Archives for posts with tag: dry bulk

By the late 1800s, the shipping industry had been transformed by the introduction of steam power and iron ships. Coal and grain were two of the most important cargoes, alongside timber, sugar, cotton and tea. While technology, the sheer scale of the business, and the global cargo mix, have of course all changed since then, dry bulk cargoes have retained a position at the heart of global seaborne trade.

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

The vast majority of the world’s trade in goods is moved by sea, and it has long been recognised how shipping is a critical element of the global economy, providing the connection between producers and consumers all over the planet. However, what is less frequently mentioned is the tremendous ‘value for money’ with which it does so; this is clearly worth a closer look…

Bargain Of The Century?

One US dollar doesn’t get you much in today’s world. On the basis of latest prices it would buy 0.025 grams of gold or 2% of a barrel of crude oil. Based on Walmart’s latest online pricing it would buy about half a litre of milk. That’s not a lot whichever way you look at it, in a world economy that is 75 trillion dollars large. But in shipping one dollar still gets you something very substantial. One way of looking at this is to take the movement of cargo in tonne-mile terms and divide it by the estimated value of the fleet. Here, to try to do this in like-for-like terms, the calculation includes crude and oil products, dry bulk, container and gas trade, and the ships that primarily carry those cargoes. On this basis, one dollar of ‘world fleet value’ at the start of May 2017 would have bought 110 tonne-miles in a year, based on 2017 trade projections. What an amazing bargain! One tonne of cargo moved more than 100 miles, per year, all for one little greenback!

What’s In A Number?

What drives this number? Well the essence of the value of course lies in the huge economies of scale generated by moving cargo by sea in vast quantities at one time over significant distances. The average haul of one tonne in the scope of the cargoes listed above is estimated at 5,016 miles and the average ship size at 58,706 dwt. Of course the amount of tonne-miles per dollar can vary over time, depending on changes in asset market conditions, the underlying cost and complexity of building ships and vessel productivity, speed and utilisation (rates of fleet and trade growth aren’t perfectly aligned most of the time). Across sectors the statistics can vary significantly too.

Buy In Bulk

One dollar of bulkcarrier and oil tanker tonnage accounts for 154 and 101 tonne-miles of trade per year respectively. For more complex, expensive ships the figure is lower: 20 for gas carriers. For boxships, despite their higher speed, the figure stands at 114. Vessel size (economies of scale in building) and cargo density (this analysis is in tonnes) play a role too in these relative statistics (which also don’t always capture the full range of cargo carried by each ship type).

Value For All Time

Nevertheless, whatever the precise numbers and changes over time, 110 tonne miles of trade each year for one dollar of asset expenditure just sounds like mighty good value at a time when a dollar doesn’t go very far. This underpins shipping’s ability to carry an estimated 84% of the world’s trade in tonnes and act as the glue holding the globalised economy together. Shipping’s famous volatility retains the ability to make and lose fortunes for asset players but the underlying economic contribution of each dollar invested may just be one of the greatest bargains of all time. Have a nice day.

SIW1274

As the pace of growth in Chinese seaborne imports has slowed, and prospects for a return to stronger rates of expansion appear to have diminished, focus on the potential for other countries to help provide impetus to global seaborne trade growth has increased. With an economy expanding at a robust pace, and a population close to China’s, India has increasingly featured in the spotlight.

The Big Bang

China’s dramatic growth and increased raw material demand since the turn of the century propelled world seaborne trade to new heights. By 2014, China’s imports of dry bulk goods, crude oil and oil products reached 1,850mt, 1,600mt more than in 2000. China’s industry-led development saw unparalleled growth in steel output, whilst refinery capacity and coal imports surged. But with coal demand and steel output falling, imports stalled in 2015.

A Dimmer Light?

