Archives for posts with tag: earning index

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

Advertisements

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!