Archives for posts with tag: deliveries

British cycling star Chris Froome has taken on one long cycle after another, currently tackling the Tour Of Spain following his fourth Tour De France victory back in July. Two long cycles are ongoing in the shipbuilding sector too, and this week’s Analysis takes a look at the progress of the delivery cycles in the merchant vessel and mobile offshore sectors, through a challenging period for the industry.

For the full version of this article, please go to Shipping Intelligence Network.

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Shipping is a cyclical industry and for shipyards the current trough in newbuilding orders has put further pressure on capacity. While the scale of the current surplus appears huge, this is not the first time that the shipbuilding industry has grappled with excess capacity. Looking back to the past, and specifically the shipbuilding cycle of the late 1970s, what can be learnt from previous experience?

Enjoying The Highs

The shipbuilding industry has a habit of ramping up production capacity rapidly. In 2010 shipyards broke all previous delivery records, outputting 53.2m CGT (in dwt and GT terms deliveries peaked in 2011). Compared to 2004, early into the most recent ordering boom, this was a 122% increase in deliveries. Looking back to the mid-1970s, there was a similar burst of activity as strong newbuild demand saw yard output double between 1972 and 1976 to 10.2m CGT.

What Goes Up…

As in the late 1970s, economic downturn and its impact on the shipping markets led to a significant fall in yard deliveries after their peak in 2010. The initial decrease in output was faster and sharper in the 1970s, with deliveries declining by 64% between 1976 (Year 0) and 1979 (Year 3). The current cycle has seen a more gradual fall in deliveries, declining 34% between 2010 and 2014 with 178 yards reported to have completed delivery of their orderbooks in 2012 (Year 2).

…Must Come Down

Shipyard output is still in decline. Though the surge in ordering in 2013 has helped support delivery volumes, current estimates are for an 18% fall in shipyard output in 2018. Many anticipate that the current delivery cycle will dip around 2019 (Year 9), suggesting a shorter cycle than before. It also seems unlikely that delivery levels will fall by as much as in the late 1980s, as the same pattern would imply a further 47% reduction in output from 2018 estimates to around 15m CGT.

Time To Recover?

After the 1970s crash, it took over a decade for shipbuilding output to recover. Today, following one of the weakest levels of newbuild contracting on record in 2016, the overcapacity which has characterised the global shipbuilding industry in recent years is even more prominent. While 353 shipbuilders currently have a vessel (1,000 GT or above) on order, almost half of these shipyards have failed to win a contract since the start of 2016.

If the current shipbuilding cycle were to follow the same pattern as in the 1970s, we would only be 7-8 years in, with a full recovery still some way away. However, the situation will improve if contracting levels increase. Trade growth, the replacement of older, less efficient ships and stricter environmental regulation could support yard capacity in the future through a recovery in newbuild demand.

Looking back at the shipbuilding cycle of the 1970s, it is clear that the industry has faced similar challenges in the past. It seems unlikely that we have reached the bottom of the current cycle, and pressure to remove capacity remains. Shipbuilders will be hoping that newbuild demand drivers come through quickly to stem the duration of this particular downturn.

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In the first film in the Bridget Jones series, 32 year old single Bridget soon ends up in the middle of a love triangle with the sensible Mark Darcy and charming Daniel Cleaver. The second sequel, released last year, sees Bridget finding herself unexpectedly expecting a baby. But Bridget Jones hasn’t been the only one battling tricky relationships and a rising headcount, as tanker owners will attest.

Happy Couple

The tanker market has certainly had some tumultuous times of late. Crude tanker earnings picked up in 2014, averaging nearly $27,000/day, and surged to an annual average of around $50,000/day in 2015. Things started to cool off into 2016, but in the full year average earnings were still fairly healthy at just under $30,000/day. They say two’s company; and these positive conditions did seem to have been brought about by the fortuitous lining up of two key factors.

