (see graph) to provide the most market-relevant statistics.

Splitting Up The Big Boys

The sector now looks different with new segments clear. The 8-11,999 TEU sector will comprise the initial wave of ‘Neo-Panamaxes’. The 12-14,999 TEU sector contains the larger ‘Neo-Panamaxes’ of the future. Today 59 ships in the 12-14,999 TEU sector can transit the new locks on the basis of the official dimensions, another 39 have dimensions so close to the limits one would imagine they are likely to transit, and a further 50 will probably fit through on the basis of the already mooted expansion of the beam restriction to 51m. There are a further 43 ships closely related in design terms to those detailed above, but above 15,000 TEU there is a clear step up to much longer and beamier designs. Deeper levels of segmentation will continue to track the decline in the ‘old Panamax’ sector.

Big News Is Old News?

So the opening of the new locks in Panama is big news for bigger boxships. Market watchers will have to keep a keen eye on the impact, and also get used to a new perspective on the market structure and data. But in a sector where there’s been so much upsizing in recent years anyway, perhaps that’s not such a new thing after all? Have a nice day.

SIW1228

It has been well documented that newbuild orders have slowed substantially in 2015, with 857 contracts recorded at yards in the first three quarters of the year, down 45% from 2014 on an annualised basis. However, it’s also clear that builders in the big three shipbuilding countries have experienced differing fortunes. Looking beyond the aggregate trend, what has driven the divergent outcomes?

Hardened Times

In 2015 so far, the newbuilding market has seen subdued ordering activity. In the first three quarters, shipyards globally took orders equivalent to 24.3m CGT (compensated gross tonnes, a measure of shipyard ‘work’ or capacity). This compares to a total of 43.9m CGT in full year 2014. However, the big three builder countries have experienced significantly different fortunes. Chinese yards have been hit extremely hard, with new contracts in CGT terms down by 49% on an annualised basis. New contracts at Japanese yards, meanwhile, have dropped by a more moderate 14%, whilst ordering in Korea has fallen by 7%, not too bad when global contracting is down by 26%.

Exposed To A Changing Mix

What explains the difference? Many factors are at play but foremost is the ‘product mix’ – the type of units ordered. And even more so, it’s the mix in the context of the ‘exposure’ or track record that each builder nation has in the key vessel sectors. The graph illustrates ordering in selected sectors in the major builder countries alongside their ‘exposure’.

The bulker sector lies at the heart of Chinese yards’ fortunes this year. Global bulker orders of 2.6m CGT (152 units) are down by 77% on an annualised basis (to 11% of orders globally). In 2014 China took 9.2m CGT of bulker orders, but in 2015 ytd has taken only 0.5m CGT. This accounts for 8% of total Chinese orders of 6.3m CGT this year, but over the previous five years bulkers have accounted for 57% of contracting in China (and 39% of contracts globally). China’s exposure to bulkers comes at a price now that the product mix has shifted.

Anyone Well Set?

Boxships and tankers have accounted for 61% of global ordering in the ytd, and Korean builders’ exposure to these sectors (23% and 28% respectively in 2010-14) has stood them in good stead. These types have accounted for 71% of the total 8.8m CGT of contracts placed in Korea in the ytd, with the major yards more focussed on boxships and medium-sized builders on tankers. In Japan, meanwhile, product switching has helped. Japanese builders have historically been highly exposed to bulkers (64% in 2010-14, and 29% even in 2015 ytd) but an increased focus on tankers and boxships (23% and 29% in 2015 ytd respectively), and support from domestic ordering, has allowed them to plug into today’s product mix, taking  6.0m CGT of orders in the ytd.

Monitoring The Exposure

So, aggregate building trends tell part of the story but product mix developments can be critical too. As every good trader knows, understanding your exposure is important. Sometimes this can be managed, and sometimes not, but it generally explains a lot. Have a nice day.

SIW1192