Archives for posts with tag: business

For the golfers contesting this week’s Ryder Cup, the impact of bunkers can be minimised through skill, practice and a little luck. For shipowners, bunkers are unavoidable, and over the past few years high oil prices have ensured that they have been a major handicap. Shipowners are getting plenty of practice at dealing with high oil and bunker prices, maybe they are due a change in their “luck”?

When an onlooker suggested he may have been lucky holing three bunker shots in a row, golf legend Gary Player famously replied “the more I practice, the luckier I get”. Well, over the past few years a combination of low rates and high fuel costs have given shipowners plenty of “bunker practice”.

Par For The Course

The Graph of the Week tracks the share of freight revenue accounted for by bunker costs. In the early part of the period shown, the low and relatively stable oil price ensured that bunkers did not become too much of a burden, with peaks and troughs corresponding to the strength of the freight markets. Then in 2007-08 oil prices started to rise steeply, but the strength of the freight market helped to cover the impact of rising bunker costs and ensure that the share of bunker costs remained below 50%.

In The Rough

However, in the wake of the global financial crisis, a combination of high oil prices and weaker markets caused the share of freight revenues accounted for by bunker costs to climb to much higher levels. This peaked in late 2012 and early 2013, when bunker costs exceeded 80% of freight revenue on the example tanker voyage, with the extra costs of low sulphur fuels generating even higher shares on some routes.

Driving Down Costs

Well-practiced shipowners responded by finding ways to reduce fuel consumption: slow-steaming, retro-fitting fuel-saving equipment and ordering “eco-designs”. They have found environmental regulations pulling in the same direction, and in a way helping. After all, the risk of ordering a slower but more efficient ship is greatly reduced if everyone has to do so to meet regulatory targets.

Out Of The Woods?

Further help has come from the 15% fall in oil prices since June resulting in a reduction in bunker costs (Rotterdam 380cst currently stands at $540/t, down from $601/t in June). Oil prices are on track for their third straight monthly fall, with a combination of sluggish demand and ample supplies seeing the benchmark Brent crude spot price drop below $96/bbl this week, the lowest level for two years.

Bunkers’ share of freight remains volatile and dependent on market fluctuations. Recently the percentage has started to fluctuate in a slightly lower range than previously as lower bunker prices have helped to reduce the fuel cost burden. However, bunkers’ share of revenue is still uncomfortably high for many, and shipowners have had to learn to deal with high bunker costs. For those currently in a position to benefit from lower prices today, is it luck, or is it practice?

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In the well-loved sitcom Absolutely Fabulous, Jennifer Saunders, Joanna Lumley and company provide an apt demonstration that even totally dysfunctional families can muddle through pretty well in the end, and have fun doing it. Could these comedy characters be a possible role model for regulating the shipping family?

Step Change For Regulators

As shipowners struggle with a long recession, escalating fuel costs and tricky credit, it’s easy to see why changing regulations seem like yet another chaotic burden in an already dysfunctional world. And, to be fair, the regulatory framework has made life harder in the last decade. Regulation of emissions, carbon footprint and ballast water have propelled regulators into the heart of shipping economics, leaving many owners struggling with hard choices about how to meet the new rules.

A Real Little Scrubber

Sulphur emissions illustrate how tricky things have become. Ideally regulations have a well-defined timescale and global adoption, but the sulphur regulations have neither. Although the timetable cuts the 3.5% global sulphur cap for marine fuel to 0.5% in 2020, the implementation date could be 2025 if the IMO’s distillate fuel study indicates supplies may not be available. And the global cap is not global either. The “Emission Control Areas” (ECAs) in North America, the Baltic and the North Sea have different rules. From next January ships trading in ECAs face a 0.1% sulphur cap.

Unquantifiable Options

More complexity is added by the options for getting down to 0.1%. One is to use eye-wateringly expensive distillate fuel; another is LNG; and the third is to install a “scrubber”. Since distillate fuel costs about 50% more than MFO, that’s unattractive, but LNG is unlikely to be much cheaper and scrubbers can cost in the region of $2-4m each.

Undecided Or Indecisive?

Luckily, the immediate decision is not too difficult because most ships will not spend long in ECAs. For example, a ship trading between Rotterdam and New York sails about 3,400 miles on the high seas, and around 20% of the distance is in ECAs. However, with more diverse trading the average over the year should be less, say 10%? From January 2015 a bulker sailing 300 days a year at sea, with 10% in ECAs, would spend an extra $0.2m a year on distillate fuel. Is it worth fitting a scrubber to save $0.2m pa? For bulkers no, but for ferries, offshore units and the like trading full time in ECAs, it might be. But when the global sulphur cap drops to 0.5% in 2020 the annual fuel bill will jump by over $2m, which would pay for a scrubber in a year or two, so that’s when the big step change in scrubber installation will happen. Unless, of course, the IMO defers to 2025.