Firstly, limited tanker ordering in the years after the global economic recession led to a spell of very muted growth in the tanker fleet. By the start of 2015, tanker fleet capacity was just 3% larger than at the start of 2013 (in the same period, the bulkcarrier fleet grew 10%). Secondly, the oil price crash in mid-2014 kick-started a period of unusually firm growth in seaborne oil trade. The ensuing low oil price environment supported healthy refinery margins and a build-up in oil inventories in key regions, whilst price pressures also dampened US oil production and boosted US crude imports. Overall, seaborne crude oil trade grew on average by a healthy 3.5% p.a. in 2015-16.

Delivery Record

However, a resurgence in contracting (1,278 tankers were ordered in 2013-15, up from 577 in 2010-12) has seen tanker fleet growth accelerate, to around 6% in 2016. The tanker supply surge has continued, with deliveries in January 2017 reaching an all-time monthly record of 6.7m dwt. With these new additions, tanker fleet capacity has already grown by 1.1% since the start of 2017, a similar rate of growth to that seen in full year 2014, with more tonnage delivered last month than in some whole years in the 1980s. In full year 2017, tanker fleet growth looks set to reach around 5%.

Troubling Trio

Another tricky element could also now be materialising on the demand side. Compliance by major oil exporters with agreed production cuts seems to have been high so far. The wider impact of these cuts on the tanker market is certainly far from clear, but there is the potential for improved oil price levels to support US oil output and undermine crude imports. At the same time, oil inventory drawdowns in some regions remain a key risk

Finding Mr Right

So, they say three’s a crowd, and the tanker market could be facing up to some real tests if the three factors of fast supply growth, changes in oil production and inventory drawdowns come together. Bridget Jones would be the first to tell you that finding the right way forward when the future’s uncertain and numbers are multiplying is tricky at the best of times, but rarely have shipowners not been up for a challenge. Have a nice day.

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With the Test cricket season in England just starting, there’s plenty of attention on batsmen facing up to tricky deliveries. In the world of shipping, however, much of the supply-side discussion so far this year has opened up with a focus on the severe lack of contracting or the increased levels of demolition, whilst the examination of ship deliveries has remained down the order…

Testing Times

The delivery run-rate is a vital supply-side lever. As part of the ‘market mechanism’, when the earnings environment gets tough deliveries will typically moderate to adjust, either in the long-run as a result of reduced ordering or in the short-term as scheduled deliveries are delayed or cancelled. In this way, market conditions mitigate against the addition of further capacity, attempting to rebalance supply with demand, and a range of drivers come into play. Testing market conditions incentivise owners to attempt to delay or cancel existing orders. Difficulties in finalising finance also put pressure on the completion of deliveries, and in addition yards can also run into problems in perilous markets, impinging on their ability to deliver capacity on time or at all.

On The Back Foot

One way of measuring the stress on deliveries is to look at ‘non-delivery’ due to slippage (delay) or cancellation of orders, comparing actual deliveries to the start year scheduled orderbook. In 2015, in dwt terms, non-delivery of the shipping orderbook stood at 35%. With the sector under extreme pressure, bulkcarrier non-delivery stood at 42% in 2015, and is running at 56% in the year to date. In another sector under pressure, containership non-delivery stood at 13% last year but has since then increased dramatically. In offshore, where market conditions are the worst since the 1980s, non-delivery in unit terms last year stood at 42% and in the year to date stands at 60%. Clearly non-delivery is a significant supply side lever, and in the year to date, across all types it stands at 51% (in dwt).

Deliveries Fast Or Slow

So even though overall deliveries as a whole are projected to grow marginally by 5% in 2016 to 102m dwt, the impact of non-delivery is clear. Across the full year it is projected that 40% of the start year orderbook won’t get delivered. World fleet growth looks set to slow to around 2.7% (from 3.3% in 2015), compared to the 6.4% that would have been the case if the start year orderbook had been delivered to schedule in full this year. The missing 67m dwt of projected ‘non-delivered’ capacity is more than 25% larger than the full year demolition projection, so in the here and now delivery dynamics are having at least as big an impact as the recycling of tonnage.

Balancing The Attack?