This rapid expansion in China’s imports occurred fairly quickly, and comparison to a ‘base year’ shows that Indian imports are tracking behind China’s progression. In 2000, China’s GDP per capita stood at US$1,000, and the country’s dry bulk and oil imports topped 200mt. India reached both of these milestones in 2007, and since then, Indian imports have risen by 280mt to around 500mt, compared to China’s 950mt of extra imports between 2000 and 2009. Differing political systems and economies have clearly proved key. Industry accounts for a greater share of China’s GDP than India’s, whilst 25% of growth in the value of India’s trade in the last ten years (in both goods and services) was accounted for by the service sector, compared to 12% for China.

Reaching For The Stars

The concern for some shipping sectors is that the pace of growth in India’s import volumes already appears to be slowing, partly as targets for thermal coal self-sufficiency have undermined coal imports since mid-2015. Meanwhile, India is aiming to become a ‘global manufacturing hub’, with ambitious targets to treble steel production capacity to 300mt by 2025. However, the steel industry globally is currently under severe stress, and it is also unclear to what extent output growth may boost iron ore imports given India’s domestic ore reserves.

What Do The Skies Hold?

Nevertheless, India seems to hold plenty of potential in some areas. The outlook for imports of coking coal, crude oil and oil products still appears positive. And at a macro level, in 2015, India’s dry bulk and oil imports represented 0.4 tonnes per capita, below the global average of 1.0 tonnes per capita. Bringing India towards this level could generate significant additional import volumes.

So, the stars don’t seem to be in a hurry to line up Indian imports for growth on this explosive scale for now, with coal imports likely to fall further. But this may not be the end of the story. Growth in India’s refinery capacity, steel production, GDP and population looks set to outpace China’s in the coming years. Whilst Indian imports may not dazzle in some areas as brightly as China’s have, the shipping industry will still be hoping they may provide some sparkle in others.

SIW1217

It has been a grim start to 2016 for the bulkcarrier market, with the Baltic Dry Index sliding to new record lows on almost every day of the year so far. With a nearly constant stream of negative news continuing to emerge across each of the key dry bulk cargo sectors, it is almost as if Poseidon, the Greek god of the sea, has with his powerful trident launched a three-pronged attack.

Down To The Ocean Depths

The current depression is indeed severe. The Baltic Dry Index, a daily indicator of bulkcarrier rates, fell to its 19th consecutive record low of 317 points on 29th January. This is far below the average of 718 points in 2015, which itself was the second lowest annual average on record, and represented a year in which bulker earnings averaged around $7,000/day, little over estimated operating costs.

Surprise Attack

Of course, difficult market conditions are nothing new. Bulker earnings have been under pressure since 2011, when more than 100m dwt of deliveries kept fleet growth in double-digits. Whilst fleet growth eased to 2.4% in 2015, the slowest pace in 16 years, new demand-side pressures emerged, with dry bulk trade remaining flat last year. In Greek mythology, Poseidon’s trident had the power to cause earthquakes on earth, and there has certainly been evidence of a shake up recently. But where have each of the three prongs hit, and how sharply?

Strikes To The Core

The first earthquake is being felt in the iron ore trade, which accounts for around a third of dry bulk trade. Following rapid growth of 15% in 2014, Chinese imports eased in 2015, and expansion in iron ore trade slowed during the year (see graph). Overall, global iron ore trade is estimated to have grown by only 2% in 2015, and continued weak Chinese steel demand and the temporary closure of several major iron ore ports in January has done little to reverse this trend into 2016 so far.
The second shake up has hit trade in coal, which accounts for a quarter of dry bulk trade, very hard. Volumes declined by an estimated 5% in 2015, and the decline in volumes on the top 100 coal trade flows neared 10% y-o-y in Q3 2015, as Chinese and Indian imports fell. With several countries looking to increase reliance on clean energy sources, a major improvement in volumes seems unlikely.

Shifting The Currents

Finally, whilst the third earthquake has perhaps been less obvious than the first two, it has still had a significant impact. Growth in minor bulk trade, a diverse cargo grouping that accounts for more than a third of dry bulk trade volumes, was limited to 1% last year, owing in part to lower Chinese demand for imports of forest products, steel products, nickel ore, and various other smaller cargoes.

Stem The Tide?

