Archives for posts with tag: demolition

In 2016 the shipping industry saw significant supply side adjustments in reaction to continued market pressures. For shipbuilders this meant a historically low level of newbuild demand with fewer than 500 orders reported in 2016, and the volume of tonnage on order declined sharply. Meanwhile, higher levels of delivery slippage and strong demolition saw fleet growth fall to its lowest level in over a decade.SIW1256

Pressure Building Up

2016 was an extremely challenging year for the shipbuilding industry. Contracting activity fell to its lowest level in over 20 years with just 480 orders reported, down 71% year-on-year. Domestic ordering proved important for many builder nations and 68% of orders in dwt terms reported at the top three shipbuilding nations were placed by domestic owners last year. Despite a 6% decline in newbuild price levels over 2016, few owners were tempted to order new ships, especially with the secondhand market offering ‘attractive’ opportunities. Only 48 bulkers and 46 offshore units were reported contracted globally last year, both record lows, and tanker and boxship ordering was limited. As a result, just 126 yards were reported to have won an order (1,000+ GT) in 2016, over 100 yards fewer than in 2015.

A Spot Of Relief

However, a record level of cruise ship and ferry ordering provided some positivity in 2016. Combined, these ship sectors accounted for 52% of last year’s $33.5bn estimated contract investment. European shipyards were clear beneficiaries, taking 3.4m CGT of orders in 2016, the second largest volume of orders behind Chinese shipbuilders’ 4.0m CGT. Year-on-year, contracting at European yards increased 31% in 2016 in terms of CGT while yards in China, Korea and Japan saw contract volumes fall by up to 90% year-on-year.

Further Down The Chain

In light of such weak ordering activity, the global orderbook declined by 29% over the course of 2016, reaching a 12 year low of 223.3m dwt at the start of January 2017. This is equivalent to 12% of the current world fleet. The number of yards reported to have a vessel of 1,000 GT or above on order has fallen from 931 yards back at the start of 2009 to a current total of 372 shipbuilders.

Final Link In The Chain

Adjustments to the supply side in response to challenging market conditions in 2016 have also been reflected in a slower pace of fleet growth. The world fleet currently totals 1,861.9m dwt, over 50% larger than at the start of 2009, but its growth rate slowed to 3.1% year-on-year in 2016. This compares to a CAGR of 5.9% between 2007 and 2016 and is the lowest pace of fleet expansion in over a decade. A significant uptick in the ‘non-delivery’ of the scheduled start year orderbook in 2016, rising to 41% in dwt terms, saw shipyard deliveries remain steady year-on-year at a reported 100.0m dwt. Further, strong demolition activity helped curb fleet growth in 2016 with 44.2m dwt reported sold for recycling, an increase of 14% year-on-year.

End Of The Chain?

So it seems that the ‘market mechanism’ has finally been kicking into action. A more modest pace of supply growth might be welcome news to the shipping industry but further down the chain shipbuilders are suffering. Contracting levels plummeted in 2016 and the orderbook is now significantly smaller. Even with the ongoing reductions in yard capacity, shipbuilders worldwide remain under severe pressure and will certainly be hoping for a more helpful reaction in 2017.

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Strong demolition has been a prominent feature of the shipping industry this year, as challenging market conditions continue to drive a significant supply-side response in a number of sectors. Across the total shipping fleet, demolition could reach one of the highest levels on record in full year 2016, but which markets in particular have taken the biggest hits?

Revving Up

2016 has been an extremely difficult year for the shipping markets, with conditions in most sectors under pressure. Reflecting this, demolition has remained at elevated levels, and in January to November, 841 vessels of 41.3m dwt were scrapped. Demolition so far this year has already exceeded last year’s total of 38.9m dwt, and whilst scrapping volumes have picked up in most sectors, some markets have played a more important role in this year’s tally than others.

