Archives for posts with tag: Capesize

The fundamental lying beneath the shipping industry is cargo and its journey, and in many cases the cargoes are the world’s key commodities. In 2014, prices across a range of commodities took a sharp dive, but over the last year or so they’ve started to improve again. So, what do the trends in the prices of the commodities underlying the shipping markets tell us about the shape of things today?

Oiling The Wheels?

Most followers of commodities will be aware of the oil price downturn, with the price of Brent crude falling from an average of $112/bbl in June 2014 to reach a low of $32/bbl in February 2016. However, it has since improved, to an average of $52/bbl in March 2017, with the key driver the implementation of oil output cuts by major producers. Despite this recent price rise, in this case the underlying commodity price trend does not appear to be supportive for shipping, with seaborne crude oil trade growth subsequently slowing, having risen by an average of 3.9% p.a. in 2015-16, and tanker markets easing back. On the other hand, rising oil prices might start to help support an improved offshore project sanctioning environment, though the stimulation of increased shale production in the US poses a risk to its seaborne imports.

Bulk Bounce

On the dry bulk side, the iron ore price fell from $155/t in February 2013 to reach a low of $40/t in December 2015 but has since recovered robustly to an average of $87/t in March 2017. Meanwhile, the coal price fell from $123/t in September 2011 to a low of $50/t in January 2016 but has since improved firmly to an average of $81/t in March 2017. In China government policies and domestic output cuts drove shipments of ore (up 7%) and coal (up 20%) in 2016, helping to support international prices. Demand growth has continued in the same vein in 2017, with ore and coal imports up 13% and 48% y-o-y respectively in the first two months. Average Capesize spot earnings recently hit $20,000/day, and some industry players have appeared cautiously optimistic about the possibility of better markets.

Spending Power?

What does all this mean for the third main volume sector, container shipping? Well, in this case, the previous downward pressure on commodity prices had been felt in the form of pressure on imports into commodity exporting developing economies faced with reduced income and spending power. This had a clear negative impact on volumes into Latin America, Africa and eventually even the Middle East; overall north-south volume growth fell below 1% in 2016. Although it’s early days yet, the recovery in commodity prices should suggest a gradual improvement even if the benefits lag commodity pricing, and the positive impact might not be evenly paced across the regions.

From The Bottom Up

So, it appears that commodity prices have now departed the bottom of the cycle. Alongside the impression of a generally firmer background, inspection of the underlying drivers suggests a mixture of messages for shipping, less beneficial in some instances, but in many ways more positive for volumes. As ever, it’s interesting to take a look at what lies beneath…

SIW1267:Graph of the Week

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.

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Ingmar Bergman’s classic movie The Seventh Seal is about a knight who, during the Black Death, challenges Death to a chess match, in the hope that while the game continues he can put off his demise. This grim epic could be seen as a metaphor for the daunting progress through long shipping cycles, as one risk-laden move in the toxic chess game follows another.

August 2007 – The Game Starts

Today’s cycle started eight years ago in 2007. It was an epic year. Capesize earnings averaged over $110,000/day and merchant shipbuilding investment reached a record $229 billion (excluding offshore). But there was good reason to be apprehensive. In August the first signs of the financial crisis hit Europe, as interbank investors grew paranoid about the vulnerability of their counterparties to CDO exposure, bringing Eurodollar trading to a halt. Meanwhile analysts were worried that the Chinese super-boom would peak out after the Olympic Games in 2008. So although dry bulk investors were still making money and ordering ships, the solitary chess game with destiny had already started.

Mounting A Comeback

Seven years later the chess game is still going on. The financial crisis got off to a more dramatic start than anyone anticipated. In 2008 as panic swept through financial markets and trade credit became almost unobtainable, the world economy, including China, came precariously close to meltdown. But fortunately this time the politicians eased through the crisis successfully. China mounted a heroic infrastructure programme which gave bulkers a very decent boom in 2009-10. Following this the market fluctuated, but reached decent levels in late 2011 and again in late 2013.

Not Deadly Or Distressed?

As recessions go so far the game with destiny has gone quite well. Since the end of 2007 Capesize earnings have averaged $32,300/day and the market has soaked up 490m dwt of new bulkers. In 2013, 104m dwt of bulkers were ordered. So someone in the industry believed bulkers would win their chess game.

