Archives for posts with tag: newbuilding

Following the lowest year of contracting volumes for over thirty years in 2016, newbuilding market observers could have been forgiven for not looking too hard every month for signs of improvements on last year’s figures. In the early part of 2017 they would probably have been justified, but with more positive sentiment building, recent months have seen an increasing degree of upside on last year.

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

 

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2017 is shaping up to be a record year for secondhand sales volumes. Meanwhile, newbuilding activity remains at historically low levels. As a result, the ratio of secondhand to newbuild activity has surged, and while this is an indication of the current market environment, it might also be interpreted as an indicator of the ‘market mechanism’ starting to re-balance industry fundamentals.

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

In 2016 the shipping industry saw significant supply side adjustments in reaction to continued market pressures. For shipbuilders this meant a historically low level of newbuild demand with fewer than 500 orders reported in 2016, and the volume of tonnage on order declined sharply. Meanwhile, higher levels of delivery slippage and strong demolition saw fleet growth fall to its lowest level in over a decade.SIW1256

Pressure Building Up

2016 was an extremely challenging year for the shipbuilding industry. Contracting activity fell to its lowest level in over 20 years with just 480 orders reported, down 71% year-on-year. Domestic ordering proved important for many builder nations and 68% of orders in dwt terms reported at the top three shipbuilding nations were placed by domestic owners last year. Despite a 6% decline in newbuild price levels over 2016, few owners were tempted to order new ships, especially with the secondhand market offering ‘attractive’ opportunities. Only 48 bulkers and 46 offshore units were reported contracted globally last year, both record lows, and tanker and boxship ordering was limited. As a result, just 126 yards were reported to have won an order (1,000+ GT) in 2016, over 100 yards fewer than in 2015.

A Spot Of Relief

However, a record level of cruise ship and ferry ordering provided some positivity in 2016. Combined, these ship sectors accounted for 52% of last year’s $33.5bn estimated contract investment. European shipyards were clear beneficiaries, taking 3.4m CGT of orders in 2016, the second largest volume of orders behind Chinese shipbuilders’ 4.0m CGT. Year-on-year, contracting at European yards increased 31% in 2016 in terms of CGT while yards in China, Korea and Japan saw contract volumes fall by up to 90% year-on-year.

Further Down The Chain

In light of such weak ordering activity, the global orderbook declined by 29% over the course of 2016, reaching a 12 year low of 223.3m dwt at the start of January 2017. This is equivalent to 12% of the current world fleet. The number of yards reported to have a vessel of 1,000 GT or above on order has fallen from 931 yards back at the start of 2009 to a current total of 372 shipbuilders.

Final Link In The Chain

Adjustments to the supply side in response to challenging market conditions in 2016 have also been reflected in a slower pace of fleet growth. The world fleet currently totals 1,861.9m dwt, over 50% larger than at the start of 2009, but its growth rate slowed to 3.1% year-on-year in 2016. This compares to a CAGR of 5.9% between 2007 and 2016 and is the lowest pace of fleet expansion in over a decade. A significant uptick in the ‘non-delivery’ of the scheduled start year orderbook in 2016, rising to 41% in dwt terms, saw shipyard deliveries remain steady year-on-year at a reported 100.0m dwt. Further, strong demolition activity helped curb fleet growth in 2016 with 44.2m dwt reported sold for recycling, an increase of 14% year-on-year.

End Of The Chain?

So it seems that the ‘market mechanism’ has finally been kicking into action. A more modest pace of supply growth might be welcome news to the shipping industry but further down the chain shipbuilders are suffering. Contracting levels plummeted in 2016 and the orderbook is now significantly smaller. Even with the ongoing reductions in yard capacity, shipbuilders worldwide remain under severe pressure and will certainly be hoping for a more helpful reaction in 2017.

The shipping markets have in the main been pretty icy since the onset of the global economic downturn back in 2008, but 2016 has seen a particular blast of cold air rattle through the shipping industry, with few sectors escaping the frosty grasp of the downturn. Asset investment equally appears to have been frozen close to stasis. So, can we measure how cold things have really been?

Lack Of Heat

Generally, our ClarkSea Index provides a helpful way to take the temperature of industry earnings, measuring the performance of the key ‘volume’ market sectors (tankers, bulkers, boxships and gas carriers). Since the start of Q4 2008 it has averaged $11,948/day, compared to $23,666/day between the start of 2000 and the end of Q3 2008. However, earnings aren’t the only thing that can provide ‘heat’ in shipping. Investor appetite for vessel acquisition has often added ‘heat’ to the market in the form of investment in newbuild or secondhand tonnage, even when, as in 2013, earnings remained challenged. To examine this, we once again revisit the quarterly ‘Shipping Heat Index’, which reflects not only vessel earnings but also investment activity, to see how iced up 2016 has really been.