Bulker Beat

Amidst continued depressed earnings, bulkcarriers have accounted for the lion’s share of tonnage scrapped this year. Bulker scrapping set a new record in 1H 2016, and while demolition has slowed in recent months, 385 bulkers of 27.7m dwt have been scrapped in the year to date. Bulker demolition has been historically firm since 2011, but the pace of scrapping in most bulker sectors this year has still exceeded the 2011-15 average, with Capesize and Panamax recycling this year around 1.4 times this level.

Boxship Bumps

Meanwhile, containership demolition has also made headlines this year, with increasingly young vessels being recycled. In dwt terms, boxship scrapping has totalled 7.9m dwt so far in 2016, but recycling volumes are already over triple that of full year 2015, with scrapping on track to reach a record 0.7m TEU this year. The pace of demolition of ‘old Panamaxes’ has been running at more than twice the five year average, whilst scrapping has accelerated firmly in the 3,000+ ‘wide beam’ sectors, with 6,000+ TEU boxships also scrapped for the first time.

Big Hits On The Bodywork?

By contrast, despite the softening in crude and product tanker market conditions this year, tanker scrapping has remained relatively subdued, at less than half of the five year average. However, while gas carrier scrapping remains limited in numerical terms, with just 18 ships recycled so far this year, LPG carrier demolition is on track to reach around double the five year average after earnings fell swiftly to bottom of the cycle levels. Meanwhile, car carrier scrapping has soared to 27 units of 0.14m ceu. This is already the second highest level on record, and on an annualised basis is four times above the 2011-15 average.

So, while total demolition this year is still falling short of 2012’s record 58.4m dwt, 2016 looks set to see yet another year of very firm recycling, eight years after the onset of the downturn. In some sectors, this strong scrapping is providing a helpful brake on fleet expansion. Furthermore, with bruising market conditions having clearly taken their toll, many owners are likely to be looking to the demolition market for a little while yet.

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As snooker players know, it’s hard to keep a good break going. In today’s conditions, the shipping industry needs supply-side re-positioning to help the markets back to improved health, and increased recycling in recent years has been a clear part of this. However, there’s still some way to go to better times, so it’s worth taking a look at how today’s ‘big break’ might leave the future potential scrapping profile.

The Big Break!

Since the start of 2009, a total of 206.6m GT of shipping capacity has been sold for recycling, compared to an aggregate of 63.1m GT in the previous seven years. This total includes 94.7m GT of bulkcarrier tonnage and 29.1m GT of containerships, helping to address oversupply in the volume shipping markets. But given such a prolific run of demolition activity, what does the future potential scrapping profile look like? Well, there are many measures that can be used to investigate this, including the metric featured in the graph. If the average age of scrapping is taken as a useful indicator of the current state of conditions facing owners in each market, then calculating the amount of tonnage remaining in the fleet at today’s average age of scrapping or higher might tell us something interesting, especially if ongoing market conditions persist.

What’s Left On The Table?

In the tanker sector, which up until fairly recently was backed by stronger market conditions, the average age of scrapping in the year to date remains relatively high, at 25 years for crude tankers and 27 for product tankers (bear in mind that not many tankers have been sold for scrap recently, and the average age may fall). Given that a lot of older single hulled tanker tonnage was phased out in the 2000s, the amount of tonnage above the average age today is limited. In the bulker and containership sectors, both under severe market pressure for some time now, the statistics are a little more revealing. Despite heavy recycling in recent times, the share of tonnage above the current average age of scrapping is 8% for Capesizes and 6% for Panamaxes. For boxships sub-3,000 TEU the figure is 10% and for those 3-6,000 TEU 12%. Of course if the average age of scrapping falls, then the picture changes again. In the 3-6,000 TEU boxship sector, the youngest ship sold for scrap this year was just 10 years old; around 50% of tonnage today is that age or older.

Cue More Demo?

