Archives for posts with tag: global economic

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.

SIW1242 Graph of the Week

Back in the past the gas shipping sectors may have been considered relatively niche within the world of global shipping. However, in the last two decades they have been amongst the faster growing parts of the industry. This week’s Analysis takes a look at how shipping’s ‘coolest’ sector has grown in prominence to become part of the mainstream, and some of the ups and downs along the way.

Keeping Cool

Gas (LNG and LPG) shipping may once have been considered by some as a relatively niche part of global shipping, with the fleet and trade volumes dwarfed by other sectors. Even today, LNG and LPG carriers account for just 5% of total world fleet GT, and LNG and LPG trade accounted for just 3% of global seaborne volumes in 2015. However, following phases of rapid fleet growth, the combined gas carrier fleet now stands poised to top 100 million cbm of gas carrying capacity next year, more than double the size of the fleet at the end of 2007.

Gas Expands

Following expansion in LNG trade in the late 1990s, in the mid-2000s a glut of new export terminal sanctioning led to a surge in LNG carrier contracting, peaking at 10.9m cbm in 2004. This supported average fleet growth of 15% p.a. in the period 2000-08, to 40.3m cbm at the end of 2008. In comparison the LPG carrier fleet grew more steadily, though trade growth was supported by increased export volumes from the Middle East and Europe. Between 2000 and 2008, LPG carrier capacity increased from 13m cbm to 18m cbm, at an average rate of growth of 4% p.a. Across this period combined gas carrier capacity grew by an average of 10% p.a. to total 58.2m cbm by the end of 2008. However, after the economic downturn, sanctioning of liquefaction projects slowed, which limited LNG fleet growth, and growth in the LPG sector slowed too. Between 2008 and 2014, combined gas carrier fleet capacity grew by a much less rapid 6% p.a. on average, with even slower growth in 2011-12.

Powering On

Nevertheless, since the start of 2015 it has been full steam ahead for the gas carrier fleet. With LNG carrier ordering backed by the return to liquefaction terminal sanctioning in the 2010s and the vision of a cleaner energy future, and LPG carrier demand supported by the advent of fracking in the US and refinery capacity expansion elsewhere, 26.1m cbm of combined gas carrier capacity was ordered in 2013-15. This has supported rapid fleet growth in recent years and since the end of 2014, LPG carrier fleet capacity has grown by 32% and LNG carrier fleet capacity by 12%.

Mainstream Profile

So, the gas sector’s profile is fully in the mainstream today, and despite it’s relatively limited share of the world’s tonnage and global seaborne trade, in other ways it accounts for rather more weight. Gas carriers are complex, high value units; they account for 15% of the shipyard orderbook in CGT (shipyard work) terms today, and for an estimated value of $78bn, 9% of the world fleet total. And with a 20-year compound annual growth rate of 8% in combined capacity, and the 100 million cbm mark just around the corner, surely that’s one of modern shipping’s success stories? Have a nice day.

SIW1241 Graph of the Week

Two high-level indicators of vessel and structure demand in the offshore sector are energy prices and oil company E&P spending. A third, slightly more specific indicator is estimated offshore project capital expenditure, or CAPEX. While this metric does not capture demand arising from, for example, offshore exploration campaigns, it can be a key proxy for demand resulting from offshore EPC activity.

CAPEX Defined

Since the start of 2010, around $980bn of CAPEX has been committed to some 669 offshore projects globally. But just what makes up offshore project CAPEX? As defined herein, it consists of estimated capital invested in the development, redevelopment or decommissioning of offshore fields; it excludes spending on licensing rounds, seismic surveys and exploration wells, as well as operational expenditure arising from manning and IMR at active fields. CAPEX is committed via EPC contracts, usually issued soon after a project final investment decision (FID), for items such as MOPUs, fixed platforms, pipelines and subsea trees, as well as support, installation and development drilling services. CAPEX also translates into field developments that create durable demand for OSVs. CAPEX data collected by Clarksons Research is as specified by project operators; where no definitive figure is given, estimates are derived from assessment of comparable projects with known CAPEX.