So, the seas have been exceedingly stormy in the dry bulk sector. The impact from China’s economic transition is still resonating, and as yet there are few signs of an imminent improvement. As distressed conditions take their toll, hopes will be that the power of Poseidon’s trident will eventually start to ebb.

With tanker owners “on top of the world” and their dry bulk counterparts often feeling like they are “staring into the abyss”, 2015 was a year of contrasting fortunes across bulk shipping. However with global seaborne trade growth slowing to 2% (to reach 10.7bn tonnes) and the world fleet growing at 3% (to reach 1.8bn dwt), for many sectors it has been a case of the fundamentals working against them.

SIW1204

Onwards And Upwards

The good news or the bad? Well let’s start with the good! There is no doubt who stole the show in 2015, with average tanker earnings up 73% y-o-y and VLCCs leading the way, up 120% with earnings spiking over $100,000/day. Low oil prices drove demand (total seaborne oil trade grew 4.8% to 2.9bn tonnes), supporting the best tanker market since 2008. Indeed, with a tanker fleet around 30% bigger than during the last market spike, the approximate earnings flow into the sector topped $42bn, the second highest year on record after 2008 ($46bn).

Sitting Pretty

Although tankers had a sparkling year, VLGCs managed to outdo even their stellar performance of 2014, with average earnings increasing to over $85,000/day! LPG was also the top performing trade, with an estimated 8% increase (with US exports up over 30% to around 16mt). The specialised products market made steady gains, as did the ro-ro, ferry and cruise markets. Elsewhere however, it was difficult to avoid a sinking feeling.

That Sinking Feeling!

Having spent the years since the financial crisis worrying about supply, dry bulk owners seemed to “get the message” with an 87% increase in demolition and an 74% drop in ordering. 93 demolished Capesizes represented an all time record, and bulkcarrier fleet growth of 2.7% was the slowest since 2003. However the reality of the “new economic normal” in China (where coal imports dropped 28% and iron ore imports managed just 1% growth) meant that seaborne dry bulk trade stalled at 4.7bn tonnes. Average earnings fell 28%, but in the final months of the year, earnings sat at OPEX levels and reached well publicised all time lows.

Buyers & Sellers…

Despite the rush to beat NOx Tier III regulations, newbuilding orders across tankers and bulkers totalled 65m dwt, down 32% year-on-year. Overall yard orders totalled 96m dwt ($70bn), down 21%, with busy ordering of large containerships in the first six months of the year. The average lead time for orders however dropped to 22 months and the immediate outlook is quiet. We reported 67m dwt of tanker and bulker sales in 2015, down on 2014, especially for tankers (-34%). Asset prices were relatively steady in tankers but unsurprisingly down 30-40% in dry, with buyers increasingly selective towards good spec tonnage. Greek owners again topped the asset play charts, involved in nearly 50% of all reported tanker and bulker deals either as buyers or sellers. Meanwhile, scrap prices nearly halved, as global steel prices fell.

Poles Apart?

So, it was a year of contrasting fortunes across wet and dry (we estimate the largest earnings differential on record!), but a tough year for most across shipping (look out for our review of the container market next week and our offshore review in Offshore Intelligence Monthly for more depressing numbers!). Perhaps 2016 may be a case of “opposites attract”, with those tanker owners sitting on the top of the world eyeing up a bottoming out dry cycle. Have a nice New Year!

Bulkcarrier investors are generally an optimistic lot, with little time for pessimistic analysts. They know that however gloomy the forecasts, some time they will make a nice profit. After all, the ships last 30 years, especially small bulkers and a lot can happen in that time. But occasionally even they get gloomy and that seems to have happened today.

Bottom Fishing For A Bonus

It’s easy to see why. The Baltic Dry Index has hit all-time lows and Capesizes, which were supposed to be gold-plated investments in a world dominated by China, are looking decidedly tarnished. Nearly new ships have been chartering for well under $10,000/day and it’s been going on for a long time. These moments of deep negative sentiment are often a good time to invest, especially if finance is in short supply. It happened in 1986 when a new Panamax bulker cost $13.5m and a 5 year old ship cost $6m, and again in 1999 when new Panamax prices slumped below $20m and a 5 year old ship was sold for $13.5m. 10 years later these ships became profitable beyond the dreams of even the most optimistic investors, grossing over $100m in earnings and capital gains. Could this be another magic moment?