What does this tell us overall? Well, using the sector breakdown shown in the graph, the statistics tell us that around 75m GT in the fleet is above the current average age of scrapping, 6% of the world fleet. At 2016’s rate of demolition, that’s another 2.4 years’ worth. And given the age profile of the world fleet, after another 2 years an additional 21m GT will have crossed the current average age mark and after 5 years another 77m GT.

Break Not Over?

So, what chance does the industry have of keeping the demolition pressure on? Well, obviously freight and scrap market conditions and regulatory influences will have a big say. However, it looks like, in today’s terms at least, the industry might be in a good position to keep the break going. Have a nice day.

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It’s the time of year, with the school holidays and end of term approaching, that many pupils will nervously take home their school reports to anxious parents. With the spread of challenges facing the industry, it’s unlikely the shipping markets would achieve many top grades. However some sectors might still achieve an “A” for effort and this week’s analysis reviews the markets’ performance in the first half.

Must Do Better!

Our Graph of the Week compares performance in the first half of 2016 to the averages since the financial crisis, as a barometer of performance against trend. First on the graph is the ClarkSea Index, our average earnings index covering all major sectors, which is 18% down on the average since 2009 and 30% compared to 1H 2015. The index actually finished the mid-year at just $8,575/day, close to its all time low of $7,444/day. Clearly room for improvement.

Heading For Re-Sits?

With widely reported historical lows in the bulker sector in the first half, Capes averaged below $5,000/day in 1H 2016, some 76% below the average since 2009. Containerships fared little better, slumping to 54% below trend while offshore rates were also almost 50% down on trend and generally hovering around OPEX levels. The prevalence of lay-up and stacking makes offshore arguably the most challenged sector at present. LPG rates also moved below trend, with VLGCs averaging $32,000/day, albeit following their stellar performance of 2015. Meanwhile trade is heading towards more muted growth with an expectation of 2.2% in 2016 compared to a trend rate of 3.2%.

“A” For Effort

Reduced fleet growth (1% to reach 1.8 bn dwt), increased demolition and extremely limited newbuild orders should all get an “A” for effort. Although demolition of 29m dwt was slightly below 1H 2012 levels, it was 43% above trend. However orders of 18m dwt and $16bn constituted a 35-year low and 68% down on the average since 2009 (lower than the 19.1m dwt in 1H 2009 and lower still if the Valemax orders of 12m dwt are excluded). Further pain for the shipyards and pressure on newbuild prices seems likely as the year progresses. Sale and Purchase activity was well down in value terms but marginally above trend by tonnage, reflecting the strong buying appetite for bulkers (bulker sales of 21m dwt in 1H 2016, the highest tonnage figure since 1H 2007).

Keep Up The Good Work

Although they eased back during the first half, tanker earnings continued to perform above trend with VLCC rates still averaging around $50,000/day. Product tanker earnings have also eased back somewhat this year but remain above trend, as does our index of chemical tanker earnings. The best performer across shipping was the Ro-Ro market, continuing its improvement from 2015 and 60% above trend, with the Ferry and Cruise markets also generally positive.

So shipping is experiencing some of its toughest conditions since the financial crisis and, despite its many efforts, may well be heading for an appointment with the headmaster (the bankers?). Have a nice day.

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“When the going gets tough, the tough get going” – at least that’s what Billy Ocean’s number one hit told us in 1986. Well, there’s no escaping that the dry bulk markets are in a tough place at the moment. Owners have responded by selling more, and younger, vessels for demolition, but just how tough have they been so far, and how tough might they get?

…The Tough Get Going

The first 3 months of 2016 are shaping up to be the biggest quarter on record for bulkcarrier demolition. In the first 9 weeks of the year, 120 bulkcarriers of 10.1m dwt have been reported sold, a pace that, if continued, will see the current record of 10.9m dwt set in Q2 2015 surpassed. Such high levels of demolition clearly reflect the depressed state of the bulkcarrier market in 2016 so far. This week’s graph highlights previous occasions when low freight rates have led bulkcarrier owners to get tough with older vessels.