Fabulous Future, Darling

So there you have it. Fuzzy regulations, but for most the economics are not too tricky. Intra-ECA ships should scrub up soon, global traders “wait-and-see”, and Transatlantic traders follow the ‘Ab Fab’ strategy – mix up a distillate cocktail and have a bit of fun! Have a nice day.

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When the shipping market boom of the 2000s came to an abrupt end with the onset of the financial crisis in late 2008, vessel earnings underwent a severe and well-documented downturn. Almost six years on, it may seem there have been ups and downs since then, but for the shipping markets as a whole, to what extent has this been the case?

Cashflow Crunch

Since the onset of the downturn in Q4 2008, although residual asset values have survived relatively well (see the analysis in SIW 1134), vessel cashflow has struggled. The graph makes this clear, showing the quarterly average of the Clarksea Index since the start of 2007. Following the huge recalibration of earnings in late 2008, the average of the ClarkSea Index in Q1 2009 stood at $11,516/day. After five and a half years of painful downturn, in Q3 2014 (to 22 Aug), the average was $10,900/day, just 5% different. Are we back to square one?

Well, although it is the case that there have been some interesting moves in the markets since end 2008, the average value of the Clarksea Index has moved within a quite narrow band. The quarterly average of the index peaked $5,522/day above the ‘post-downturn’ average (since end 2008) and has dipped as far as $3,078/day below the average. Across this period, the average divergence of the quarterly average from the post-downturn average has been just $1,864/day, with 14 of the 23 quarters seeing the index within $2,000/day of the average ‘line’.

Bouncing Up (And Down)

The post-downturn period can be split into phases. In Phase 1, late 2009 through to mid-2011 the index ‘bounced’ from its post-crash trough on the back of Chinese government stimulus driving the bulk markets and the rapid reactivation of boxships idle in the immediate aftermath of the downturn. During this phase the quarterly index averaged 19% ‘above the line’. But in the face of hefty supply side growth it wasn’t to last and during Phase 2 (2012 and 1H 2013) the gains ebbed away and the quarterly index remained resolutely between $8,623 and $10,767/day, averaging 20% ‘below the line’.

Great Expectations?

Phase 3 in 2H 2013 was relatively short-lived. Big bulkers and tankers staged a rally in late 2013, a year in which investors seemed to have started to scent the bottom of the market (leading to 2,818 new ship orders in all, up from 1,506 in 2012). In Q4 13 and Q1 14 the quarterly index values were ‘above the line’ by $1,089/day (9%) on average.

Still At Square One (Or Not?)

But in Q2 and Q3 14 the index averaged 12% ‘below the line’, and has now moved within a $4,650/day range for the last 15 quarters. On 22 August the index stood at $11,249/day, more or less where it was in Q1 2009. Analysts point to improving fundamentals, and some sectors are seeing traction, but in overall terms we’re still waiting for take off from market conditions too close to subsistence for many. Despite resilient asset prices, helped by itchy investors and low interest rates, industry cash flow has remained within a narrow band for the last six years. Here’s hoping for a lucky number 7!

SIW1136

Who would have thought it? Nowadays a surprising number of people around the world seem to know about shipbuilding. Even taxi drivers can sometimes tell you there’s been a shipbuilding boom, and they’re right. For two decades the maritime industry watched in awe as shipyard output grew eightfold from 19m dwt in the early 1990s to 166m dwt in 2011.

Nice Steady Investment Story

Then came the crash. Deliveries dropped to 109m dwt in 2013, a big fall, but not the disaster many expected. Somehow the industry bailed itself out, and while lower deliveries grabbed the limelight, the yards were running flat out to keep up with the new investment profile which was throwing them a lifeline. In the run-up to the boom, 42% of estimated investment was in the tanker and container sectors; 50% in bulk and specialised, and 7% in gas. This pattern was largely maintained during the boom. All nice and steady, but then everything changed.

All Change for the Recession

Since 2008, there has been a major re-alignment in market shares, as structural changes in these segments have altered investment patterns. Tankers and containerships have suffered, falling to 22% (the tanker share fell from 24% in the boom years to 12%, and containers from 18% to 10%). Meanwhile, the bulk and specialised share jumped to almost 70%.