But in 2015 the game changed. Capesize earnings averaged only $6,212/day in the first half. For the first time signs of real distress are apparent. After 8 years, dry bulk sentiment finally collapsed and bulker orders fell from 16m dwt in January 2014 to 0.05m dwt in June 2015. A helpful step towards market recovery, but it leaves the shipyards with a problem. Over the last 8 years bulkers were a third of shipyard workload (see inset pie chart). Although tankers and container ships are still being ordered, they show no sign of filling the gap left by bulkers.

Dance Macabre

So there you have it. Bulkers have finally made a meaningful move towards better times by cutting investment. But the game isn’t over yet. They still need a strong world economy and continued Chinese import growth. Meanwhile a new chess game with destiny is getting started, this time in the shipyards as they try to plug the bulker gap. Maybe the game’s not over yet. So if you want a nice relaxing summer, our advice is don’t watch The Seventh Seal. Have a nice day.

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In the last four months dry bulk orders have fallen to 0.4m dwt per month, the lowest level since the 1990s. This is a massive 98% reduction from the 23m dwt peak in orders in December 2007, and probably the sharpest decline in recent decades. Not really a surprise in a market where Capesize bulkers are struggling to earn $4,000/day, but a timely relief to investors with ships on the orderbook.

Investment Fever

This investment collapse marks the end of a remarkable phase of bulkcarrier history. During the last decade, 724m dwt of new bulkers have been ordered, around 70m dwt/year. Just to put that in perspective, during the previous decade ordering averaged about 20m dwt/year.

The 5 years from 1996 to 2001 were disappointing to investors, who ordered only 1.2m dwt/month. At the time this was seen as normal, and included a spike in 1999, when investors snapped up Panamax bulkers for $19-$22m. These were probably the most profitable bulkers ordered in the industry’s post-war history. Upon delivery they sailed straight into the bulk shipping boom. Proof that “crazy investors” are not always crazy.

Softly, Softly

The next phase from 2002 to November 2006 was quite restrained, considering the rise in freight rates. Ordering edged up, averaging 2.8m dwt/month. As earnings eased in 2006, many assumed the boom was over, but they were wrong and what happened next was unprecedented. As earnings escalated owners threw caution to the wind, and the big bulker cash machine drew investors from outside shipping. In December 2007, ordering peaked at 23m dwt, and in 2007 to 2014, investment averaged 6.8m dwt/month (81m dwt/year), an astonishing number for a period mostly in global recession.

Carry On Investing

Despite the onset of the global downturn in 2008, two more bulker investment spikes followed in 2010 and 2013. With surplus bulker capacity, and China’s growth engine easing off, it’s hard to explain this investment on strictly economic grounds. Easier, perhaps, to understand the change in expectations. The memory of spectacular bulker earnings had been fresh in the minds of some investors, but a decade later and that dream is fading.

The collapse in bulkcarrier investment is a particular problem for shipyards. Many builders in China and Japan surfed the wave of bulkcarrier investment and bulkers still account for around half of tonnage on order globally. In today’s sluggish world economy, that is going to be a difficult gap to fill. The fact that bulker prices are around 5% down this year, and ordering has virtually stopped tells its own story.

Big Bulker Investment Boom

So there you have it. The spectacular run of dry bulk investment which kicked off in early 2003 has finally ended. Then China’s imports were growing at 27% a year, a big difference from the 3% growth in 2014. This is disappointing, but as serious shipping investors know, in good markets and bad, there’s still an awful lot of cargo that has to be moved around the world – it’s just a matter of who moves it. Have a nice day.

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SIW1115Big ships get lots of attention. How often do you read about the Valemaxes, Capesizes and VLCCs? Of course the big bulk trades are massively important and the five major bulks totalled 2.8 bt of cargo last year. But they’re not the whole story. The minor bulks are not so minor any more. This year they will reach 1.5 bt of small parcels that tie up lots of ships – probably about 200 m dwt.

Minor Bulk, Major Cargo

This seething mass of trades is the bedrock of the “handy bulker” business, but for analysts they are challenging. Clarkson Research tracks more than 30 “minor bulk” commodities, each a micro-business with its own drivers, trading partners and transport requirements. The smallest is less than 10 mt pa and the biggest nearly 300 mt. The best way to deal with so many commodities is to bundle them into groups that can be analysed together.

