Archives for posts with tag: Clarksons Research

In recent years, in generally difficult market conditions, it has been no surprise that many sectors have seen a significant removal of surplus tonnage. This has been particularly notable in the bulkcarrier and containership sectors, and in the case of the Capesizes and the ‘Old Panamax’ boxships, it has been a bit like the famous race between the tortoise and the hare but with even more changes in leadership…

At The Start

Back in 2012, Capesize demolition was on the up with the market having softened substantially in 2011 on the back of elevated levels of deliveries. Meanwhile, ‘Old Panamax’ containership demolition (let’s simply call them Panamaxes here) was also on the rise with earnings under pressure. Across full year 2012, 4.7% of the start year Capesize fleet was sold for scrap (11.7m dwt) and 2.6% of the Panamax boxship fleet (0.10m TEU). In both cases this was working from the base of a fairly young fleet, with an average age at start 2012 of 8.2 years for the Capes and 8.9 years for the Panamax boxships.

The cumulative volume, as a share of start 2012 capacity, of Capesize demolition remained ahead of Panamax boxship scrapping until Sep-13, by which time 7.3% of the start 2012 Panamax boxship fleet had been demolished compared to 7.2% of the Capesize fleet. In 2013 the Cape market improved with increased iron ore trade growth whilst the boxship charter market remained in the doldrums. In 2013, Cape scrapping equated to 3.2% of the start 2012 fleet (7.9m dwt); the figure for Panamax boxships was 6.0% (0.24m TEU). The fast starter had been caught by the slow burner.

Hare Today…

But by 2015, Cape scrapping was surging once more, regaining the lead from the Panamax boxships. By May-15 the cumulative share of the start 2012 fleet scrapped in the Capesize sector was 13.7% compared to 13.4% for the Panamax boxships. Iron ore trade growth slowed dramatically in 2015, whilst the Panamaxes appeared to be enjoying a resurgence with improved earnings in the first half of the year ensuing from fresh intra-regional trading opportunities.

…Gone Tomorrow

But the result of the race was still not yet clear. Today the Panamaxes are back in front again, thanks to record levels of boxship scrapping in 2016, including 71 Panamaxes (0.30m TEU) on the back of falling earnings, ongoing financial distress and the threat of obsolescence from the new locks in Panama. Despite a huge run of Capesize scrapping in Q1 2016 (7.5m dwt), the cumulative figure today for Capes stands at 22.3% of start 2012 capacity, compared to 25.4% for Panamax boxships, remarkably similar levels.


Where’s The Line?

So, today the old Panamax boxships are back in the lead, but who knows how the great race will end? Capesize recycling has slowed with improved markets, but Panamax boxships have seen some upside too, even if the future looks very uncertain. Hopefully they’ll both get there in the end but no-one really knows where the finish actually is. That’s one thing even the tortoise and the hare didn’t have to contend with. Have a nice day.

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Many of shipping’s asset markets appear to offer a fairly reasonable level of liquidity most of the time, but just like the “Karma Chameleon” in the 1983 No.1 song, sometimes this can “come and go” due to a variety of factors. Recently, it appears that S&P market liquidity has been coming on strong in the main volume sectors, and once again there appear to be a number of different drivers behind the changes…

You Come And Go…

As in all economic asset markets, liquidity can change its hue according to the market environment, depending on the appetite of potential buyers and sellers to transact at a given level against a backdrop of a range of factors, including the availability of finance. From much lower or dropping levels of liquidity just a year or so ago, it seems that today S&P market liquidity has been on the up, with things looking increasingly active recently. The graph indicates, for the three main volume sectors, the monthly level of liquidity in terms of the volume of reported sales (in vessel numbers) on an annualised basis, as a percentage of the existing fleet at the start of each month. A 6-month moving average (6mma) is then taken to remove some of the month-to-month volatility and illustrate the general trend.

By George! A New High…

The lines on the graph (unlike in the song lyrics they’re not “red, gold and green”…) show how quickly the liquidity has risen in the main sectors. For bulkcarriers the 6mma has jumped from 4.1% in Feb-16 to 7.2% in Apr-17. In the tanker sector, it increased from 3.3% in Apr-16 to 4.6% in Mar-17, and in the containership sector it has leapt from 2.3% in Feb-16 to 5.5% last month. On a combined basis across the three sectors, the 6mma has increased from 3.5% in Feb-16 to 6.0% in Apr-17, and the monthly figure for Feb-17 reached 9.7%. The 6.0% figure represents the highest 6mma level of liquidity since the onset of the financial crisis in late 2008 (the low point being 2.5% and the average across the period 4.3%).