Gut-Based Gambling

Deep negative sentiment generally occurs when everything goes wrong at the same time. In the 1980s the world economy went into deep recession after the second oil crisis. Surplus bulker capacity was topped up by heavy deliveries, which the closure of shipyards did little to neutralise. Banks were too preoccupied with defaulting clients to consider new loans. In 1997-99 the Asia crisis, which coincided with a surge of deliveries after the brief 1995 bulker boom, left investors wondering if they would ever see light at the end of the tunnel. China was not even on the radar.

Today’s bulker outlook is also gloomy. The global steel industry is under immense pressure, and an increasing focus on clean energy is souring the outlook for coal consumption. Chinese dry bulk imports have dropped, and prospects for Indian coal imports have also worsened. So after a decade when seaborne dry bulk grew at nearly 200mt a year, in 2015 trade is set to decline. Meanwhile the surplus is being topped up by deliveries.

Searching For Silver

But there are a few positives. Cheap oil at $40/bbl is putting money in everyone’s pocket. Bulker ordering has slumped to 13m dwt this year; demolition is up 70%; fleet growth is down to 3%; and China seems keen on its ‘One Belt, One Road’ strategy, which could add to trade.

The Magic Number?

So there you have it. But there is one other interesting factor to consider. Somehow the tanker sector is generating very impressive earnings in a market which, on the basis of fundamental analysis, is also carrying surplus capacity. Slow steaming can help, and maybe that’s good advice. This may not be a magic moment like 1999, but, take it easy, keep your eyes open and maybe there’s a silver lining somewhere out there for the right ship. Have a nice day.

SIW1201

For shipping investors, questions about buying, selling, or maybe cashing out are always present. And the trigger is, of course, the market cycle. But if history is any guide, the market can play tricks on over-enthusiastic investors and sometimes it turns out that the modest upswing on the way to a sustained better market turned out to be the peak of the boom.

A Matter Of Perspective

Take a look at the Clarksea Index in the 1990s (the blue line in the graph). Earnings peaked in 1990, slumped in 1992, and then by 1995 edged up to a reasonable but unexciting $14,000/day. At the time the market thought this was the end of the beginning, but it turned out to be the beginning of the end. In 1997 along came the Asia Crisis which zapped demand. By 1999 the earnings had slumped below $10,000/day, a deep recession. The 1990s turned out to be generally disappointing. Booms were short, patchy and unpredictable, generating insufficient earnings to pay for losses during the longer spells of soggy rates.

Here We Go Again

So it’s a bit worrying that so far in the 2010s the Clarksea Index is tracking the 1990s (the red line). A good year in 2010 turned into a trough with earnings under $10,000/day in 2012. Since then earnings have picked up and over the last 12 months have been around $15,000/day. The lines look similar and statistically they are. Earnings 1990-95 averaged $12,100/day and in 2010-15 they have averaged $12,200/day. Will this uncannily close correlation continue?

What Does It Mean?

First let’s take a closer look at what the second half of the 1990s was like. Basically things did not improve. By 1999 the Clarksea Index was below $10,000/day and average earnings in the five years to start 2000 were less than $12,000/day. In September 1999 market sentiment was at rock bottom. Even diehard optimists were pessimistic. But this was absolutely the best buying opportunity in the last 50 years, especially for new bulkcarriers.

Post-Modernist Question

So maybe “when will the market recover?” is the wrong question for today. If the 1990s is any guide the answer might be “don’t hold your breath”. And the fundamentals could be interpreted to support this view. With a young fleet, shipyard capacity still in apparent surplus, a wobbly world economy with China, the growth driver, searching for its ball in the long grass, and seaborne trade growth down near 2%, this looks uncomfortably like the 2010s version of the 1990s. A chilling thought.

Ignore At Your Peril?