The “Six Minor Bulks”

The six minor bulk commodity groups shown in the chart are agri-bulks; fertilisers; forest products; iron & steel; minor ores; and other minerals. This wide-ranging mix of trades displays good and bad points. On the positive side, the average volume trend since 1990 has been upwards. In the period 1990-2003 minor bulk trade grew at an average of 3% per annum, and this has risen to 4% in the years since then. Not so good was the volatility, growth swinging between 6-8% pa (for example 1994, 2003-4, 2006-7 and 2011) and zero or negative growth (1991, 1996, 1998, 2001 and 2008-09).

Cargo Diversity

There has also been a good deal of diversity in the growth rates of the individual commodities. Across the period in question agribulks and fertilisers, two solid trades of around 300 mt combined, grew at 3% per annum, which fits in with their agricultural base. But forest products, another 200 mt trade, have been quite flat, averaging only 0.9% growth since 1990. Iron and steel, which includes products, scrap, pig iron and DRI reached 426 mt in 2013. But trade growth has averaged only 2.8% pa and the trend is edging downwards. In contrast the minor ores, which include nickel, manganese and copper, are the stars of minor bulk. They have averaged 9.2% pa growth since 1990, accelerating to 15.7% in the last decade, backed by Chinese demand. Finally the other minerals include lignite, anthracite, cement, sulphur, salt, petcoke, limestone and lots of very small trades. Together they totalled almost 500 mt of cargo in 2013 – a challenge for analysts, but good business for small bulkers.

Real Life Shipping

So there you have it. Minor bulks don’t hit the headlines, but they provide business for an enormous range of shipowners at the smaller end of the dry market. Some are big and highly organised corporates, others are companies with just a few ships. And with each decade the trade gets bigger and more complex, which, on the whole, is good news for shipowners who like a challenge but not media attention. Have a nice day.

SIW1083Currently there is quite a bit of interest in dry bulk carriers, despite earnings which continue to scrape along the sea bed. On the newbuilding front there is a brisk orderbook, with 42m dwt of deliveries scheduled for 2014 and brokers having difficulty finding berths for 2015. Meanwhile, some big owners who saved their cash in 2008 are in the market,“hoovering up” ships. So does that mean recovery is just around the corner?

Dry Bulk Buzz?

Let’s start with the easy stuff, the supply-demand balance. It’s easy because with today’s fundamentals you don’t need a computer model to work out that, despite heavy scrapping, there is a mega-backlog of surplus bulkers. Since 2007 the dry bulk fleet has increased by 85%, whilst bulk trade has grown by only 32%. This has transformed the 6% shortage in 2007 into the bulker market’s biggest ever “surplus” of around 30% (see graph). For comparison there was an 11% surplus in 1998/9 and 10% in 1986, both grim years with rock bottom rates and distressed asset prices.

Three Shades of Gloom

But the investment market does not see it this way. Admittedly the freight rates are perfectly consistent with the grim fundamentals: the spot market has averaged around $7,500/day for Capes and $5,200/day for Panamaxes so far this year, which barely covers OPEX. But asset prices tell a very different story, with the price of a 5 year old Panamax bulker up 9% in the last three months to about $21m and a 5 year old Capesize about $34m. At the bottom of the 1999 recession the Panamax price dropped to $13m and the Capesize price to $24m. So why are today’s prices so firm?
The conventional reasons for optimism are the economic outlook and shipyard capacity. In spring the world economy was deep in recession, but the bounce-back has started. A few years of 6% trade growth would soon soak up the surplus. Meanwhile, by 2014, bulker deliveries will halve. Encouraging, but hardly decisive.

In reality today’s market is not really about fundamentals. There are other factors at work. The fall in the credit worthiness of banks, and in the interest they pay, has left investors seeking investments with long term “real” value. Ships are core assets which (like bank deposits) are not making much today but will do some day. Meanwhile escalating bunker prices have put icing on the cake; slow steaming has absorbed much of the surplus. When the market tightens, the fleet will speed up, and investors with fuel efficient ships will benefit.

Still No Magic Solutions

So there you have it. Frightening fundamentals are maybe the worst ever for bulkers. But with fewer shipyards and a better economic cycle, the surplus could disappear in a few years, leaving investors with ships performing much better than bank deposits. It will take time, but as Shakespeare said “How poor are they that have not patience! What wound did ever heal but by degrees?” Good advice, but don’t forget that some wounds take longer to heal than others!