Measuring CAPEX

One advantage of CAPEX as a metric is that, unlike a count of project FIDs, it reflects the differing ‘weight’ of projects. Indeed, project CAPEX can vary by several orders of magnitude. The B-173A Expansion project off India, for example, entailed the installation of a second shallow water fixed platform on the B-173A gas field. The project, which started up in 2015, had a reported price tag of $67m. In contrast, the ongoing 230,000 bpd Kaombo Ph.1 development off Angola has a reported CAPEX of $16bn. This wide variation in costs helps to explain recent CAPEX trends. During the 2011 to 2013 boom years, estimated CAPEX averaged $204bn p.a. globally, supported by high energy prices and rising E&P budgets. As oil prices tumbled in 2014, CAPEX fell by 54% y-o-y. CAPEX in 2015 was steady on 2014, even though FIDs fell by 41%, as a few giant projects with low breakevens, such as Johan Sverdrup (Norway, $12bn) and WND Ph.1 (Egypt, $12bn), received FIDs. However, other FIDs have continued to slip in the downturn. CAPEX so far in 2016 stands at around $40bn, down 34% y-o-y on an annualised basis.

CAPEX As An Indicator

As offshore CAPEX has fallen, EPC tendering has suffered, and hence, for example, MOPU newbuild contracting has dropped from an average of 18 units p.a. in 2010 to 2013, to just eight units in 2015 and two in 2016 to date. Similarly, 16 pipelayers were contracted in the same period, but only one unit has been ordered since 2013, reflecting depressed utilisation and earnings. Until CAPEX begins to increase once more, these sectors are likely to remain challenged.

In terms of spotting a recovery, then, it is worth keeping an eye on oil companies’ offshore project CAPEX plans. For not only is CAPEX one of a range of factors affecting offshore markets; it is a useful indicator with particular relevance to EPC-led vessel activity and investment too.

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During the summer, the cruise ship fleet surged past half a million berths of total capacity. The cruise industry is continuing to expand its horizons, and has seen strong newbuilding investment this year. Whilst many of the new ‘mega-ships’ will likely be heading to sunny climes, there have been developments at the small end of the sector too, for ships venturing forth to remote and often chilly destinations.

Look North…

Arctic navigation was once the preserve of intrepid explorers. In 1848, British explorer Sir John Franklin set out on an ultimately doomed attempt to navigate the Northwest Passage. His abandoned ship, HMS Terror, was finally discovered this month in near-pristine condition in 80 feet of water off Canada’s King William Island. Today, Arctic navigation is potentially less hazardous, and while many modern cruise passengers are not always seen as the most adventurous of folk, rising demand for ‘expedition’ ships has been an interesting feature of cruise ship ordering this year. Nine such orders have been placed in 2016 to date, including some for voyages to the Poles, with other contracts for small vessels catering for the high-end, luxury market. Overall, vessels with less than 1,000 berths have accounted for half of the 26 cruise ship orders placed so far this year.

Look Big…

However, it has been the rapid expansion in the ‘mega-ship’ sizes that has recently pushed the cruise fleet over its new milestone, and underpinned the expansion in the cruise ship orderbook to a record 60 units of 142,922 berths at the start of September. Around 70% of berth capacity ordered this year has been accounted for by ships of 4,000 berths and above, with many of the major brands confirming contracts. Having expanded robustly by a CAGR of 4.3% p.a. in 2006-15, growth in the cruise fleet is now likely to accelerate in the next few years, as more ‘mega-ships’ are delivered. Cruise operators retain a positive market outlook, with increased passenger volumes in Asia expected to be a key driver of global cruise passenger growth. Some experts expect Chinese cruise passenger numbers to reach 3-4 million by 2020.

Look Helpful…

Overall, 2016 is a record year for investment in the cruise ship sector, with estimated investment in the year to date at $8.9 billion, already up nearly 50% on the previous high reached last year. A large number of orders are also in the pipeline and are likely to be confirmed in the coming years, which could add at least another 65,000 berths to the orderbook (nearly half of the current size of the orderbook). Given the extremely subdued level of ordering in other vessel sectors, the cruise sector has accounted for almost 50% of the total estimated value of newbuilding investment in the year to date, and provided support to the European yards who dominate in this sector.