So there you have it. The close correlation of the last five years could just be a coincidence. But it raises questions investors cannot ignore; they must decide whether the correlation with the 1990s will continue. The fundamentals suggest it is one plausible scenario. And the follow on question is “will the industry emerge from the 2010s with the same decisive momentum it left the 1990s?” Now that would be worth the wait. Have a nice day.

SIW1195

Bulkcarrier owners could be forgiven for feeling just a little bit dizzy at the moment. The unprecedented growth in China’s steel industry over the last decade has for years provided an adrenaline-infused experience in dry bulk trade. But with both Chinese steel production and iron ore imports registering a decline in the first half of 2015, is the playtime over?

Down To Earth With A Bump

It’s no surprise that the recent wobbles in China’s economy have been leaving dry bulk’s thrill-seekers with a nasty headache. Construction activity has slowed, and total steel use dropped by 5% y-o-y in the first five months of the year. Steel production has declined by a less severe 1% y-o-y, but this is still an unpleasant change of direction for those accustomed to average output growth of more than 10% per annum over the last ten years.

Round The Roundabout Again

Yet these worries over China’s steel industry are not new. According to China’s annual estimates, steel output growth in 2014 slowed to 1%, from 14% in 2013. However, iron ore imports increased in 2014 by a massive 15% to 914mt. Almost heroic growth in Australian iron ore production flooded the global iron ore market with cheap ore, displacing some higher-cost domestic Chinese ore production. Ambitious production expansion in Australia is still underway, and exports from the country are up 9% so far this year, but total Chinese seaborne imports are down 1%. So what has changed?

Balance Shifts On The See-Saw

This year seems to have proved a tipping point in the iron ore market. Weak Chinese demand is contributing to record low iron ore prices (dipping below $50/tonne in April). In 2014, the rapid drop in prices boosted China’s overall import demand, but no such positive effect is visible this year. Instead, the extent of the price drop has squeezed out a number of small iron ore miners across the world, and Chinese imports from many smaller suppliers have been depressed this year. And while Chinese miners have clearly reduced domestic production, there are questions over how much more capacity (particularly state-owned) will be cut.

Swings In Need Of A Push?

The unsettling thought for the dry bulk market is that the excitement of the Chinese ride could be coming to an end. Despite the price drop, most major ore miners are forging ahead with expansion plans. If China’s steel usage has peaked, miners will be fighting for market share in a shrinking demand arena. And if Chinese ore output proves resilient to price pressures, this could leave those expecting a resumption of firm iron ore trade growth with only a severe case of vertigo.

While global growth in low-cost ore production could still boost imports later this year, there is certainly no longer a consensus that China’s steel industry has considerable long-term growth potential. Faced with this ominous scenario, bulker owners will be hoping that the current weakness in China’s iron ore imports is only a temporary downward swing. Time will tell, but for some the playground which once spurred great excitement might be starting to lose its appeal.

SIWK20150807

In the last four months dry bulk orders have fallen to 0.4m dwt per month, the lowest level since the 1990s. This is a massive 98% reduction from the 23m dwt peak in orders in December 2007, and probably the sharpest decline in recent decades. Not really a surprise in a market where Capesize bulkers are struggling to earn $4,000/day, but a timely relief to investors with ships on the orderbook.

Investment Fever

This investment collapse marks the end of a remarkable phase of bulkcarrier history. During the last decade, 724m dwt of new bulkers have been ordered, around 70m dwt/year. Just to put that in perspective, during the previous decade ordering averaged about 20m dwt/year.

The 5 years from 1996 to 2001 were disappointing to investors, who ordered only 1.2m dwt/month. At the time this was seen as normal, and included a spike in 1999, when investors snapped up Panamax bulkers for $19-$22m. These were probably the most profitable bulkers ordered in the industry’s post-war history. Upon delivery they sailed straight into the bulk shipping boom. Proof that “crazy investors” are not always crazy.

