Archives for posts with tag: ClarkSea

“Look after the pennies and the pounds look after themselves” goes the saying, a mantra the shipping industry has a long taken to heart. In this week’s Analysis, we review trends in ship operating expenses (OPEX) that have taken the total cost base of the shipping industry through the $100 billion barrier for the very first time.

Watching The Pennies!

Of all global industries, perhaps few have had the extreme cost focus of shipping over the past 30 years. During the 1980s recession, any operating “fat” was largely removed with the growth of open registries and a drive to outsourcing. This helped shipping, alongside its near “perfect” competitive economic model, deliver exceptionally cheap and secure freight, in turn a key facilitator of globalisation.

Nice And Lean…

OPEX response since the financial crisis has been relatively modest. Our average OPEX index (using the ClarkSea “fleet” mix and information from Moore Stephens) shows just a 1% decrease in OPEX since the financial crisis to $6,451/day in 2016. By comparison, the ClarkSea Index dropped 71%, from $32,660/day in 2008 to $9,441/day in 2016 (a record low). In part, this modest, albeit painfully achieved, drop reflects upward pressures from an expanding fleet and items such as crew and ever- increasing regulation. However it also reflects the already lean nature of OPEX.

$100 Billion And Counting…

Our estimate for aggregate global OPEX for the world’s cargo fleet has now breached $100 billion for the first time, up from $98 billion last year and $83 billion in 2008. The largest constituent remains crew wages ($43 billion covering 1.4 million crew across the fleet). By comparison aggregate ship earnings for our cargo fleet fell from an eye watering $291 billion in 2008 to $123 billion in 2016!

Cutting The Fat…

One sector that has seen dramatic cost reduction has been offshore. Estimates vary, but 30% seems a reasonable rule of thumb for reductions in OPEX since 2014. While painful, this has been part of a process of making offshore more competitive against other energy sources (offshore contributes 28% of oil production, 31% of gas, and 16% of all energy) and one of the factors behind the increase in sanctioning of offshore projects.

Getting Smarter…

So shipping is one of the leanest industries around but is always under pressure to do more! It seems clear that squeezing cost in the traditional sense, offshore aside, will be pretty challenging — UK media reported on the docking of the 20,150 teu MOL Triumph, highlighting it was manned by only 20 crew! Getting smarter, collecting and using “big data” and technology and automation are all gaining traction. The industry’s fuel bill (accounted for outside of OPEX) is clearly a big target.

This will all require new technology, skills and perhaps new accounting approaches. Plenty of food for thought but it seems like just going on another severe diet won’t work this time. Have a nice day!

SIW1272

Advertisements

With the ClarkSea Index around $9,000/day, and many if not most of the major shipping markets under severe pressure, it’s hard to escape the conclusion that the shipping markets are a tough place right now, with limited pickings to share between owners. However, everything’s relative, and from one angle the size of the ‘pie’ might just be bigger than it seems…

How Big’s The Pie?

Last week the ClarkSea Index stood at $8,743/day, and during 2016 as a whole the index averaged $9,441/day, taking into account earnings in the tanker, bulkcarrier, gas carrier and containership sectors, across a selection of over 21,000 units at the start of the year. Estimating the aggregate annual earnings for the basket of vessels in question, that works out at $72.5 billion in full year 2016. To put this in context against the boom years of the 2000s, in 2007 the ClarkSea Index averaged $33,061/day across a basket of over 15,000 ships, generating aggregate earnings of $189.1bn, over two and half times more than in 2016.

In terms of average earnings levels, 2016 actually compares more equally to 1992, 25 years ago, when the ClarkSea Index averaged $9,786/day, or 1999 when it averaged $9,855/day. But of course the fleet has grown since those days and, in dwt terms, the basket of ships in the index in 2016 was 159% bigger than in 1999 and 219% larger than in 1992. Aggregate earnings in 1999 reached $43.6bn and in 1992 were $36.1bn. 2016’s total was 66% and 101% larger respectively. In today’s challenging markets it is food for thought that the earnings stream is still that much bigger than at similar earnings levels in the past.