Fresh Heat?

This year, we’ve tweaked the index a little, to include historical newbuild and secondhand asset investment in terms of value, rather than just the pure number of units. This helps us better put the level of ‘Shipping Heat’ in context. In these terms, shipping appears to be as cold (if not more so) as back in early 2009. This year the ‘Heat Index’ has averaged 36, standing at 34 in Q4 2016, which compares to a four-quarter average of 43 between Q4 2008 and Q3 2009.

Feeling The Chill

Partly, of course, this reflects the earnings environment. The ClarkSea Index has averaged $9,329/day in the year to date and is on track for the lowest annual average in 30 years. In August 2016, the index hit $7,073/day, with the major shipping markets all under severe pressure.

All Iced Up

The investment side has seen the temperature drop even further. Newbuilding contracts have numbered just 419 in the first eleven months of 2016, heading for the lowest annual total in over 30 years, and newbuild investment value has totalled just $30.9bn. Weak volume sector markets, as well as a frozen stiff offshore sector, have by far outweighed positivity in some of the niche sectors (50% of the value of newbuild investment this year has been in cruise ships). S&P volumes have been fairly steady, but the reported aggregate value is down at $11.2bn. All this has led to the ‘Shipping Heat Index’ dropping down below its 2009 low-point.

Baby It’s Cold Outside

So, in today’s challenging markets the heat is once again absent from shipping. And, in fact, on taking the temperature, things are just as icy as they were back in 2008-09 when the cold winds of recession blew in. This year has shown that after years out in the cold, it’s pretty hard for things not to get frozen up. Let’s hope for some warmer conditions in 2017.

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As the many Greek players in the shipping industry know well, the legend of Icarus tells us the dangers of flying too high. Merchant vessel earnings eventually found their 2008 heights just as unsustainable, even as some talked of a “new paradigm”. Most will be familiar with the lengthy downturn that has followed. But spare a thought for the offshore markets, now going through their own Icarus moment.

Flying On The Dragon’s Back

As with the expectations of some in the shipping industry that Chinese demand for raw materials would grow indefinitely, the consensus over the 2010-13 period was that oil prices were set to remain above $100/bbl. Oil demand growth seemed firm and supply growth scarce as decline in output from ageing onshore fields undermined growth from new deepwater offshore regions. The offshore sector attracted interest from shipyards in both Korea and China, and amongst traditional shipowners (including some Greek players).

The precipitous fall from grace of the main shipping markets in late 2008 seemed to presage a tough and lengthy downturn. As the graph shows, the ClarkSea Index (an indicator of merchant sector vessel earnings) fell by more than 80% in a matter of weeks, and offshore support vessel (OSV) and rig dayrate indices fell by 50%. Yet, by late 2009, the oil price had bounced back, and offshore units seemed like attractive investment opportunities for diversification away from over-supplied shipping sectors.

On The Right Path?

For some years, offshore investors seemed to have taken the correct turning, as dayrates for rigs and OSVs soared, and by 2013 were close to the heights reached prior to the financial crisis. Meanwhile, the ClarkSea Index remained earthbound, with earnings hampered by a sluggish world economy and phases of newbuilding activity, as government stimulus and low newbuilding prices combined to boost counter-cyclical orders.

For Icarus, the heat of the sun proved to be his undoing. In the case of the offshore markets, the heights they reached were dashed by an unexpected underground source of oil and gas. Few saw coming the game-changing effect that technological change would have on the oil supply-demand balance. Fracking produced 3.8m bpd of additional onshore oil supply from US shale by 2015.

Initially, the effect of this extra supply was hidden, by outages due to political instability in areas such as Libya, Russia, and Iraq. But as oversupply of about 2m bpd became clearer, Saudi Arabia refused to resolve the problem through a unilateral oil output cut.

Down To Earth

Today the offshore markets look to be in an equally or even more challenged position than the major shipping segments. Dayrates for both rigs and OSVs have fallen by 40-50% over the course of the last eighteen months. There is currently little positive sentiment, and many assume that the near future for these offshore sectors could come to resemble the ClarkSea Index’s recent past. But cyclicality, after all, has been a part of these industries for decades. As the best Greek asset players will tell you, the key is to ride a market upturn, but to get out before you get too close to the sun.

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The volatility of the shipping markets has always presented opportunities and pitfalls for investors (see SIW 1210). Getting the timing right is key, and newbuilding decisions can prove especially difficult given the need to look further forwards into the future – always a tricky task. The challenging state of many shipping markets suggests that owners have struggled to find the right balance when planning ahead.

Changeable Winds

Accurately forecasting future shipping market developments is clearly fraught with difficulties. Owners making newbuild investments may be renewing their fleets, or building for dedicated business, but for those ordering more speculatively, the investment might reflect expectations of future demand and market conditions.

