Archives for posts with tag: global economic

In the ‘Three Card Trick’ or game of ‘Find The Lady’ beloved by hustlers everywhere, the aim is to track the movement of one item amongst three, but blink and you’ll miss it! Shipping’s orderbook appears to have its own version of this pastime, with the three largest shipowning nations, in terms of the volume of tonnage on order, swapping places frequently.

Are You Watching Closely?

Today, Japanese owners account for the largest orderbook across all owner nationalities, with 488 ships (100 GT and above) of 28.2m GT on order. This year, the size of their orderbook has surpassed that of their Chinese counterparts, leaving Japanese owners on top of this particular pile. At the same time the Japanese own the world’s second largest fleet (164.2m GT) behind Greek owners (210.1m GT). This change is the latest in a recent set of switches in the leadership of ownership of the global orderbook.

Switch One

Following the boom in ordering preceding the global economic downturn, the orderbook stood at its highest ever level (416.6m GT) in October 2008. At this point in time it was Greek owners who accounted for the largest orderbook, and by some margin, 56.5m GT, ahead of the German owners in second place with 41.4m GT (today this has dwindled to just 3.3m GT). Since then, things have largely gone one way for the Greek orderbook. Today it stands at 14.7m GT, 74% smaller than back in October 2008, and it is the third largest in the world. The Greek fleet has meanwhile maintained a healthy degree of expansion, with net asset play gains adding firmly to deliveries.

Switch Two

By start 2011 the Chinese owners’ orderbook was the world’s second largest and across the period 2012-15 it vied with the Greek orderbook for pole position before pulling ahead last year. Ordering, often state-backed, and significantly at Chinese yards, propelled the Chinese orderbook to become the world’s largest by October 2015, and today it stands at 24.8m GT (17% of the Chinese fleet), still close to the largest in dwt terms (39.1m dwt).

Switch Three

The final switch came in December 2016 when Japanese owners took the lead in the orderbook stakes. The Japanese orderbook surged in 2015 as Japanese owners contracted 22.0m GT, often bulkers (42%) and largely at domestic yards (87%). The global orderbook is much smaller than it was back in 2009 (at 136.6 m GT), but the Japanese orderbook has held its own through 2016 and into 2017 to take top spot, and today is equivalent to 17% of the Japanese fleet.

Top Hat Trick

So, against the background of a declining orderbook since 2008, the Japanese orderbook has switched from third to first position. But it’s still close and the Chinese orderbook is just 3.4m GT smaller today. Contracting has been extremely limited last year and this year so far, but at some point it will come back in greater volumes and then it will be necessary to watch the movements in the orderbook even more intently. Have a nice day.

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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.

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“Look after the pennies and the pounds look after themselves” goes the saying, a mantra the shipping industry has a long taken to heart. In this week’s Analysis, we review trends in ship operating expenses (OPEX) that have taken the total cost base of the shipping industry through the $100 billion barrier for the very first time.

Watching The Pennies!

Of all global industries, perhaps few have had the extreme cost focus of shipping over the past 30 years. During the 1980s recession, any operating “fat” was largely removed with the growth of open registries and a drive to outsourcing. This helped shipping, alongside its near “perfect” competitive economic model, deliver exceptionally cheap and secure freight, in turn a key facilitator of globalisation.

Nice And Lean…

OPEX response since the financial crisis has been relatively modest. Our average OPEX index (using the ClarkSea “fleet” mix and information from Moore Stephens) shows just a 1% decrease in OPEX since the financial crisis to $6,451/day in 2016. By comparison, the ClarkSea Index dropped 71%, from $32,660/day in 2008 to $9,441/day in 2016 (a record low). In part, this modest, albeit painfully achieved, drop reflects upward pressures from an expanding fleet and items such as crew and ever- increasing regulation. However it also reflects the already lean nature of OPEX.