A Bigger Bake

And furthermore, there’s a wider world of shipping outside the scope of the ClarkSea Index basket which is (hopefully) generating income too. If, for instance, the 2016 earnings of the ClarkSea Index basket were extrapolated on a $/dwt basis (it stood at $48/dwt) across the whole of the 1.7bn dwt world cargo fleet, the overall earnings of that wider fleet would have come to $85bn. That’s roughly the size of the economy of Ukraine!

Rising Cost Of Ingredients

However, having said all this, it’s not just about earnings. Costs need to be taken into account too. Using a weighted index of OPEX across the ClarkSea Index basket and subtracting it from aggregate earnings would imply an overall net cash flow in of $23.4bn in 2016 (this compares to around $150bn in 2007 and 2008). Helpfully, in recent decades fleet expansion has outweighed growth in OPEX so the net cash flow pie has grown compared to previous downturns too.

A Slice Of The Action

So, whilst market conditions are as challenging as any seen in the last few decades, the revenue ‘pie’, though hardly tasty yet, is at least significantly larger than it was last time that earnings were at a similar level. For the industry that means a larger pie to be shared around. In today’s difficult markets that could be helpful, but of course you have to get a big enough slice. Have a nice day.

SIW1261

There have been plenty of record breaking facts and figures to report across 2016, unfortunately mostly of a gloomy nature! From a record low for the Baltic Dry Index in February to a post-1990 low for the ClarkSea Index in August, there have certainly been plenty of challenges. That hasn’t stopped investors however (S&P not newbuilds) so let’s hope for less record breakers (except demolition!?) in 2017.SIW1254

Unwelcome Records….

Our first record to report came in August when the ClarkSea Index hit a post-1990 low of $7,073/day. Its average for the year was $9,441/day, down 35% y-o-y and also beating the previous cyclical lows in 2010 and 1999. With OPEX for the same basket of ships at $6,394/day, margins were thin or non-existent.

Challenges Abound….

Across sectors, average tanker earnings for the year were “OK” but still wound down by 40%, albeit from an excellent 2015. Despite a good start and end to the year, the wet markets were hit hard by a weak summer when production outages impacted. The early part of the year also brought us another unwelcome milestone: the Baltic Dry Index falling to an all time low of 291. Heavy demolition in the first half and better than expected Chinese trade helped later in the year – fundamentals may be starting to turn but perhaps taking time to play out with bumps on the way. The container market (see next week) had another tough year, including its first major corporate casualty for 30 years in Hanjin. LPG had a “hard” landing after a stellar 2015, LNG showed small improvements and specialised products started to ease back. As reported in our mid-year review, every “dog has its day” and in 2016, this was Ro-Ro and Ferry, with earnings 50% above the trend since 2009. Also spare a thought for the offshore sector, arguably facing an even more extreme scenario than shipping.

Buy, Buy, Buy….

In our review of 2015, we speculated that buyers might be “eyeing up a bottoming out dry cycle” in 2016 and a 24% increase in bulker tonnage bought and sold suggests a lot of owners agreed. Indeed, 44m dwt represents another all time record for bulker S&P, with prices increasing marginally after the first quarter and brokers regularly reporting numerous parties willing to inspect vessels coming for sale. Tanker investors were much more circumspect and volumes and prices both fell by a third. Greeks again topped the buyer charts, followed by the Chinese. Demo eased in 2H but (incl. containers) total volumes were up 14% (44m dwt).

Order Drought….

Depending on your perspective, an overall 71% drop in ordering (total orders also hit a 35 year record low) is either cause for optimism or for further gloom! In fact, only 113 yards took orders (for vessels 1,000+ GT) in the year, compared to 345 in 2013, with tanker orders down 83% and bulkers down 46%. There was little ordering in any sector, except Cruise (a record 2.5m GT and $15.6bn), Ferry and Ro-Ro (all niche business however and of little help to volume yards).

Final Record….