Softly, Softly

The next phase from 2002 to November 2006 was quite restrained, considering the rise in freight rates. Ordering edged up, averaging 2.8m dwt/month. As earnings eased in 2006, many assumed the boom was over, but they were wrong and what happened next was unprecedented. As earnings escalated owners threw caution to the wind, and the big bulker cash machine drew investors from outside shipping. In December 2007, ordering peaked at 23m dwt, and in 2007 to 2014, investment averaged 6.8m dwt/month (81m dwt/year), an astonishing number for a period mostly in global recession.

Carry On Investing

Despite the onset of the global downturn in 2008, two more bulker investment spikes followed in 2010 and 2013. With surplus bulker capacity, and China’s growth engine easing off, it’s hard to explain this investment on strictly economic grounds. Easier, perhaps, to understand the change in expectations. The memory of spectacular bulker earnings had been fresh in the minds of some investors, but a decade later and that dream is fading.

The collapse in bulkcarrier investment is a particular problem for shipyards. Many builders in China and Japan surfed the wave of bulkcarrier investment and bulkers still account for around half of tonnage on order globally. In today’s sluggish world economy, that is going to be a difficult gap to fill. The fact that bulker prices are around 5% down this year, and ordering has virtually stopped tells its own story.

Big Bulker Investment Boom

So there you have it. The spectacular run of dry bulk investment which kicked off in early 2003 has finally ended. Then China’s imports were growing at 27% a year, a big difference from the 3% growth in 2014. This is disappointing, but as serious shipping investors know, in good markets and bad, there’s still an awful lot of cargo that has to be moved around the world – it’s just a matter of who moves it. Have a nice day.

SIW1170

According to Warren Buffett, the best way to become rich is to “close the doors. Be fearful when others are greedy. Be greedy when others are fearful”. Since dry bulk investors seem to be having a fearful fit of nerves at the moment, maybe it’s a good time to start getting greedy. But what exactly does that mean for shipping?

Two Tier Strategies

Actually this pithy advice bundles up two investment strategies. One is not to let your judgement be swayed by sentiment, especially when the market is at an extreme high or low. The other is to be contrarian. This is good advice for shipping, but it leaves investors with the problem of deciding what constitutes “being greedy”.

Bulkers Back To Basics

Recent secondhand price data provides a neat illustration of the issues. The Bulkcarrier Secondhand Price Index, based at 100 in January 2000, has recently dipped and is now almost back to where it was 15 years ago. In the meantime prices have been through a heroic cycle. After staying at around 100 points for the first three years, the price index took off, climbing to 500 points in 2008, before collapsing in 2009. After a brief recovery in 2010 the index is now back around 100. So investors who were not greedy and sold in 2007-08 have a nice warm feeling. But was selling really the right strategy? Let’s dig a bit deeper.

Patience Is Golden

Take a new Panamax bulker delivered in 2000 as an example. The inset table shows how things worked out for “non-sellers”. The ship cost $25.5m, and at 15 years old was worth $9m in March 2015, so the ship depreciated by $16.5m. But in 2000-15, assuming the ship trades 330 days a year, it would have made around $96m trading spot (boosted by strong earnings in 2007-08). Deducting depreciation and rough operating expenses ($32m at around $5-6,500/day) leaves net earnings of around $48m, generated over 15.25 years. That is $3.2m a year. On an original investment of $25.5m that is roughly a return of 12% per annum.

Safe As Ships?

That’s not exactly a top-end equity return, and punters might wonder if all that volatility is only worth 12%? But the net cash flow (revenue less OPEX) shows that in this example, if the ship was funded with equity and well insured, there was fairly low risk. There were a few months when earnings could probably not cover costs, but a modest working capital would cover these (although for some longer periods, net cash flow was tight). And of course it’s a very different story if the ship was funded with debt (another sort of greed?).

The Right Perspective

So there you have it. The shipping market looks unbelievably volatile and exciting. But if you “close the door”, focusing only on the numbers, for “greed” you could read “leverage”. With great patience; decent management; and lots of equity, shipping is a business where you can, if the timing is right, get a fair commercial return and an even better night’s sleep. Or you can get greedy, it’s your choice. Have a nice day.

SIW1166