$100 Billion And Counting…

Our estimate for aggregate global OPEX for the world’s cargo fleet has now breached $100 billion for the first time, up from $98 billion last year and $83 billion in 2008. The largest constituent remains crew wages ($43 billion covering 1.4 million crew across the fleet). By comparison aggregate ship earnings for our cargo fleet fell from an eye watering $291 billion in 2008 to $123 billion in 2016!

Cutting The Fat…

One sector that has seen dramatic cost reduction has been offshore. Estimates vary, but 30% seems a reasonable rule of thumb for reductions in OPEX since 2014. While painful, this has been part of a process of making offshore more competitive against other energy sources (offshore contributes 28% of oil production, 31% of gas, and 16% of all energy) and one of the factors behind the increase in sanctioning of offshore projects.

Getting Smarter…

So shipping is one of the leanest industries around but is always under pressure to do more! It seems clear that squeezing cost in the traditional sense, offshore aside, will be pretty challenging — UK media reported on the docking of the 20,150 teu MOL Triumph, highlighting it was manned by only 20 crew! Getting smarter, collecting and using “big data” and technology and automation are all gaining traction. The industry’s fuel bill (accounted for outside of OPEX) is clearly a big target.

This will all require new technology, skills and perhaps new accounting approaches. Plenty of food for thought but it seems like just going on another severe diet won’t work this time. Have a nice day!

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Many of shipping’s asset markets appear to offer a fairly reasonable level of liquidity most of the time, but just like the “Karma Chameleon” in the 1983 No.1 song, sometimes this can “come and go” due to a variety of factors. Recently, it appears that S&P market liquidity has been coming on strong in the main volume sectors, and once again there appear to be a number of different drivers behind the changes…

You Come And Go…

As in all economic asset markets, liquidity can change its hue according to the market environment, depending on the appetite of potential buyers and sellers to transact at a given level against a backdrop of a range of factors, including the availability of finance. From much lower or dropping levels of liquidity just a year or so ago, it seems that today S&P market liquidity has been on the up, with things looking increasingly active recently. The graph indicates, for the three main volume sectors, the monthly level of liquidity in terms of the volume of reported sales (in vessel numbers) on an annualised basis, as a percentage of the existing fleet at the start of each month. A 6-month moving average (6mma) is then taken to remove some of the month-to-month volatility and illustrate the general trend.

By George! A New High…

The lines on the graph (unlike in the song lyrics they’re not “red, gold and green”…) show how quickly the liquidity has risen in the main sectors. For bulkcarriers the 6mma has jumped from 4.1% in Feb-16 to 7.2% in Apr-17. In the tanker sector, it increased from 3.3% in Apr-16 to 4.6% in Mar-17, and in the containership sector it has leapt from 2.3% in Feb-16 to 5.5% last month. On a combined basis across the three sectors, the 6mma has increased from 3.5% in Feb-16 to 6.0% in Apr-17, and the monthly figure for Feb-17 reached 9.7%. The 6.0% figure represents the highest 6mma level of liquidity since the onset of the financial crisis in late 2008 (the low point being 2.5% and the average across the period 4.3%).

S&P’s Big Hits…

However, on inspection the drivers look a little different. In the bulkcarrier sector, as has been widely reported, with some improvements in freight market conditions buyer appetite appears to be back, and has driven pricing upwards. Reported sales volumes in the first four months of 2017 stood at 277 units, up more than 50% y-o-y. In the tanker sector, liquidity appears to be coming back after a period in which, against easing markets, prices may have been too high for buyers’ tastes. Again, volumes in the first four month are up by more than 50% y-o-y. In the boxship sector, meanwhile, it’s different once again, with distressed sales to the fore after the cumulative impact of markets which have until now been in the doldrums for some time. Mar-17 saw an all-time record monthly level of containership sales (44) and the year to date figure is closing in on the full year 2016 total.

In The Culture Club?

So, S&P liquidity can come and go, and recently it has clearly been on the way up. For those trying to transact to access tonnage, or exit the market, that’s a big help, and it’s good news too for asset players, an enduring part of the shipping market’s culture. Have a nice day!

