Archives for posts with tag: Capesizes

“When the going gets tough, the tough get going” – at least that’s what Billy Ocean’s number one hit told us in 1986. Well, there’s no escaping that the dry bulk markets are in a tough place at the moment. Owners have responded by selling more, and younger, vessels for demolition, but just how tough have they been so far, and how tough might they get?

…The Tough Get Going

The first 3 months of 2016 are shaping up to be the biggest quarter on record for bulkcarrier demolition. In the first 9 weeks of the year, 120 bulkcarriers of 10.1m dwt have been reported sold, a pace that, if continued, will see the current record of 10.9m dwt set in Q2 2015 surpassed. Such high levels of demolition clearly reflect the depressed state of the bulkcarrier market in 2016 so far. This week’s graph highlights previous occasions when low freight rates have led bulkcarrier owners to get tough with older vessels.

When The Going Gets Rough…

The first period of sustained high demolition was in the mid-1980s, with activity peaking at 12.3m dwt in 1986 – equivalent to 6.2% of the total start-year fleet. In the same year average scrapping ages plummeted to 18.8 years – that was tough! The second major phase of demolition occurred through the second half of the 1990s and into the first half of the 2000s. Peak demolition levels were similar to those seen in the mid-1980s, with 12.3m dwt leaving the fleet in 1998. But fleet growth in the intervening period meant that this accounted for just 4.6% of the fleet at the start of the year. Average scrapping ages dipped slightly, but remained above 25 years.

So how tough are things now? In terms of tonnage leaving the fleet, the current phase is by far the most extensive. 2012 was the biggest year on record for bulker demolition with 33.4m dwt heading to the breakers. However, rapid fleet expansion over the past decade means that this accounted for 5.4% of the start-year fleet, slightly below the level seen when Billy Ocean was having hit records 30 years ago. The first half of 2015 and the start of 2016 have been very active periods, but these high volumes will need to be maintained in order for the annual demolition-to-fleet ratio highlighted in the graph to return to the levels of the mid-1980s.

…The Tough Get Rough

How much tougher can owners get? The average scrapping age for bulkcarriers has fallen from 33 years in 2007 to 24 years so far this year, and market conditions are such that vessels built in the 2000s are now candidates for recycling (a total of 10 such Capesizes and Panamaxes have been sold since the start of last year). So it’s clear that owners are getting tougher, even if there might still be some way to go.

There are still 57.8 dwt of bulkcarriers in the fleet aged 20 years or over, including 108 Capesizes and 166 Panamaxes. So despite a predominantly young age profile (see SIW 1209), there are plenty of potential demolition candidates in the fleet. The dry bulk market has bounced back from tough times in the past. For those prepared to “tough it out”, further demolition could help the market return to better times. Have a nice day!

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Analysts are busy updating their models for the new US budget year. If the big picture for tankers and bulkcarriers is what interests you, it’s not enormously complicated. Everyone uses roughly the same information, and data for running supply-demand balances is readily available. Of course it’s a complex world, but one conclusion is recurrent – overall, there’s still plenty of surplus shipping capacity.

Same Surplus, Different Rates

The fundamentals have not changed much over the summer. Comparing ‘raw’ supply and demand figures, both the tanker and bulker sectors appear to have a surplus of around 25%. These are the same numbers that have been cropping up for a while. But earnings statistics tell a different story. Over the last year tanker earnings averaged $29,000/day (VLCCs $50,000, Suezmaxes $43,000 and Aframaxes $35,000). But bulkers only managed $8,000/day (Capesizes $11,000, Panamaxes $8,000 and Supramaxes about $7,600). If both markets have 20-30% surplus capacity, what’s going on?

Could the statistics be wrong? It’s possible but it’s hard to see how. In tankers, for example, 2015 seaborne oil imports are only 6% higher than in 2008 but the tanker fleet is 33% bigger. These statistics are fairly easily verified. Bulk trade is up 38% since 2008, but the fleet has grown 93%. There may be some extra tonne-miles, but not enough to change the conclusion that both markets are carrying a lot of surplus ships.

