Archives for posts with tag: cargo

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

In the 60s film Carry On Up The Khyber, the Brits were at war in Afghanistan (sound familiar?). Unlike our modern lads, the Highland division had a secret weapon, which they kept under their kilts! But when the dastardly enemy captured Scotsman Private Widdle, he was found to be wearing underpants. Armed with this knowledge they set out to discredit the “secret weapon”.

Shipping’s Secret Weapon

The shipping investor’s “secret weapon” is, of course, the market cycle. Since cycles come in all shapes and sizes, “buy low, sell high” makes a great business strategy for investors who “trade ships not cargo”. This philosophy became popular at the end of the 1980s when there were fortunes to be made on trading distressed assets. For example, a VLCC purchased at $3 million in the 1983 was soon worth $20 million. But it’s a tricky business, and investors need to get comfortable with the real dynamics of the “weapon” they are playing with.

It’s Not a Gift, It’s a Loan

The notoriously cyclical VLCC market shows how dangerously dynamic this mechanism can be. The graph estimates the annual “free cash flow” of a VLCC between 1970 and 2013. The cash flow is calculated from spot market earnings less depreciation (not cash, but ships must be paid for some time), interest at LIBOR plus spread, and OPEX.

The approximate “free cash flow” (in $m pa) displays an astonishingly long cycle. Between 1970 and 1973 the VLCC netted $40 million, a fortune on a vessel purchased, for example, for $18 million in 1966. Then between 1974 and 1995 it lost $94 million. Much of this was in the 1980s, but the vessel did not recover full depreciation until the mid-1990s. Then from 1996 to 2010 the money came back again, with investors grossing $90 million over 15 years. Since 2011 the investment is back in the red to the tune of $13 million. It would have been much more if interest rates had not crashed.

Three Lessons

Lesson 1 from this analysis is that the timing of the mega-investment campaigns in 1973 and 2007 could hardly have been worse, requiring deep pockets and patience to survive. Lesson 2 is that spectacular profits are possible but very tricky to achieve. In 1999 a few courageous VLCC investors were on the verge of bankruptcy and sentiment was at rock bottom. However a VLCC ordered for around $70 million, to be delivered in 2000, would by 2008 have earned over $80 million after expenses and the 10 year old ship value peaked at $135 million. Lesson 3 is that investors who didn’t play the cycle made a pittance. The 1974-95 loss of $94 million was eventually recouped by a profit of $89 million in the 2000s. But over the 44 years the net balance was a miserable $23 million.

Cycles Out of Kilter, Captain?

So there you have it. The choice between trading ships and trading cargo is a real one. Investors who opt for trading cargo must, like military leaders, prepare for a long low margin war. And investors who decide to trade ships had better make sure that they’ve got more than just underpants under their kilts. Have a nice day.

SIW1123

SIW1110In the movie Super Size Me, a film-maker investigated what would happen to him if he ate nothing but fast food for a month, consuming a ‘super-sized’ meal every time. A casual glance at industry headlines over recent years would reflect the fact that shipping is involved in its own super sizing experiment, with news of larger and larger ‘megaships’ hitting the water in many sectors.

Super Sizing

The average vessel size in the world cargo fleet covered by Shipping Intelligence Weekly has increased from 17,470 dwt at the start of 2000 to 28,572 dwt today. Whilst broad ship size ranges are often well established, owners still search for economies of scale, and there can be a tendency for ‘size creep’ with designs increasing incrementally in capacity over time. But in many sectors there have been landmark steps forward to new larger vessel sizes, such as the containerships up to 18,000 TEU in size being delivered today. Demolition of older ships following the downturn has also supported upsizing. In 2013, the average size of a delivered ship was 53,235 dwt, whilst the average size of a unit demolished was 44,238 dwt.