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The fundamental lying beneath the shipping industry is cargo and its journey, and in many cases the cargoes are the world’s key commodities. In 2014, prices across a range of commodities took a sharp dive, but over the last year or so they’ve started to improve again. So, what do the trends in the prices of the commodities underlying the shipping markets tell us about the shape of things today?

Oiling The Wheels?

Most followers of commodities will be aware of the oil price downturn, with the price of Brent crude falling from an average of $112/bbl in June 2014 to reach a low of $32/bbl in February 2016. However, it has since improved, to an average of $52/bbl in March 2017, with the key driver the implementation of oil output cuts by major producers. Despite this recent price rise, in this case the underlying commodity price trend does not appear to be supportive for shipping, with seaborne crude oil trade growth subsequently slowing, having risen by an average of 3.9% p.a. in 2015-16, and tanker markets easing back. On the other hand, rising oil prices might start to help support an improved offshore project sanctioning environment, though the stimulation of increased shale production in the US poses a risk to its seaborne imports.

Bulk Bounce

On the dry bulk side, the iron ore price fell from $155/t in February 2013 to reach a low of $40/t in December 2015 but has since recovered robustly to an average of $87/t in March 2017. Meanwhile, the coal price fell from $123/t in September 2011 to a low of $50/t in January 2016 but has since improved firmly to an average of $81/t in March 2017. In China government policies and domestic output cuts drove shipments of ore (up 7%) and coal (up 20%) in 2016, helping to support international prices. Demand growth has continued in the same vein in 2017, with ore and coal imports up 13% and 48% y-o-y respectively in the first two months. Average Capesize spot earnings recently hit $20,000/day, and some industry players have appeared cautiously optimistic about the possibility of better markets.

Spending Power?

What does all this mean for the third main volume sector, container shipping? Well, in this case, the previous downward pressure on commodity prices had been felt in the form of pressure on imports into commodity exporting developing economies faced with reduced income and spending power. This had a clear negative impact on volumes into Latin America, Africa and eventually even the Middle East; overall north-south volume growth fell below 1% in 2016. Although it’s early days yet, the recovery in commodity prices should suggest a gradual improvement even if the benefits lag commodity pricing, and the positive impact might not be evenly paced across the regions.

From The Bottom Up

So, it appears that commodity prices have now departed the bottom of the cycle. Alongside the impression of a generally firmer background, inspection of the underlying drivers suggests a mixture of messages for shipping, less beneficial in some instances, but in many ways more positive for volumes. As ever, it’s interesting to take a look at what lies beneath…

SIW1267:Graph of the Week

Natural gas is set to account for an increasing share of the global energy mix in coming years, with gas consumption growing by an average of around 1.5%-2% a year out to 2040, according to energy forecasting agencies such as the IEA. And based on recent trends, if the consensus views on natural gas prove accurate, the implications for the offshore and LNG carrier fleets are likely to be significant.

Stepping On The Pedal

In 2016, global natural gas demand stood at an estimated 347bn cfd, up by 24% on the 280bn cfd consumed in 2006. Demand for natural gas in recent years has been driven by industrialisation in developing economies (Chinese gas demand, for example, grew at a CAGR of 13% in 2006-16) and environmental concerns the world over. Historically, the majority of trade in natural gas has been by pipeline, for instance from Eurasia to Europe. In 2015, pipelines still accounted for 68% of natural gas volumes moved globally.

However, liquefied natural gas (LNG) has become an increasingly important form in which gas is traded, even given the costs of complex liquefaction and regasification facilities. Over 50% of existing nameplate liquefaction capacity at LNG export terminals (349mtpa globally) has come online since 2005. As a corollary, from start 2006 to start March 2017, the LNG carrier fleet increased from 193 to 479 vessels and tripled in total capacity to 70.2m cubic metres of LNG.