When The Going Gets Rough…

The first period of sustained high demolition was in the mid-1980s, with activity peaking at 12.3m dwt in 1986 – equivalent to 6.2% of the total start-year fleet. In the same year average scrapping ages plummeted to 18.8 years – that was tough! The second major phase of demolition occurred through the second half of the 1990s and into the first half of the 2000s. Peak demolition levels were similar to those seen in the mid-1980s, with 12.3m dwt leaving the fleet in 1998. But fleet growth in the intervening period meant that this accounted for just 4.6% of the fleet at the start of the year. Average scrapping ages dipped slightly, but remained above 25 years.

So how tough are things now? In terms of tonnage leaving the fleet, the current phase is by far the most extensive. 2012 was the biggest year on record for bulker demolition with 33.4m dwt heading to the breakers. However, rapid fleet expansion over the past decade means that this accounted for 5.4% of the start-year fleet, slightly below the level seen when Billy Ocean was having hit records 30 years ago. The first half of 2015 and the start of 2016 have been very active periods, but these high volumes will need to be maintained in order for the annual demolition-to-fleet ratio highlighted in the graph to return to the levels of the mid-1980s.

…The Tough Get Rough

How much tougher can owners get? The average scrapping age for bulkcarriers has fallen from 33 years in 2007 to 24 years so far this year, and market conditions are such that vessels built in the 2000s are now candidates for recycling (a total of 10 such Capesizes and Panamaxes have been sold since the start of last year). So it’s clear that owners are getting tougher, even if there might still be some way to go.

There are still 57.8 dwt of bulkcarriers in the fleet aged 20 years or over, including 108 Capesizes and 166 Panamaxes. So despite a predominantly young age profile (see SIW 1209), there are plenty of potential demolition candidates in the fleet. The dry bulk market has bounced back from tough times in the past. For those prepared to “tough it out”, further demolition could help the market return to better times. Have a nice day!

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SIW1054Imagine the intrepid crew of ‘Starship Enterprise’ staring out at a weird apparition approaching the ship. Spock makes his apocryphal observation “it’s life Jim, but not as we know it”. Then imagine the equally intrepid navigator of the ‘Bulkship Enterprise’ staring at the 2014 statistics as she sails into 2015, and observing “it’s a cycle, Captain, but not as we know it”. So what is it?

Alien Life Form

For the Captain, the problem of identification comes to bear because bulk shipping’s vital statistics in 2014 exhibit symptoms which don’t fit with the industry’s perception of how a shipping cycle ought to behave. For one thing, cycles are supposed to last 7 years. Well it’s now 6 years and 5 months since the great downturn started in August 2008 and the market is still relatively flat.

At the end of 2008 the ClarkSea Index stood at $13,654/day and it ended 2014 at $14,787/day. In the meantime, the annual average value of the index has wandered between $9,000/day and $16,000/day and currently seems to be going nowhere fast.

Fundamentally Floored

Another feature of this alien “cycle” is that it seems impervious to warning fire. Bulk trade (wet and dry) has grown by 21% since 2008, but bulk tonnage supply surged by 54% between end 2008 and end 2014. And it’s not just the big orderbook from the boom. Investors have been very active. Bulk orders of 142.4m dwt in 2013 and 86.5m dwt in 2014 are not so different to pre-crisis levels.

Meanwhile, secondhand prices, which it could be argued should be heading for distressed levels, have been surprisingly resilient. A 5-year-old VLCC costing $77m at end 2014, and a 5-year-old Capesize costing $39m, are both indicators of relatively firm prices. Yet despite high prices and the credit clampdown, the 75.1m dwt of secondhand bulk sales in 2014 was close to the highest on record.