S&P’s Big Hits…

However, on inspection the drivers look a little different. In the bulkcarrier sector, as has been widely reported, with some improvements in freight market conditions buyer appetite appears to be back, and has driven pricing upwards. Reported sales volumes in the first four months of 2017 stood at 277 units, up more than 50% y-o-y. In the tanker sector, liquidity appears to be coming back after a period in which, against easing markets, prices may have been too high for buyers’ tastes. Again, volumes in the first four month are up by more than 50% y-o-y. In the boxship sector, meanwhile, it’s different once again, with distressed sales to the fore after the cumulative impact of markets which have until now been in the doldrums for some time. Mar-17 saw an all-time record monthly level of containership sales (44) and the year to date figure is closing in on the full year 2016 total.

In The Culture Club?

So, S&P liquidity can come and go, and recently it has clearly been on the way up. For those trying to transact to access tonnage, or exit the market, that’s a big help, and it’s good news too for asset players, an enduring part of the shipping market’s culture. Have a nice day!

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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…

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The introduction of new environmental regulations is leading the shipping industry to look for ways of reducing its emissions of harmful gases. This week we focus on two separate but related issues: the way in which vessels are powered, and the type of fuel that they use. New technologies are being adopted, with certain ship types leading the way…

Electric Therapy

The majority (96%) of active merchant vessels are powered by mechanical systems in which a form of fuel oil powers a main engine (usually a 2 or 4-stroke diesel) which is connected to the propeller. Most other vessels are “diesel-electric”, in which the power generated by the (4-stroke) main engine(s) is converted to electricity before being transferred to propeller(s) or thruster(s) via electric motors.

By optimising the loading of the engines, diesel-electric systems can lower fuel consumption and emissions. These systems are well established in sectors such as offshore, tugs and passenger, where manoeuvrability, variation in power demand and engine noise are important considerations. For larger cargo vessels, where demand for power is generally higher and more consistent, conventional mechanical systems remain more efficient and cost-effective. Our Graph of the Week shows that against a backdrop of reduced contracting in the larger cargo sectors, electrically-driven ships have assumed a greater share of the newbuilding market, accounting for 22% of reported newbuilding contracts so far this year.

Battery Charged

The next step for electric power may be more widespread adoption of batteries in main propulsion systems. There are 22 vessels in service and 14 on order that use batteries, mostly alongside either conventional diesel or dual-fuel generating sets. As well as reducing emissions when using battery power, these can enhance efficiency by optimising engine loads and transferring surplus power to or from the batteries as required. For smaller ferries intended for short routes, all-electric propulsion systems are feasible.

Gas Treatment

LNG has been identified as a cleaner fuel capable of reducing vessel emissions in line with new regulations. Clarksons Research’s World Fleet Register currently identifies 542 merchant ships in the fleet and on order capable of using LNG fuel. 351 of these are LNG carriers, which can use cargo boil-off to fuel a choice of turbine, dual-fuel diesel electric or dual-fuel 2-stroke main engines. In other sectors LNG fuel has taken longer to gain market share, but there are signs that where ship designs and the supply of bunkers allow, it is becoming more popular. Out of the 130 contracts recorded so far in 2017, 21 are for vessels capable of using LNG fuel. These include 4 Aframax tankers, the largest vessels other than LNG carriers to adopt dual-fuel 2-stroke engines.

More efficient power systems and cleaner fuels are two examples of how the shipping industry is responding to the challenges set by new environmental regulations. Alongside other developments in vessel design and operating practices, shipping is steering towards a more efficient and cleaner future. Have a nice day!

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To much fanfare and accompanied by voluminous industry coverage, Mexico recently concluded Round 1.4, the country’s first ever deepwater licensing round. However, Mexico’s shallow waters may yet have a future too: Bay of Campeche reserves remain considerable and indeed, the country’s third shallow water bid round is ongoing. It is therefore worth reviewing the current state of shallow water E&P in Mexico.

Veering Off Course

Mexican offshore oil is currently produced entirely from shallow water fields, as has always been the case. The key sources of Mexican offshore oil have been several large field complexes such as Cantarell and Ku-Maloob-Zaap. As these fields and others came online, the country’s offshore oil output grew with a robust CAGR of 6.6% from 1980 to 2004, reaching a peak of 2.83m bpd in 2004. As the graph implies, four complexes accounted for 93% of this production. Decline set in thereafter at ageing fields (production at Cantarell began at the Akal field in 1979). Pemex – the sole operator of Mexican offshore fields prior to 2014 – tried to halt production decline, but with little success, given budget and technical constraints. Thus by 2013, offshore oil production at the four key field complexes had fallen to 1.31m bpd, accounting for 69% of Mexico’s offshore oil production of 1.90m bpd.