So although in general the majority of ships on order still get delivered in the end, it is crucial to track delivery trends. This year every 10% of orderbook ‘non-delivery’ is equivalent to about 1% of growth in the world fleet. That clearly matters, and with the orderbook not necessarily a great guide to supply growth in difficult market conditions, deliveries, as well as ordering and demolition trends, remain essential to understanding the development of the market mechanism.

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The volatility of the shipping markets has always presented opportunities and pitfalls for investors (see SIW 1210). Getting the timing right is key, and newbuilding decisions can prove especially difficult given the need to look further forwards into the future – always a tricky task. The challenging state of many shipping markets suggests that owners have struggled to find the right balance when planning ahead.

Changeable Winds

Accurately forecasting future shipping market developments is clearly fraught with difficulties. Owners making newbuild investments may be renewing their fleets, or building for dedicated business, but for those ordering more speculatively, the investment might reflect expectations of future demand and market conditions.

These trends are hard to predict. Economic and political developments, amongst many others, can shift quickly and change trade patterns. Combined with supply factors such as newbuild pricing or finance availability, it is easy to see how the volume of tonnage ordered can be misaligned with the requirement.

Clouds Gathering

Comparing historical contracting to the volume of ‘required’ deliveries shows that investment has frequently ‘overshot’ the need for additional ships. In 2003 for example, global contracting totalled 117m dwt. Assuming that these ships take two years to be delivered, trends in 2005 could indicate whether this level of ordering was lower than or surplus to requirement. Global demolition totalled 6m dwt in 2005, and world seaborne trade grew by 4.5%, which based on estimated fleet productivity in 2003, could have required an extra 42m dwt of tonnage to transport. So ordering in 2003 may have been 70m dwt greater than the estimated volume of deliveries needed in 2005. The surplus was even greater in 2007, when 275m dwt was ordered, but with seaborne trade dropping by 3.7% in 2009, there was no ‘requirement’ for any additional tonnage to be delivered that year.

Gusts From The East

Since 2000, more years than not have seen ‘excess’ ships ordered. After the financial crisis hit, surplus capacity led to weaker markets and changes in productivity, such as slow steaming. Ordering in 2009-12 was closer to estimated ‘requirement’, but surged to 178m dwt in 2013, with hope in some sectors that the bottom of the cycle had been reached.

Yet 2015 saw seaborne trade growth slow to 2.1%, led by trends in China. With 39m dwt scrapped in 2015, and an estimated 36m dwt needed to ship the additional trade volumes, ordering in 2013 could have ‘overshot’ by 100m dwt, exerting further supply pressures.

An Unsettled Climate

The story clearly varies across sectors, but shipping investors seem an optimistic bunch, and are now being let down by underperformance of seaborne trade. At times, this optimism has raised demand for shipyard capacity, but has still created a surplus, with lower ordering in 2014-15 still possibly excess to requirement based on current projections. In such a changeable climate as shipping, it’s clear that checking the forecast is vital, but it seems that getting a clear view ahead is hard.

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With the holiday season almost upon us, deliveries of many types are the focus of attention. In shipping, deliveries into the world fleet peaked a few years ago, and then the rate of capacity delivered from the world’s shipyards went on the slide. At some point this should have started to stabilize but, with output often fairly volatile from month to month, it needs some work to identify when.

Peaking Deliveries

In the years 2006-08 an unprecedented total of 646m dwt of vessel capacity was ordered at the world’s shipyards. Although, following the economic downturn, the delivery of some of this was delayed or cancelled, capacity delivered rose substantially in the years 2010 to 2012, and peaked on an annual basis in 2011 at 166m dwt (on a monthly basis, 12-month moving average deliveries peaked at 14.8m dwt in June 2012). Inevitably, following the downturn, a slowdown in ordering occurred, and after the peak in output deliveries started to slide. The question was how long would the slide in deliveries last, and how quickly would surplus building capacity exit the arena?

Sliding Then Flattening

Monthly delivery data provides some of the answer. Although this can be volatile, the 12-month moving average (a metric showing the average monthly output over the last 12 months) gives an idea of ‘annual’ output capacity at any point in time. The graph shows that this had dropped to 12.8m dwt by January 2013 and then to 10.1m dwt by July 2013. By January 2014, the 12-month moving average had reached 8.6m dwt, down 42% from the peak. Shipyard output, in dwt terms at least, had slowed perhaps more quickly than many had imagined.

