Archives for posts with tag: contract

As in the case of most areas of shipbuilding, the contracting boom of the mid-2000s allowed Chinese shipyards to gain market share in the OSV sector. Initially, however, this was limited to relatively simple units. More recently, Chinese yards have begun to construct more sophisticated vessels, with broader global appeal. At the same time, they have grown market share (53% of the OSV orderbook, versus 36% in 2008).

AHTS Demand Dries Up

Back in the boom years, although Chinese yards took many orders, the majority of these were from Asian owners for use in the benign waters of the East. Asian-designed ‘commodity’ AHTSs of around 5,150 bhp made up the bulk (55%) of these orders. Chinese yards were assisted in gaining a market share by
build-to-stock intermediaries, such as MAC, Coastal or Nam Cheong, which outsourced orders to Chinese yards with the prior intention of resale close to delivery. Meanwhile, European owners tended to restrict their ordering to established yards, for instance those in Norway, whose designs they knew and trusted.

In Asia, working for NOCs like Petronas, Pertamina and PTTEP, whose operations are mostly near-shore, these small OSVs could find a market. But both Chinese yards (keen to diversify their product mix) and Asian owners (keen to expand their business into new geographies) had an incentive to change approach.

PSV Purchasing

In an effort to climb the value chain, Chinese yards began to licence OSV designs from European companies, such as Rolls-Royce, or Ulstein for example. Subsequent ordering of such designs has been focussed on larger PSVs – in 2013, 82% of orders for Chinese built PSVs 4,000+ dwt had European designs. Demand for these vessels outpaced that for AHTSs, as more deepwater and far-from-shore fields entered development, with PSVs being the vessel of choice for these remote operations. The yards’ previous (Asian) clients transferred their attention to these vessel types, keen to gain a slice of the action in areas like the North Sea, or West Africa. At the same time, non-Asian owners were encouraged to order at yards now offering designs which they recognised, at prices 20-30% lower than those offered by European shipyards. Between the start of 2010 and 2014, China’s OSV orderbook rose nearly fivefold, to 382 units (53% market share).

Future Demand

Of course, the trend towards China can only last if the vessels which they deliver meet with acceptance in the Atlantic oil producing regions. However, the signs are encouraging, with Chinese built vessels making up a large proportion of deliveries into internationally operated areas (33% in 2013). Of all Asian-built PSVs with European designs currently active, around 30% are employed in West Africa, whilst 30% of PSVs >3,000 dwt are working in NW Europe.

This is an evolving situation, which will become clearer as the large PSV orderbook delivers. For the time being, however, Chinese yards look to have risen to the challenge of becoming builders of OSVs attractive for global operations.

OIMT201411

SIW1105Tankers and bulkers; love them or hate them, you can’t really escape them in shipping. They are the bed-rock of independent shipowners’ business. Of course there are plenty of specialist vessels, but it’s the two big bulk fleets which inevitably catch the attention of speculative investors. And investment discussions always end up with the same question – should we order a bulker or a tanker?

Playing Investment Tag

Although designed to carry totally different cargoes, these two titans of bulk transport seem to be subject to some deep economic force which draws them together. For example the total tonnage of tankers ordered between 1963 and 2013 was 1,139m dwt, whilst the tonnage of bulk carriers ordered was 1,145m dwt, a difference of 0.5%. Extraordinarily close over a fifty year period. But in the long run what goes around comes around and the year to year pattern of investment was very different.

Tankers First…

A good way to analyse the different ordering trends of tankers and bulkers is to compare the contracts placed each year as a % of the fleet at year end. The chart shows this back to the 1960s. The big boom of the 1970s was clearly led by tankers whose investment built up during the 1960s to peak at 49% of the fleet ordered in 1973. In the same year bulker ordering was 17% of the fleet. This spike was followed five years later in 1978 by a collapse of orders to only 1% of the fleet – 3m dwt of tankers and 1.4m dwt of bulkers.

Bulkers Next…

Then in the 2000s the investment momentum for both segments built up, with orders ratcheting rapidly up from about 9% of the fleet at the beginning of the decade to a peak for tankers of 25% in 2006. Then bulkers surged ahead, with orders hitting a peak of 43% of the fleet in 2007. Not quite beating the tanker record in 1973, but a pretty close second. Meanwhile tanker investors were more restrained with investment of 12% in 2007, similar to bulkers in 1973. And once again, 5 years later in 2012 orders slumped to only 3% of the fleet. All of which helps to put the order recovery in 2013 into perspective. It was a very busy year with orders for 35m dwt of tankers, and 80m dwt of bulkers. This was almost three times the tonnage ordered in the previous year. And the percentage of the fleet ordered surged up to 11% for bulkers and 7% for tankers.

The Bottom Line

So there you have it. There are similarities between the 1970s boom and bust investment cycle and the investment trend over the last five years. In the post-70s downturn bulkers did better than the over-ordered tankers, who suffered a heroic collapse of demand due to a high oil price (sound familiar?). Today bulkers are again leading the recovery, driven by hot cash and a punt on surfing the Asian economic wave. But the lesson is clear enough. Tanker and bulker investment ended up in the same place, but investment cycles along the way are not closely correlated. So ex-pect a bumpy ride. Have a nice day.