Getting Back On Track

This situation prompted President Peña Nieto’s government to initiate energy sector reforms in 2013, opening up the country’s upstream sector to foreign companies for the first time since 1938. Pemex was granted 83% of Mexican 2P reserves in “Round Zero” in 2014. The first shallow water round, Round 1.1, followed in December 2014. Only two of 14 blocks were awarded though, reportedly due to unfavourable fiscal terms inhibiting bidding by oil companies. The authorities then improved terms before launching Round 1.2 (shallow water), Round 1.3 (onshore) and Round 1.4 in 2015. Round 1.2 was better received than 1.1: as per the inset, 60% of blocks were awarded (75% of the km2 area on offer). One of the round’s victors, Eni, has already been granted permission to drill four appraisal wells on Block 1.

Turning Things Around?

In light of these positives, there are high hopes for Round 2.1, a shallow water round launched in July 2016. Indeed, 10 out of the 15 Round 2.1 blocks are in the prolific Sureste Basin, home to the Cantarell complex. Eight of these ten areas are unexplored, so there is sizeable upside potential, and have been mapped with 3D seismic, so operators could begin drilling promptly. Moreover, the surface area of the blocks in Round 2.1 are twice that of Round 1.1. It should also be noted that according to a 2016 IEA study, Mexico’s shallow waters still account for 29% of the country’s remaining technically recoverable oil resources. Finally, with rates for a high spec jack-up in the GoM assessed at about $85-90,000/day in January 2017, down 45% on three years ago, some oil companies might be tempted to make a move on a round that could offer a relatively low cost means to grow oil reserves and production.

So arguably, Mexican shallow water E&P is on the road again. There are potential hazards of course, such as oil price volatility or Mexico’s relationship with the US. But it is not implausible to think that Mexican shallow water oil production might speed up again in the coming years.

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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.

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Last year saw a huge amount of change in the under pressure container shipping sector. In particular, the ongoing consolidation of the sector in one form or another grabbed the headlines. To put this into context, it’s interesting to see how the level of consolidation relates to other parts of shipping, how it has developed over time and how it might progress looking forward.

Solid In A Fragmented Field

It’s quite clear that the shipping industry is a fairly fragmented business. On the basis of start 2017 Clarksons Research data, 88,892 ships in the world fleet were spread across 24,267 owners. That works out at less than 4 vessels per owner. Although 145 owners with more than 50 ships accounted for almost 12,000 of the vessels (and 29% of the GT), it’s still not that consolidated. The liner shipping business however is one the more consolidated parts of shipping, as well as being home to some of the industry’s larger corporates. At the start of the year, the 5,154 containerships in the fleet were owned by 622 owner groups, about 8 ships per owner, but, perhaps more pertinently, were operated by 326 carriers, about 16 ships per operator. Each of the top 8 operators deployed more than 100 ships. But despite the less fragmented nature of the sector, recent market conditions have led to another round of consolidation in the box business.

All Change At The Big End

The three largest operators (by deployed capacity) at the start of 2017 were European: Maersk Line (647 vessels deployed) followed by MSC (453) and CMA-CGM (454). Of the remaining carriers in the top 20 all but three were based in Asia or the Middle East. However, what’s really interesting is that out of the 20 largest carriers back in late 2014, 4 are now gone. CSAV was acquired by Hapag-Lloyd, NOL/APL by CMA-CGM and the two major Chinese lines merged. And of course in late summer 2016, the financial collapse of Hanjin Shipping marked the sector’s biggest casualty in 30 years.

Long-Term Liner Trends

Against this backdrop, the graph shows  that the latest wave of box sector consolidation is actually part of a long-term trend. Back in 1996 the top 10 carriers deployed 45% of capacity and at the start of 2017 that figure stood at 70%. The coming year is set to see Hapag-Lloyd complete its merger with UASC, and Maersk Line’s planned acquisition of Hamburg-Sud is also awaiting necessary approvals. The second half of last year also saw the three major Japanese operators declare their intention to merge containership operations in a joint venture due to be established this year and start operations in 2018. The ‘scenario’ based on these changes would see the top 10’s share at 79%, nearly twice as much as 20 years ago.

Tracking The Top Table

So, the container sector is one of the more consolidated parts of shipping, and both the long-term trend and recent developments point towards ongoing consolidation. Many hope this will help the recalibration of market fundamentals and eventually support improved conditions. In the meantime, we’ll be publishing the ranking of the top containership operators every month, so watch this space.

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