Alien Market Mutation

Another puzzle for the navigators is the resurgence of tanker sentiment. Tanker demand has been hammered by the triple death ray of fracking, high oil prices (up until the astonishing downturn over the last few months) and the environmental agenda. So oil trade edged up only 0.4% in 2014, while the tanker fleet grew by 1.4%. Yet average weighted tanker earnings surged by 32% compared to the 2013 average levels, with crude carrier earnings booming and products earnings fairly flat. Meanwhile bulkers, much favoured for their umbilical link to Chinese and Asian demand, saw dry bulk cargo trade grow 3.7% and the fleet by 4.4%. Average weighted bulkcarrier earnings fell by 2% (and more in the larger sizes), which was not enough to deter investors from ordering 60m dwt of new capacity.

Beam Me Up, Scotty

Against this surreal background, it’s easy to see why some investors might be feeling a little disorientated. Tankers may be in vogue, but the fundamentals across the market remain tricky. Chinese growth appears to be slowing, Europe is struggling and the shipyards seem to be immune to everything the market throws at them. At the same time, the surplus tied up by vessels slow steaming appears to be undiminished.

It all adds up to something which doesn’t fit neatly into the usual cyclical pattern. No wonder some confused investors wish they could beam up to the deck of ‘Starship Enterprise’ and view this alien landscape from a safe distance. Have a nice day.

In the initial aftermath of the world economic downturn, global vessel demolition hit 33m dwt in 2009, followed by 28m dwt in 2010 and 43m dwt in 2011. In 2012, sales for scrap peaked at 58m dwt, and then totalled 47m dwt in 2013. At such elevated levels, compared to the annual average of 18m dwt in the 2000s, it’s worth considering how high a total might be maintained in the years ahead.

Downturn Upturn

In the first 8 months of 2014, robust levels of demolition have continued, with total sales for scrap amounting to 23.5m dwt, including 10.0m dwt of bulkers and 6.4m dwt of tankers. As the graph shows, the average age of vessels sold for scrap in the year to date stands at 27.5 years, having fallen from around 30 years in the period 2009-11 when the weak earnings environment took hold and encouraged the clear out of old ‘surplus’ tonnage.

However, with many of the units demolished coming from the larger, volume sectors where scrapping ages have generally been younger (the average age of demolition of VLCCs and Capesizes this year has been 21.0 and 24.1 years respectively), the average age of dwt capacity demolished has been lower than the average by ship number, standing at 24.7 this year.

High Profile?

Weak market conditions have ensured that owners have continued to scrap older tonnage, but, with markets by nature cyclical, to what extent could the elevated level of demolition continue in the future? Well, whilst it provides no guarantee of scrapping levels, the age profile of the fleet remains a useful indicator. In reality, market conditions, costs and timings of special surveys, and steel scrap market conditions help determine owners’ decisions, and in today’s environment fuel efficiency and regulatory concerns also play a key role. Nevertheless, the profile of fleet capacity hitting ‘average’ scrapping age gives a hint as to the direction of future demolition levels.

Help From The Aged

The graph shows historical scrapping and capacity set to reach 25 years old each year. There’s also a long ‘tail’ of capacity older than 25 years (103m dwt built pre-1989), and the graph includes a share each year. This adds up to an indicator of ‘scrap candidate capacity’. In 2017, when today’s 22 year old capacity hits 25, it reaches 23m dwt and by 2020 it is up to 35m dwt. Not all sectors have the same age profile, and many ships have a longer life than 25 years, but no doubt some younger tonnage will be scrapped too. What is clear is that more capacity was delivered in the mid-to-late 1990s than in the early 1990s and late 1980s, and this will drive scrapping at some point.

On The Level?

So, the big slump led to elevated levels of scrapping that the flattish deliveries of the 1980s and 1990s initially suggested it would be hard to maintain. However, scrapping has rolled on robustly, and the fleet’s age profile suggests that, in a few years, it may be easier to reach similar levels. Market conditions will mean that actual volumes move in cycles, but particularly with fuel and regulatory agendas to the fore, accelerated levels of demolition might become more common.

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