Shifting It Up A Gear

Growth in the seaborne LNG trade is in turn closely linked with growth in offshore gas production, as major LNG exporters such as Qatar and more recently Australia use offshore gas fields to provide feedstock to LNG trains. Qatar accounted for 30% of LNG exports and 22% of existing liquefaction capacity in 2016, all fed via offshore gas, mostly from the giant North Field. In 2006, offshore fields accounted for 28% of global gas production and by 2016, 31%. This is set to rise to 32% (119bn cfd) in 2017, mainly due to field start-ups off Australia that are to feed LNG projects like Wheatstone. Finding, developing and supporting offshore gas fields on Australia’s NW Shelf has created demand for a range of vessels from the offshore fleet of over 13,500 units.

More Gas In The Tank

The exploitation of these remote reserves has also spawned the FLNG concept – vessels that can be used to exploit otherwise stranded gas. The LNG markets are clearly challenged at present but in the long term, planned FLNG projects in Australia, Mozambique, Tanzania, Mauritania and other areas could potentially sustain offshore gas production growth. Another major source of gas production growth has been the US shale gas sector, where production rose from 4bn cfd in 2007 to 48bn cfd in 2016. The US accounts for over 50% of liquefaction capacity under construction (while some planned projects entail liquefaction of shale gas on near-shore FLNGs) and is set to become a major LNG exporter in coming years.

So offshore gas production has grown as a share of total global gas production, as has US shale gas. Both trends can create opportunities for LNG and offshore vessels. And if, in line with consensus expectations, gas continues to grow as a share of the energy mix, then these trends may have a long and interesting road ahead.

SIW1265:Global Natural Gas Production And LNG Export Capacity

After a long cycle of build-up in capacity in the 2000s, shipyards hit a new peak in global output in 2010. Since then, the impact of reduced vessel ordering on shipbuilders worldwide has been a key issue for the industry, and it’s clear that global output has dropped significantly and shipyard capacity has diminished. But how far can those shipyards still active look ahead today?

Looking Forward

‘Forward cover’ is one basic indicator of the volume of work that shipyards have on order, calculated by dividing the total orderbook by the last year’s output (in CGT). Unsurprisingly, after a period of extremely low ordering in 2016, forward cover has shortened. Currently, global forward cover stands at 2.3 years having declined throughout 2016, as the orderbook shrank by 25% in CGT terms. Global forward cover was as low as 2.1 years at the start of 2013 (but delivery volumes in 2012 were 37% higher than in 2016) and peaked at 5.6 years in 2008.

Looking around the shipbuilding world, yards in Korea currently have the lowest level of cover at 1.5 years. European yards, meanwhile, bucked the trend in 2016, increasing their forward cover on the back of cruise ship orders (and falling production volumes) to 4.2 years.

Less To Go Round

Fewer fresh orders have also led to a greater number of yards ending the year without receiving a single contract. During 2005-08, the number of yards to take at least one order was on average equivalent to 87% of the number of yards active (with at least one unit on order) at the start of the year. In 2009-15, with ordering generally lower, the figure averaged 49%. In 2016 this fell further to 28%, with just 133 yards receiving an order. In China, 48 yards (26 of which were state-backed) won an order in 2016 compared to 284 yards in 2007. In Japan, 22 yards took an order in 2016 compared to 60 as recently as 2015. In Korea, 11 shipyards took an order last year.

Out Of Work?

Whilst many yards have tried to cope with the lower demand environment by slowing production or working outside their traditional product range, the statistics clearly point to huge challenges. In 2016, 117 yards delivered the final unit on their orderbook. The peak production level of these yards, many of them smaller builders, totals around 4m CGT. However, 163 yards are scheduled to deliver their current orderbook by the end of 2017 (although in reality slippage may mean some of the work runs on past the end of the year). Statistically, this represents 43% of the number of yards active at the start of the year. Although these yards have been reining back capacity and outputting less in recent years, the peak production level of this set of yards totals as much as 12m CGT. Offshore builders of course face huge pressures too, with about half of those active scheduled to deliver their final unit on order this year.

Global shipyard output and capacity have fallen significantly since the peak years. However, many remaining yards still don’t need to look too far ahead to see the end of their current workload. The shipbuilding industry will be hoping to see a return to a more active newbuilding market sooner rather than later.

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