These trends are hard to predict. Economic and political developments, amongst many others, can shift quickly and change trade patterns. Combined with supply factors such as newbuild pricing or finance availability, it is easy to see how the volume of tonnage ordered can be misaligned with the requirement.

Clouds Gathering

Comparing historical contracting to the volume of ‘required’ deliveries shows that investment has frequently ‘overshot’ the need for additional ships. In 2003 for example, global contracting totalled 117m dwt. Assuming that these ships take two years to be delivered, trends in 2005 could indicate whether this level of ordering was lower than or surplus to requirement. Global demolition totalled 6m dwt in 2005, and world seaborne trade grew by 4.5%, which based on estimated fleet productivity in 2003, could have required an extra 42m dwt of tonnage to transport. So ordering in 2003 may have been 70m dwt greater than the estimated volume of deliveries needed in 2005. The surplus was even greater in 2007, when 275m dwt was ordered, but with seaborne trade dropping by 3.7% in 2009, there was no ‘requirement’ for any additional tonnage to be delivered that year.

Gusts From The East

Since 2000, more years than not have seen ‘excess’ ships ordered. After the financial crisis hit, surplus capacity led to weaker markets and changes in productivity, such as slow steaming. Ordering in 2009-12 was closer to estimated ‘requirement’, but surged to 178m dwt in 2013, with hope in some sectors that the bottom of the cycle had been reached.

Yet 2015 saw seaborne trade growth slow to 2.1%, led by trends in China. With 39m dwt scrapped in 2015, and an estimated 36m dwt needed to ship the additional trade volumes, ordering in 2013 could have ‘overshot’ by 100m dwt, exerting further supply pressures.

An Unsettled Climate

The story clearly varies across sectors, but shipping investors seem an optimistic bunch, and are now being let down by underperformance of seaborne trade. At times, this optimism has raised demand for shipyard capacity, but has still created a surplus, with lower ordering in 2014-15 still possibly excess to requirement based on current projections. In such a changeable climate as shipping, it’s clear that checking the forecast is vital, but it seems that getting a clear view ahead is hard.

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It has been well documented that newbuild orders have slowed substantially in 2015, with 857 contracts recorded at yards in the first three quarters of the year, down 45% from 2014 on an annualised basis. However, it’s also clear that builders in the big three shipbuilding countries have experienced differing fortunes. Looking beyond the aggregate trend, what has driven the divergent outcomes?

Hardened Times

In 2015 so far, the newbuilding market has seen subdued ordering activity. In the first three quarters, shipyards globally took orders equivalent to 24.3m CGT (compensated gross tonnes, a measure of shipyard ‘work’ or capacity). This compares to a total of 43.9m CGT in full year 2014. However, the big three builder countries have experienced significantly different fortunes. Chinese yards have been hit extremely hard, with new contracts in CGT terms down by 49% on an annualised basis. New contracts at Japanese yards, meanwhile, have dropped by a more moderate 14%, whilst ordering in Korea has fallen by 7%, not too bad when global contracting is down by 26%.

Exposed To A Changing Mix

What explains the difference? Many factors are at play but foremost is the ‘product mix’ – the type of units ordered. And even more so, it’s the mix in the context of the ‘exposure’ or track record that each builder nation has in the key vessel sectors. The graph illustrates ordering in selected sectors in the major builder countries alongside their ‘exposure’.

The bulker sector lies at the heart of Chinese yards’ fortunes this year. Global bulker orders of 2.6m CGT (152 units) are down by 77% on an annualised basis (to 11% of orders globally). In 2014 China took 9.2m CGT of bulker orders, but in 2015 ytd has taken only 0.5m CGT. This accounts for 8% of total Chinese orders of 6.3m CGT this year, but over the previous five years bulkers have accounted for 57% of contracting in China (and 39% of contracts globally). China’s exposure to bulkers comes at a price now that the product mix has shifted.

Anyone Well Set?

Boxships and tankers have accounted for 61% of global ordering in the ytd, and Korean builders’ exposure to these sectors (23% and 28% respectively in 2010-14) has stood them in good stead. These types have accounted for 71% of the total 8.8m CGT of contracts placed in Korea in the ytd, with the major yards more focussed on boxships and medium-sized builders on tankers. In Japan, meanwhile, product switching has helped. Japanese builders have historically been highly exposed to bulkers (64% in 2010-14, and 29% even in 2015 ytd) but an increased focus on tankers and boxships (23% and 29% in 2015 ytd respectively), and support from domestic ordering, has allowed them to plug into today’s product mix, taking  6.0m CGT of orders in the ytd.

Monitoring The Exposure

So, aggregate building trends tell part of the story but product mix developments can be critical too. As every good trader knows, understanding your exposure is important. Sometimes this can be managed, and sometimes not, but it generally explains a lot. Have a nice day.

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