But, has the rate of output stabilized since then? The graph suggests yes. In April 2014, the 12-month moving average reached 8.0m dwt, and since then has remained in a fairly narrow range between 8.0m and 7.4m dwt. Clearly the rate of output has flattened. The full year delivery forecast for 2014 stands at 7.8m dwt per month, with a not too dissimilar figure currently projected for 2015.

Covering Up

Meanwhile, the line on the graph highlights an interesting side effect. As deliveries have slowed, and the orderbook has started to grow again (at 316m dwt, it is today 18% larger than at start 2013), the orderbook expressed as years of ‘cover’ in terms of the 12-month moving average rate of deliveries has increased significantly, moving from 2.2 years in July 2013 to 3.5 years today. Not quite the 4.4 years seen in 2010, but substantially more cover than the 1.7 years when deliveries went on the slide in 2012.

Onward, Upward?

So, it looks like deliveries have stabilised, and this perhaps came around a little more quickly than some expected. Moreover, whilst the environment today is still challenging for yards, a side effect of the slowdown in output has been an increase in the level of cover. When output starts to increase again is open to question, but today’s orderbook for 2015 delivery (135.1m dwt) is a little bigger than that for 2014 delivery at the start of this year (133.8m dwt), so watch this space.

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SIW1107Pete Seeger, who died this week, knew how to get his message across. His well-known Where Have All The Flowers Gone topped the pop charts and was one of the New Statesman’s top 20 political songs. Its lyrical style softens the theme that human beings never really learn, but in the end it doesn’t matter much. Words with a familiar ring for shipping folk.

No Hammer? Try a Steel Box

The shipping industry doesn’t have a folk singer, but if it did, he could write a shanty about the disappearing bulkers. It’s a story which raises questions about what we are up to. These basic steel boxes crawled into the 2000s on their knees after a couple of gloomy years in 1998/9. Their gloom was reflected in deliveries, which averaged only 14.5m dwt p.a. between 1998 and 2002 (see graph).

Too Many “Little Boxes”?

Then China got busy, the 2003-8 boom started and bulker deliveries surged 50% to 21.7m dwt p.a. The financial crisis put an end to booming freight, but deliveries trebled to 76.8m dwt p.a. 2009-13. Two thirds of the tonnage delivered since 1998 has hit the market in the last 5 years. Supply has grown more than twice as fast as demand, from 417m to 722m dwt. But few bulkers are laid up. So where are they?

Unlike the 1980s, owners are keeping their ships moving. Slower speeds, waiting, multi-porting, and dead freight have soaked up deliveries, opening the way for market spikes, driven by cargo fluctuations at major loading areas. A shipping network creeping round the world at 11 knots is harder to tap for quick tonnage than a pool of laid up ships, as the Capesize market has discovered.
Turn! Turn! Turn! – Please

But the capacity to go faster is there and as rates rise, so will the available supply. For example a Panamax bulker operating at 11 knots might need around $21,000/day to cover costs – say $13,000/day for the ship and $8,000/day for bunkers. If, however, rates move up to around $30,000/day, that might be enough to pay for bunkers operating at 14 knots. Of course the owner could keep on slow steaming and pocket the extra cash, but in a tight market charters and competitors would soon put a stop to that.

So spotting the turning point depends on whether all the bulkers have gone for good, locked in to permanent slow steaming. Investors who ordered 80m dwt of bulkers in 2013, obviously think much of the capacity has gone for good and so must analysts predicting $60,000/day this year.

We Shall Overcome

So there you have it. Bulkers are ferrying their cargo around the world at snail’s pace, and helping their bank balances whilst saving the planet with a downsized carbon footprint (maybe half what it used to be?). But economics and history say speed can still crawl out of the woodwork – all it needs is the right amount of cash. So the good news is there might be higher rates ahead, or it could just mean that most of it will go on bunkers. Well, that’s life. Have a nice day.