Bigger Than Mac

But upsizing isn’t universal, and the graph illustrates the trends in the three main sectors. The tanker fleet has hardly upsized at all. The average size at the start of 2000 was 85,323 dwt, and today that stands at 86,248 dwt. However, the containership fleet has seen significant upsizing as operators have searched for lower unit costs. In 2000 the average size of a boxship was 24,716 dwt and today that figure is up 71% to 42,496 dwt. Consistent ordering of larger ships has driven this trend, and in TEU terms the average size has risen even more rapidly, by 97% from 1701 TEU to 3367 TEU. The size of the largest ship in the fleet has increased from 9,600 TEU to 18,270 TEU. That’s a long way from the 58 containers loaded onto Malcolm McLean’s Ideal-X which undertook the first container voyage in 1956.

Interestingly, the bulkcarrier upsizing trend has been just as strong. The average bulker size has increased from 50,235 dwt in 2000 to 72,640 dwt today, helped by heavy Capesize deliveries, the introduction of VLOCs, and upsizing into the Supramax (and now Ultramax) and Kamsarmax size ranges. Growth in the average size of 44% is lower than in the container sector, but equivalent to an average rise of 1,590 dwt pa compared to 1,262 dwt for box-ships.

Going Large

So, the shipping industry has had its own bout of supersizing. Yet, although some sectors have definitely ‘gone large’ it hasn’t been universal. In previous eras, upsizing has often found a limit, but today there’s no clear end to the trend yet. The average vessel on order is currently a whopper of 64,370 dwt. With the right amount of seaborne trade, there will hopefully be enough to feed everyone, but upsizing creates additional capacity and shipowners will be hoping they don’t get left with a nasty bout of indigestion.

SIW1101In the Financial Times last week Bill Gates gave the shipping industry a nice tribute. Asked to recommend a book for Christmas, he chose ‘The Box That Changed The World’. Explaining his choice he described shipping as “one of the cornerstones of globalization”, and said that since reading the book he “won’t look at a cargo ship the same way again”. A small but significant step along the road to wider public recognition.

Unsung Heroes

In 2013 the shipping industry will prove its worth by moving 10 billion tonnes of cargo. An amazing number and a reminder that whatever the state of the market, shipping companies must still deliver the goods. Another statistic that might impress Bill Gates is 1.5 tonnes of cargo delivered per capita. An astonishing number, which includes every man, woman and child on the planet. Of course some import more than others, and as this changes it will challenge shipping in the coming decades.

Must We Do Better?

All this is positive, but looking ahead the the focus is now on delivering more cargo with less carbon emissions. Doing this is hard enough, but how can the industry monitor its progress? One perspective is provided by tracking the tonnes of cargo delivered per dwt per annum. The industry’s performance over the last 20 years shows the complexity. Back in 1986, during a deep depression, the world fleet delivered 6.3 tonnes/dwt. But by 2004 this had surged by 30% to reach to 8.2 tonnes/dwt.

Ship to System Gains

This improvement was driven by a tightening market. With higher freight rates, charterers used ships more efficiently. Ships sailed faster, emitting more carbon, but logistical inefficiencies like multi-port discharge, dead-freight and waiting were squeezed out. For example the US Gulf-Japan grain trade, previously a 55,000 tonne parcel in a Panamax bulker for Panama Canal transit, was downgraded to Supramaxes loading a full cargo with no dead-freight.

Cheap and Cheerful

This performance surge did not survive the downturn. After 2009 the ratio fell to 6.6 tonnes/dwt and by 2013 to only 6.1 tonnes/dwt, lower than in 1986. Slow steaming driven by sky high bunker costs has played a big part in this reduction, whilst rock bottom freight rates encouraged charterers to use cheap ships less intensively. In fact the average global transport performance of the fleet may not be any better than 27 years ago; the flat trendline confirms this.

Living up to Bill’s Accolade

So there you have it. Bill Gates is impressed by shipping’s contribution to the global economy. But shipping is not delivering much more cargo per dwt than nearly 30 years ago. Could tighter logistics help it meet IMO’s carbon footprint target? How does 10 tonnes/dwt in 2030 sound? Certainly challenging, but is it theoretically possible? Now that’s a question worth a closer look. Have a nice day.