Archives for posts with tag: industry earnings

At this time of year, icy conditions are not uncommon, but the warmth of the festive season is usually enough to melt even the coldest of hearts. Going into this year, shipping market activity might have still felt pretty iced up for many, but increased activity in a number of core areas in 2017 has seen the shipping market temperature rise a little…

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

 

Advertisements

In many instances the shipping industry is all about growth, with trade volumes expanding along with the world economy and fleet capacity growing too. However, that’s not exclusively the case. Today, trade volumes in some commodities are stalling, and there are some parts of the fleet that are on the wane. What might a look at some of those shrinking sectors tell us?

Frozen Out?

There are a number of reasons that can drive fleets into decline. The first is technological substitution by another sector. The reefer fleet is a good example. Total reefer fleet capacity has been in decline since the mid-1990s as containerized transportation has encroached onto the territory once held by conventional reefers. In 2012 reefer capacity in cubic feet declined by 12%, and last year by 0.6%.

Upsized?

Upsizing is another driver that can cause capacity in certain sectors to decline. As larger vessels offer greater real (or perceived) economies of scale, smaller vessel sectors can get left behind. This has been most noticeable in the containership sector. The sub-1,000 TEU boxship sector, once home to the classic ‘feeders’, has been in decline in TEU capacity terms since 2009, with growth in the boxship sector as a whole focussed on much larger vessels.

All Change?

Another driver of decline in a fleet segment can be a specific development in infrastructure. The Panamax containership fleet is an example of this. Although there are 838 Panamaxes still on the water, Panamax fleet capacity, which once accounted for more than 30% of the containership fleet, has been in decline since 2013, and there are no units on order. The planned expansion of the Panama Canal has made the Panamaxes yesterday’s vessels, and when the new locks eventually open (currently slated for later this year) the prospects for decline look even more certain. 11 Panamaxes have been sold for recycling already in 2016.

Cycling Through?

Market cycles can also explain shrinking fleets, although in this case the trends may not necessarily be lasting. In the Ro-Ro sector, with markets softer, total lane metre capacity was in decline for most of 2010-14. When markets are weak there is often limited vessel replacement with earnings insufficient to tempt owners at prevailing newbuild prices. Eventually the cycle turns, and earnings improve, incentivising owners to order new tonnage leading to fleet growth once again.

What Goes Down, Must Go Up?

Happily, however, each of these drivers also explain fleet expansion, generally with other sectors benefiting from the same trends in technology, upsizing or infrastructure. World fleet growth has slowed but remains positive, although even here it’s worth noting the patterns; growth has been more focussed on tonnage than ship numbers. Nevertheless, the global fleet is a broad church, and not everything is growing all of the time. The interesting news, however, is that if there’s growth overall, and one part is in decline, then another part must be growing even more quickly! Have a nice day.

SIW

In the hit Disney movie ‘Frozen’, Olaf is a snowman who lives in a world of cold but dreams of experiencing the heat of the summer. The shipping markets have been, in the main, fairly icy in the years since the economic downturn, but during that time shipping market investors have intermittently dreamt of sunnier times and turned up the heat, so how ‘frozen’ up has the shipping market really been?

Taking The Temperature

Like the eternal winter in the film, the shipping markets have been fairly iced up in recent years. The ClarkSea Index has traditionally been a good way of taking the temperature of industry earnings, measuring the performance of the key market sectors. Since Q4 2008 it has averaged $11,933/day, compared to $23,663/day in the period from the start of 2000 to the end of Q3 2008. However, earnings aren’t the only ‘hot thing’ in shipping. Investment in ships can blow hot and cold, and funds invested in newbuild and secondhand tonnage give an idea of the ‘heat’ generated by investors. To take this into account, the analysis here has created the ‘Shipping Heat Index’, which reflects not only vessel earnings but also the level of investment activity.

Generating Some Heat

The graph shows quarterly ‘Earnings’ and ‘Heat’ indices together, and illustrates a number of points. Firstly it shows that in the post-recession period (relative to the average before the downturn) the ‘Shipping Heat Index’ has stood at a higher level (an average 63% of pre-recession ‘heat’) than the ‘Earnings Index’ (an average of 50% of pre-recession levels). Whatever the state of the markets, shipping investors have dreamt of greater warmth and invested in capacity, often attracted by counter-cyclical opportunities at historically low prices, or the perceived benefits of new ‘eco’ tonnage.

Twin Peaks

Secondly, it is clear that the ‘Shipping Heat Index’ has had two discernable peak periods in the post-recession era. In 2010 and early 2011 it stood well above the ‘Earnings Index’, peaking at 95 in Q1 2010 compared to the latter’s 67. It did the same in 2013 and 1H 2014, peaking at 89 in Q4 2013 (compared to 56). In these periods investment in capacity surged, with investors generating heat even if earnings looked a bit more frosty.

Freezing Up

Thirdly, in Q4 2014 the relative position of the two indices has switched for the first time since Q4 2008. The Q4 value of the ‘Shipping Heat Index’ stood at 53 with the ‘Earnings Index’ at 59. The ClarkSea Index topped $16,000/day in November, with tanker earnings surging and gas carriers still performing strongly. Meanwhile, the investment scene has frozen up a little, with newbuild ordering now a lot slower than in 2013 and early 2014.

Don’t Melt!

So, even when shipping markets appear ‘frozen’, investors can still generate ‘heat’, and even in icy conditions snowmen dream of summer. With earnings rising, dreamers might be tempted again next year. The only danger is that too much heat can lead to a spot of melting if you’re not careful! Merry Christmas.

SIW 1152