Finally a couple more records – global fleet growth of 3% to 1.8bn dwt (up 50% since the financial crisis with tankers at 555m dwt and bulkers at 794m dwt) and trade growth of 2.6% to 11.1bn tonnes (up 3bn tonnes since the financial crisis) mean we still finish with the largest fleet and trade volumes of all time! Plenty of challenges again in 2017 but let’s hope we aren’t reporting as many gloomy records next year.
Have a nice New Year!

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

Every year, readers of the Shipping Intelligence Weekly are invited to submit their predictions of the value of the ClarkSea Index at the start of November the following year. The predictions are always illuminating, indicating how market watchers feel the shipping markets may pan out in the coming year, as well as shedding light on how well they have fared in avoiding potential forecasting ‘traps’…

Treading Carefully

So far in 2016, the ClarkSea Index has averaged $9,131/day, 37% lower than the full year 2015 average, with earnings in each of the sectors that comprise the ClarkSea Index down in 2016. Although there was a general consensus that tanker and LPG carrier earnings would come off this year, with accelerating fleet growth expected, some were hopeful that earnings in the bulkcarrier and containership sectors had bottomed out and would see some upside. Whilst these views on the tanker and gas carrier sectors appear to have played out broadly as expected, year to date average bulker and containership earnings currently stand 20% and 33% down on full year 2015 average levels respectively, and on November 4th the ClarkSea Index stood at $9,207/day.

Avoiding The Traps?

In the past, the ClarkSea Index competition has often indicated that participants expect the market to improve in the coming year. However, this year, many participants have avoided this potential ‘trap’, with just one third of entrants expecting (or perhaps hoping) that the ClarkSea Index would stand above the full year 2015 average on 4th November 2016. In fact, only 20% of entrants expected the ClarkSea Index to improve to $15,000/day or above at that point in time.

However, the majority of participants’ entries failed to avoid another ‘pitfall’ of forecasting, not expecting (or perhaps not wishing) that overall market conditions would deteriorate further. Rather expectations appeared to be that the ClarkSea Index would remain broadly steady. Overall, the average of the entries was $13,442/day, broadly in line with the 2015 average of $14,410/day, with around 70% of competition entrants predicting that the ClarkSea Index would stand between $11,000/day and $15,000/day on the first week of November.

Circumventing The Pitfalls

As those in shipping are all too aware, predicting how the markets as a whole will fare in the year ahead is a tricky task, especially when considering the often contrasting fortunes of the sectors that make up the ClarkSea Index. Throw the issue of timing that prediction to a single week into the mix, and side-stepping the various traps becomes even harder. The average of the predictions was more than $4,000/day away from the actual result.

So, the ClarkSea Index highlights the still very challenging market conditions, and although some of the optimism of previous competition entries was not so evident this year, it was still the case that the majority of predictions were too high. Nevertheless, the competition as always provided one winner. This year’s closest prediction was a forecast of $9,042/day, just $165 away from the actual value. Congratulations to the winning entrant; the champagne is on its way.

SIW1247

As in many sectors of economic activity, provision of just the right amount of capacity is a tricky business, and the shipbuilding industry is no exception. As a result, in stronger markets the ‘lead time’ between ordering and delivery extends and owners can face a substantial wait to get their hands on newbuild tonnage, whilst in weaker markets the ‘lead time’ drops with yard space more readily available.

What’s The Lead?

So shipyard ‘lead time’ can be a useful indicator, but how best to measure it? One way is to examine the data and take the average time to the original scheduled delivery of contracts placed each month. The graph shows the 6-month moving average (6mma) of this over 20 years. When lead time ‘lengthens’, it reflects the fact that shipyards are relatively busy, with capacity well-utilised, and have the ability, and confidence, to take orders with delivery scheduled a number of years ahead. For shipowners longer lead times reflect a greater degree of faith in market conditions, supporting transactions which will not see assets delivered for some years hence. Longer lead times generally build up in stronger markets. Just when owners want ships to capitalise on market conditions, they can’t get them so easily. But lead times shrink when markets are weak; just when owners don’t want tonnage, conversely it’s easier to get. The graph comparing the lead time indicator and the ClarkSea Index illustrates this correlation perfectly.