Time for Transition

On the tanker side, high oil prices, sluggish OECD growth and greater US energy self-sufficiency have all nibbled at demand. Meanwhile container trade growth has slowed since the boom and the sector is still struggling to absorb overcapacity. No wonder investors are easing back.

Luckily for the shipyards, bulkers and specialised vessels have stepped up to fill the gap. Bulkers have accounted for 25% of investment since 2008, similar to their share during the booming 2000s. This has been helpful for Japan and China, who dominate bulker building. And they have achieved it without taking too much of a cut on prices, which have been edging up in 2013 and 2014.

A Specialised Focus

But the real star is the specialised sector, which has accounted for 43% of estimated investment since 2008, up from 27% in 2003-2008. Cruise did pretty well, but the super-star, especially for the Korean yards, was the boom in offshore investment, including alternative energy like offshore wind farms. Offshore investment jumped from $34bn in 2008 to $47bn in 2012. Really quite exciting, but challenging for the yards.

Where Next?

So there you have it. For the time being the shipyards have struggled through, thanks to this switch in product range. Although tricky, the bulkers are keeping Japan and China busy and specialised was a nice bonus, especially for the big Korean yards. But switching product range is always difficult, and that really is the issue for the future. The first rule of shipbuilding recessions is “you never know what they’ll order next” but it’s often completely different. Have a nice day.

SIW1131

According to Oscar Wilde, a cynic is a man who knows the price of everything and the value of nothing. He haggles endlessly over a few hundred thousand dollars on a $20 million ship, when its real “value” is nothing like $20 million. Wilde also mentions “sentimentalists” who are seized by ideas like “the world’s biggest ship”, without really grasping the economics needed to make them work.

The “Price” Is Right

In both cases the key distinction is between the cash which changes hands and the value received in return. In shipping cash is exchanged for a ship and investors can easily check that it’s the right price from brokers’ reports. Another price check is to compare the ship price over time (the blue line in the graph plots the price of a 5 year old Panamax bulker) with the price suggested by a model based on spot earnings and newbuilding prices (the red line plots the price calculated by a regression model – the fit is excellent with an R-squared of 0.9). Currently brokers are reporting $24m and the model says $20m, so the market price is a bit high? Or is it?

The “Value” Investment Model

Which brings us to the ship’s “value”. Back at start 1999 when a 5 year old Panamax bulkcarrier cost $12.5m, the “model” suggested that this was a bit expensive, and $10m was more in line with fundamentals. But anyone who paid $12.5m in 1999 was getting astonishing value. By start 2007 the ship, 13 years old, was worth about $31m and over the eight years it had earned about $42m on the spot market. Deduct operating costs and the $12.5m purchase price produces a very handy profit indeed.

That’s value, but for new investors who entered the market in late 2007, the value proposition was reversed. By then the 5-year-old Panamax had a price of $75m, and the model says it should be about $70m. So if you could snap it up for, say, $65m it’s a bargain … not. Unfortunately the future value “premium” proved to be negative and by start 2014 the 11-year-old ship was only worth $17m, a $58m loss. Spot earnings over the 6 years were about $33m thanks to strong markets in 2007/8 but after operating costs the loss is significant. So haggling over a $70m or $75m purchase price was not the issue. It was all about “value”.

Hidden Value Premium

Today the Panamax price is $24m and the model says it should be $20m. But what about its “value”? Is today more like January 1999, late 2007, or something in between? Not many punters would back the January 1999 value premium. Spikes like 2007/8 are far too rare, and with today’s economic problems the fundamentals are against it. But the market is pretty low, so negative value like 2007 seems equally unlikely too.

Cynics In Charge

So there you have it. Maybe shipping investors should be contemplating a fuzzy scenario in which they break even, and maybe make a bit of cash, but not much? Not the excitement they’re used to, but compared with other investments on offer, maybe not such a bad one. In which case, today’s price may be just as important as its value. Have a nice day.

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Last week’s Analysis highlighted the rejection of the ‘P3’ container shipping alliance plans by the Chinese authorities, and how it might relate to the movement of trade by national fleets or otherwise. This week the focus is shifted to examine how liner shipping, ‘P3’ or no ‘P3’, fits within the pattern of consolidation in the key volume shipping sectors.

How Does It Stack Up?

In reality shipping is a relatively fragmented business. Over 88,000 vessels constitute the world fleet across almost 24,000 shipowners, with an average of less than 4 ships per owner. Limiting the analysis to 10,000 dwt and above, the average is still less than 7 ships. When talk of the ‘P3’ first hit the container shipping news, concerns were raised about the potential level of consolidation in shipping. Does that really stack up?