A Slow Moving Mystery

Another possibility is our old friend ‘slow steaming’. Maybe tanker owners are getting smarter. The tanker fleet trading at 15 knots carries around 25-30% more cargo than at 11-12 knots. Supply-demand calculations are usually based on a ‘design’ speed, say 15 knots. So if the fleet trades at 11 knots, the ‘surplus’ disappears because the fleet is strung out around the world, with no surplus ships at the loading zones. Freight negotiations are based on prompt ships, so it’s the backlog that does the damage. If ships speed up, surplus capacity is released to undermine the boom. But if owners do not speed up, and are sufficiently aggressive, they can benefit from the supply curve kink until someone breaks ranks, and create market spikes.

Cargo Helps

Bulkers operate in a more complex market, with different charterers. Capesizes trading at around 11.5 knots have squeezed out a few short spikes in recent years, but the smaller ships haven’t. A market moving from demand growth to apparent stagnation does not help either. Owners have a better chance of pushing rates up when cargo volumes are rising.

Does It Matter?

So there you have it. Tankers are doing well today, but are they now a better investment? The red line on the graph shows the trend in the difference in earnings over 25 years. Tankers on average earned about $7,300/day more with a slight trend in bulkers’ favour. But what the graph really demonstrates is that it basically averages out in the end. Like poker, it’s not about the hand, it’s about the players. Have a nice day.

For many of the markets covered by Shipping Intelligence Weekly, the first part of 2015 was relatively kind. Rates for crude and product tankers were riding high, boxship charter rates picked up for the first time in years and VLGC rates have hit levels above 2014 averages. Even Capesizes have recently shown signs of life. But spare a thought for the offshore sector, the hardest hit by the oil price decline.

Price Drop

Back in the downturn of 2008/09, most commodity and shipping markets felt the negative impact and the offshore markets were no exception, with dayrates dropping by an average of around 35% (see graph).  Moving forward to the current time, however, the 50% decline in oil prices since mid-2014 has brought some relief for merchant vessels, in the form of cheaper bunkers, and stimulated oil demand, helping trade. But cheaper oil has meanwhile put heavy pressure on the offshore sector, where field operators already faced cashflow problems as field developments ran late and over-budget. The response has been sharp cuts in exploration and production (E&P) budgets. It is estimated that spending on offshore E&P will fall by 19% this year.

Investment Cuts

This means investment decisions on new projects have been deferred, whilst expenditure to enhance recovery from existing fields has also slipped. Accordingly, drilling demand has fallen, just as deliveries of new jack-up and floating drilling rigs have accelerated. Rates for ultra-deepwater floaters are now almost 50% below their late 2013 peak, at around $300,000/day. This reflects the reduced demand in frontier areas for exploration and appraisal drilling, not helped by the corruption investigations in Brazil. Meanwhile, jack-up drilling rig rates have been equally hard hit, with shale gas production killing demand in one of their traditional major markets, the shallow water Gulf of Mexico. Utilisation of jack-ups is below 80%, and rates have fallen more than 35% to around $100,000/day.

Less Support For Vessels

This has had rapid knock-on consequences. The 5,365 vessels and 1,133 owners in the OSV market are also exposed to the downturn in exploration drilling and operational field maintenance. Fewer active rigs harms the AHTS market for rig towage and positioning, whilst PSVs rely on the growth in active offshore installations (drilling rigs, plus mobile and fixed production platforms) to add to demand. Rates for OSVs are down in all regions, by over 35% on average in terms of the index on the graph. PSVs have a further problem of a robust supply growth to contend with (and close to 40% of the fleet on order for the largest units over 4,000 dwt).

Of course, markets are cyclical, and the offshore sector had its moment in the sun during 2012/13, at a time when several of the merchant shipping markets were in the doldrums. Although the current oversupply in world oil markets of around 1.5m bpd is a clear short-term hurdle, projected demand trends suggest that higher oil prices remain a likely prospect in the long-term, and the improvement in other sectors suggests that there will eventually be light at the end of the tunnel for offshore too. It’s just that it could be a little way off yet. Have a nice day.
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