Stretching The Lead

Never was this clearer than in the boom of the 2000s. Demand for newbuilds increased robustly as markets boomed. The ClarkSea Index surged to $40,000/day and yards became more greatly utilised even with the addition of new shipbuilding capacity, most notably in China. The 6mma of contract lead time jumped by 49% from 23 months to 35 months between start 2002 and start 2005. By the peak of the boom, owners were facing record average lead times of more than 40 months. In reality, as ‘slippage’ ensued, many units took even longer to actually deliver than originally scheduled.

Shrinking Lead

The market slumped after the onset of the financial crisis, with the ClarkSea Index averaging below $12,000/day in this decade so far. Lead times have dropped sharply, with yards today left with an eroding future book. The monthly lead time metric has averaged 26 months in the 2010s, despite support from ‘long-lead’ orders (such as cruise ships) and reductions in yard capacity. Of course, volatility in lead time recently reflects much more limited ordering volumes.

Taking A New Lead

So, ‘lead times’ are another good indicator of the health of the markets, expanding and contracting to reflect the balance of the demand for and supply of shipyard capacity. They also tell us much about the potential health of the shipbuilding industry. In addition, even if shorter lead times indicate the potential to access fresh tonnage more promptly, unless demand shifts significantly or yards can price to attract further capacity take-up quickly, they might just herald an oncoming slowdown in supply growth. At least that might be one positive ‘lead’ from this investigation. Have a nice day.

SIW1244

With seaborne transportation accounting for the vast majority of the world’s international trade, the importance of the shipping industry to the mechanics of the world economy is generally fairly evident. But putting it into context in actual annual value terms, how does the magnitude of the shipping business compare to the size of some of the world’s economies?

Big Traders

There are a number of ways to attempt to put the annual impact of the shipping industry into the context of the wider world economy. One is to examine the value of seaborne trades. Seaborne iron ore trade totalled 1.3bn tonnes in 2015. At an annual average ore price of around $50/t, that equates to a value of $68bn. That’s about the size of the GDP of Kenya. However, that’s dwarfed by seaborne crude oil trade. At 37.4m bpd last year, at an average oil price of around $52/bbl, that’s an annual value of $717bn, almost equivalent to the GDP of Turkey (the world’s 18th largest economy). On the container side, taking port handling as an interesting metric, last year there were an estimated 664m TEU lifts at the world’s box ports. Average handling charges vary significantly, but if they worked out at $150/TEU that’s an economy of just under $100bn, almost the size of the GDP of Angola.

Of course the value of global seaborne trade must be huge. The WTO estimates the value of all global trade at $16.5 trillion, and almost 85% by volume moves by sea. Seaborne trade is probably a little skewed to relatively cheaper goods but even allowing for, say, 50% of the total value, that’s still over $8 trillion, heading towards the size of China’s economy!

Adding The Value

Another way to put shipping’s magnitude into context is to take a look at the value of the assets. Between 2007 and 2015 the average annual level of investment in newbuildings was $127bn. That’s bigger than the GDP of Hungary. Alternatively, taking the value of the fleet today, $904bn, and allowing for, say, another 15 years of trading (the average age by tonnage is around 10 years), would equate to a per annum value of $60bn, still bigger than the economy of Panama.

Call In The Revenue

But perhaps the clearest way to mirror GDP is to check the annual earnings of the vessels, just as GDP measures economic production. In 2016’s challenging market conditions, the ClarkSea Index has averaged $9,733/day (which would total aggregate earnings of $77bn in a full year across the c.22,000 vessels in the main volume sectors), but back in 2007 it averaged over $33,060/day (across over 15,600 vessels). Across a year that’s earnings of $189bn. Almost as big as the economy of shipping’s favourite investor nation, Greece!

A Big Whole

Shipping is just one of a wide range of economic activities on the planet. Sometimes its impact can be hard to put into context. But in terms of ‘economic magnitude’, elements of the shipping industry can be as big as the whole of one of the world’s larger economies, especially in a good year. Have a nice day!

SIW1231 Graph of the Week