In Bulk, But Not Consolidated

As the graph shows, there has been consolidation of ownership, but over the last 20 years it has actually been fairly gradual. Today the Top 20 tanker owners account for 30% of the tanker fleet compared to 26% in 1994. In the bulker sector the Top 20 owners account for 22% today compared to 15% twenty years ago. In general, larger entities such as industrials have increased their share of the bulk fleets. Both sectors saw a fair amount of consolidation between 1994 and 2004, before a drop in the share accounted for by the Top 20 owners since then. The downturn post-2008 looks to have led to some fragmentation as the distressed position many traditional owners found themselves in created opportunities for new entrants (and new money).

Ticking The Boxes?

Containership ownership, meanwhile, has always been dominated by large, fairly corporate, ‘liner’ companies and some substantial charter owner interests. With ‘strings’ of containerships needed to operate scheduled services, ownership has been consolidated amongst fewer entities, and in 1994 and 2014 the Top 20 owners accounted for just under 60% of overall capacity, a much higher share than in the bulk sectors.

Concentrated Liners

However, liner operation (rather than boxship ownership) is where volume shipping is most highly consolidated. Large liner companies have historically been afforded some protection, first by the conference system and then by the approval of a network of alliances, reflecting the capital intensive nature of running box shipping services and the associated infrastructure. Today the Top 20 lines operate 77% of container capable capacity globally, up from 66% in 2004 and 37% in 1994. This is clearly a highly consolidated part of shipping, ‘P3’ or no ‘P3’ (itself a proposed alliance, not a merger of operators).

Overall, shipping remains quite fragmented despite some gradual consolidation. However, liner shipping, with its heavy operational demands, is generally much more concentrated. It’s certainly not quite Coca-Cola and Pepsi, but even without the ‘P3’ alliance this is where volume shipping is by some distance already at its most consolidated. Have a nice day.

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The film Transporter starring Jason Statham ought to appeal to shipping folk. There’s a big action scene on a containership and the “transporter”, with his computer-like karate skills, has a commercial philosophy which consists of three absolute rules. Rule 1 – “never change the deal”; Rule 2 – “no names”; Rule 3 – “never open the package”. Could these be helpful in our branch of the transport business?

Our Word Is Our Bond

Rule 1 certainly can. Shipping is famous for sticking to its word, and Baltic members will enjoy the opening scene of the movie. Statham is waiting outside a bank, in his impeccable BMW get-away car, when four bank robbers jump in. But the deal was to transport only three, so Statham refuses to move. As police sirens wail, his clients solve the problem by shooting number four and pushing him out of the car. A better solution than arbitration, given the circumstances, but not one the Baltic recommends!

Shipowner With No Name

The Transporter’s second rule is also close to the heart of many shipowners – “no names”. During the 20th century shipping became a rather anonymous business, with the majority of ships flagged out under brass plate companies to avoid unwelcome costs. This practice of giving the ship a different name and nationality from the owner has gained wide acceptance and the “flagged out” fleet grew to 40% of world shipping in the 1980s and over 70% today. But Mr Statham’s “no names” rule is under pressure as the EU and US seek transparency so that the “responsible party” for pollution and terrorism incidents can be traced and apprehended.

P3 Package Poker

Which brings us to the 3rd rule – “never open the package”. The problem this rule addresses is that opening the package can produce unexpected consequences. It happens in the movie when the transporter opens the package and finds a girl and it can happen in business too. Take the recent “P3” package. The world’s three biggest (European) container operators decided that cooperation would give them a cost advantage. They packaged themselves as “P3” and asked for approval from the authorities. The EU agreed, but unexpectedly China did not. Why? One explanation is the balance of fleet ownership. Europe is a massive exporter of shipping services, with a fleet twice its ship demand, whilst China and SE Asia are big importers and exporters with relatively smaller fleets (see graph). To date China and Asia have accepted this imbalance, but maybe the world is changing.

Who Rules The Waves?

So, can the shipping industry learn from Mr Statham’s pithy approach to the transport business? “Never change the deal” is a core market principle and although “no names” does not work so well today as it used to, shipping has something to gain from keeping its head down. But it’s the unexpected consequences of opening the package that drives the film and maybe smart shipping players can learn something from Mr Statham’s error. Stick to the deal, keep your head down and whatever you do, never open the package, however interesting the contents may seem. Have a nice day.

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