So, despite weak conditions prevailing in many of the major volume markets, at least the sun is still shining on one part of the shipping industry. Whether you’re looking for a trip to some warmer latitudes or a voyage to a more bracing environment, the next phase for the cruise sector might not be plain sailing but it should be an adventure. Have a nice day!

SIW1240 Graph of the Week

Marvel’s Iron Man, as depicted in the 2008 film, features industrialist and genius inventor Tony Stark creating a powered suit, later perfecting its design and fighting evil. While it was a gold titanium alloy rather than iron which was used to make the futuristic armour, iron-based materials such as steel are used incredibly widely in the world’s industries today, with clear implications for shipping too.

Steel At The Heart

The strength of Iron Man’s suit was what helped turn Tony Stark into a superhero. The versatility and strength of steel has made it today’s most important construction material, with 1.6 billion tonnes of steel produced last year. Over recent decades, steel became one of shipping’s superheroes, with the unprecedented growth in Chinese steel production leading to a doubling of global steel output between 2000 and 2014, and helping to underpin the biggest shipping market boom in history. Growth in China’s raw material demand was explosive, and by 2014, global seaborne iron ore and coking coal trade totalled 1.6 billion tonnes, one seventh of total seaborne trade.

A Dangerous Weapon

But even superheroes have weaknesses, and reaching new heights was problematic for Iron Man, when the build-up of ice on his suit at high altitudes brought him back down to earth with a bump. A distinct chill in the air has recently surrounded the steel industry too. Slower economic growth in China, which uses half of the world’s steel, led Chinese steel consumption to drop 5% in 2015, undermining steel prices. Difficult economic conditions elsewhere also limited steel use, with consumption in Latin America and the Middle East declining 7% and 1% respectively last year, and overall, global steel output fell 3%. Weaker demand for steelmaking materials was a key driver of the fall in seaborne dry bulk trade in 2015, despite a 20% surge in Chinese steel exports. The steel market remains challenging with world consumption expected to fall again in 2016, and dry bulk trade still lacks the power to boost the bulker markets back into higher altitudes.

In Need Of A Shield

Of course, steel also impacts the supply side of the shipping industry. In Iron Man’s final showdown with the ‘Iron Monger’, in the end it all comes down to a good design and precise timing, concepts close to any shipowner’s heart. As the very fabric of the ships themselves, steel is a key cost for shipbuilders, but volatile prices have just as big an impact at the older end of the market. With continued exports of surplus steel from China maintaining pressure on steel prices, there is limited light at the end of the tunnel for owners scrapping ships in difficult market conditions for values around 50% lower than just two years ago.

Iron World

So there you have it. An Iron Man with a will of iron can save the world, whilst steel can bring the world’s shipowners fortune and challenges in equal measure. Steel may no longer be the superhero of seaborne trade growth, but it is still the glue that quite literally holds the shipping industry together and keeps 11 billion tonnes a year of cargo afloat. Now that’s a superhuman effort. Have a nice day!

SIW1239 Graph of the Week

Checking The Basket

Annual projections of seaborne trade can be useful demand side indicators. However, often it is difficult to get a real understanding of short-term trade trends. A year ago (SIW 1189) we looked at a ‘basket’ approach, which took monthly seaborne trade flows for a range of commodities, to help show year to date global seaborne trade trends. Although monthly data can be difficult to use, is not comprehensively available, and is generally subject to a lag of several months, the same monthly ‘basket’ approach examined a year ago remains a helpful indicator of short-term seaborne trade trends.

Promising Contents?

The graph shows the ‘Trade Index’ (see description for details) up to June 2016. Clearly monthly data can be very volatile; in January the index stood at -1%, but four months later it reached 7%. Furthermore, the index has picked up compared to 2015 average levels, averaging 2.1% in Q1 2016 and 4.3% in Q2. Some of this trend is accounted for by a rise in dry bulk trade which fell last year, with China’s dry bulk imports growing 6% y-o-y in 1H 2016, following a 2% drop in 2015 (although risks remain over the sustainability of this improvement). An increase in box trade growth has also been apparent, with expansion in Asia-Europe trade back in positive territory and growth in intra-Asian trade picking up.