OIM08In 1947, the first offshore oil discovery was drilled out of sight of land. Albeit only 29km away from the Louisiana coastline, and in water depths of just 4.3m, this achievement began an new era of offshore oil production. The movement of offshore operations into deeper and more remote regions has been previously documented by Clarkson Research, and as this trend continues we take a look at how the industry has prepared for this development.

Deeper and Darker

The Graph of the Month shows the trend in the characteristics of all known offshore oilfields against their year of discovery. As the more accessible fields became less available and less productive, companies moved further offshore and into deeper waters. In 1970 the average distance from shore of known oilfields stood at 60km, with the average water depth being 54m. By 2013 the average distance to shore had more than doubled to 134km, and the average water depth was 15 times deeper at an impressive 876m.

As well as increasing average water depths and distance to shore, many newly discovered fields are also in areas designated as harsh environments. Vessels operating in these frontier regions may face adverse weather conditions, longer periods of deployment and greater demand for capacity in order to maximise their efficiency.

Building for Tomorrow

In response to these more challenging requirements, the offshore industry has already altered its contracting preferences. One example of this is the trend in newbuild contracting of PSV vessels. Large PSV (>4,000 dwt) newbuild contracting in 2012 was almost 5 times higher than the number of contracts in 2009. In comparison small PSV (<3,000 dwt) newbuild contracting has decreased by 14% in the same period. The average deadweight of PSV contracted increased by almost 60% between 1990 and 2012, from 2,500 dwt to 4,000 dwt.

Another example of the offshore industry’s response to the increased water depths of newly discovered fields can be seen in the volume of newbuild orders for drillships. At present the number of drillships on the orderbook stands at 80, which is 88% of the current active fleet. In comparison to this the orderbook for Jack-Up rigs capable of drilling up to 300ft is just 13 units, a mere 4% of the existing fleet, highlighting the move from low specification, shallow water drilling units towards higher specification, deep water rigs.

Further Preparations

Whilst newbuilding of higher specification units has increased, some exceptions do remain. For example, ordering of ice class vessels has slowed in recent years despite an increase in Arctic exploration. Whilst this is still a developing sector which could fuel medium-term contracting demand, it is understandable that the recent focus of contracting has been on units intended for warmer waters. This is where the majority of deep water discoveries have occurred, and is the reason the offshore industry is gearing up for remote drilling accordingly.

SIW1075Back in the 1980s, one of the first major UK credit cards used the slogan “Your Flexible Friend” to attract customers. In today’s difficult shipping markets flexibility certainly comes in handy, particularly in the containership sector.

Flexible Help

Boxship contracting in recent years has been dominated by very large ships. 73% of capacity contracted since start 2009 has been for units 8,000 TEU or larger. As these have been delivered, the flexibility of other ships in the fleet has enabled capacity growth to reach the areas where it has been needed most. Typically, new very large ships have replaced older (generally slightly smaller) ships on the mainlanes (Far East-Europe, Transpacific) which have been redeployed to the expanding north-south trades (or in some cases laid up). In turn medium sized units replaced by newly redeployed, larger units have been moved to the fast growing intra-regional trades (or laid up).

Flexible and Friendly?

At times, this has protected main-lane freight rates from the full impact of the surplus. But it hasn’t been a ‘flexible friend’ for everyone. Owners of small and medium sized tonnage (typically charter owners who account for 58% of capacity below 5,000 TEU), hoping they would be protected from the influx of new megaships, have still felt the sharp end of the surplus as capacity has ‘cascaded’ down onto their patch.

The graph shows this process since the start of 2007. ‘Cascade A’ shows the number of 3-8,000 TEU ships redeployed (or laid up) from the mainlane trades and ‘Cascade B’ shows the number of 1-3,000 TEU ships moved off of the north-south trades. This doesn’t perfectly capture everything (e.g. de-ployment of newbuilds) but it shows the ‘cascading’ pattern well.

In an immediate response to the economic downturn, 2H 08 to 2H 09 saw 280 ships cascaded and 2011 saw a total of 176. Mainlane freight rates (thick line) benefited from this but when cascading has slowed or turned negative (including reactivation of idle ships), such as in 2010, rates have eventually declined. In 2012 the rate of cascade slowed again with a net 84 units redeployed, and this led freight rates to decline significantly, and surplus has built up on the mainlanes. For operators it looks like time for another bout of serious cascading.

Watch That Limit!

But spare a thought for charter owners. After the first acceleration, cascading slowed and their earn-ings saw some upside but second time around, still shackled by 5% of capacity idle, charter rates (dot-ted line) remain in the doldrums, and it looks like another round of cascading may well come.

However, charter owners need not despair at the prospect of endless rounds of cascading. The amount of ‘redeployable’ capacity isn’t infinite, and at some point the small and medium size ranges, where growth is limited, will probably feel some benefit. As credit card users know, even your flexible friend has a limit!