Elsewhere, seaborne crude and products trade, which were two of the fastest growing elements of total seaborne trade in 2015, expanded firmly in 1H 2016. This was underpinned by robust growth in crude imports into China (16%), India and the US, despite the disruptions to Nigerian crude exports in recent months.

Half Full Or Half Empty?

Taking a wider view, even since the financial crisis there have been clear peaks in the index. The peak in early 2011 was partly on the back of strong growth in Chinese dry bulk, oil and gas imports and box exports from Asia. The index picked up again in 2012, supported by several months of strong growth in iron ore and coal trade to Asia. The next peak was in late 2013, when once again coal imports into Asia grew robustly and expansion in intra-Asian and Asia-Europe box trade was very strong. Today, you might conclude, if you’re a ‘basket half full’ type, that we’re heading steadily upwards again. But, if you’re a ‘basket half empty’ person, you might note that the peaks each time have been short-lived and have been getting lower.

Is There Something In It?

So, our index appears to be on the up,  although still at a relatively moderate level in historical terms, and with a volatile track record behind. There’s something in the ‘basket’ for both the optimist and the pessimist! Have a nice day.

 

 

The Indonesian government has been trying to reinvigorate investment in the country’s upstream oil and gas industry in the last few years. However, tough market conditions persist and political uncertainty remains a challenge. With oil companies seemingly losing interest in acreage offshore Indonesia, could offshore drilling demand in the country be running out of steam?

Ageing Problems

Indonesia is an OPEC member state and accounted for 16% (0.25m bpd) and 23% (3.67bn cfd) of offshore oil and gas production in SE Asia in 2015. However, oil and gas production off Indonesia declined by 4.7% from 2010 to 2015. In part this decline is because there have been few major discoveries to offset dwindling reserves at the country’s mature fields. Recently, operators have also been less willing to conduct additional development drilling on these depleting fields. As the Graph of the Month illustrates, offshore development drilling fell by 27% y-o-y between 2014 and 2015 and exploration drilling has also been subdued, with just two wells drilled in 2015, compared to 24 in 2014. Moreover, exploration has yielded only seven offshore discoveries since 2014, indicating that future development drilling demand could suffer as well.

Losing Interest

Problematic energy market fundamentals aside, political uncertainty has exacerbated the situation. The implementation of controversial Regulation 79/2010 in 2010 ended previous “assume and discharge” rules, meaning that new Production Sharing Contracts (PSCs) could be subject to varying and arbitrary levels of tax previously “dischargeable”. Operators recoiled strongly, denting interest in PSCs, as demonstrated by lacklustre participation in the 2013 Licensing Round. Corrective actions have since been taken, but it created crippling uncertainty in Indonesia’s upstream sector. Looking ahead, low oil prices and a 30% downwards revision to the level of tax oil companies can offset with costs, operators could become even less willing to commit to offshore acreage. Only 6 out of 11 offshore PSCs were awarded in the 2014 tender round. Moreover, Total and Chevron intend to relinquish the Mahakam and East Kalimantan blocks, which will expire in 2017 and 2018 respectively. Of 115 offshore PSCs held as of end 2015, 39 are undergoing termination, and operators might opt to reduce or end drilling activity if they intend not to renew these PSCs.

Under Pressure

It appears operators are losing interest in acreage off Indonesia, which could translate into weaker drilling demand, though the government has been exploring ways to stimulate investment and may eventually broker deals to keep operators committed to major offshore PSCs and capital outlay. Additionally, the country’s NOC, Pertamina, reportedly could assume operatorship of over 50% of upstream acreage. These factors might improve drilling demand in the longer term.

At present however, Indonesia’s offshore sector is clearly challenged: against the backdrop of globally reduced offshore E&P, the country has its own regulatory uncertainties. These factors have led to reduced interest in offshore acreage and subdued drilling activity. Unless the government can intervene to revive operator confidence, the near future also does not look encouraging for drilling demand.

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