Archives for posts with tag: OPEX

“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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Eight years ago, the onset of the financial crisis following the demise of Lehman Brothers heralded a generally highly challenging time for many of the shipping markets, which today remain under severe pressure. But even within the relatively short period of history since then, different sectors have fared better or worse at various points along the way. This week’s Analysis examines the cumulative impact…

What Was The Best Bet?

So how would a vessel delivered into the eye of the financial storm in late 2008 have fared? The Graph of the Week compares the performance of three standard vessel types. It shows the monthly development of cumulative earnings after OPEX from October 2008 onwards for a Capesize bulkcarrier, an Aframax tanker and a 2,750 TEU containership.

A Capesize trading at average spot earnings would have generated around $37m in total, benefitting from market spikes in 2009-10 and 2013. But with Capesize spot earnings hovering near OPEX in recent times, the cumulative earnings have not increased much since mid-2014. For a hypothetical vessel delivered in October 2008 (and ordered at the average 2006 newbuild price of $63m) those earnings would equate to close to 60% of the contract price (note that if the vessel was sold today, this would result in a net loss of c. $8m, taking into account the earnings after OPEX, newbuild cost and sales income but not finance costs).

Totting Up Tanker Takings

By contrast, Aframax tanker earnings hovered close to OPEX for several years after the downturn, with far fewer spikes than in the bulker sector. However, the 2014-15 rally in the tanker market allowed the Aframax to start playing catch-up, and cumulative Aframax earnings between October 2008 and September 2016 reached around $31m. This represents around 50% of the value of a newbuild delivered in 2008 (with a newbuild price at the 2006 average of $63m), not too far from the ratio for the Capesize.

Bad News For Box Backers

Containerships haven’t really seen similar spikes, with the charter market largely rooted at depressed bottom of the cycle levels since 2008, battling with a huge surplus created by falling consumer demand and box trade in the immediate aftermath of the crash. With earnings close to operating costs for much of the period, a 2,750 TEU unit generated cumulative earnings after OPEX of just $6m from October 2008, around 10% of the average newbuild price in 2006 ($50m). The timecharter nature of the boxship business would also have potentially reduced owners’ upside when improved rates were on offer, and there was an ongoing chunk of capacity idle too.

The Stakes Are Still High

So, despite persisting challenging conditions overall, some of the shipping markets have seen significant ups and downs since 2008. Though boxships have seen limited income, interestingly similarly priced tanker and bulker newbuilds delivered heading into the downturn might have offered roughly comparable accumulated returns on the outlay. With conditions currently weak across most sectors, owners today would surely love to see any form of accumulation again.

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SIW1093In recent years large crude tankers are down having taken a good kicking, and today punters don’t seem to like the look of them. However, a survey of earnings in each major sector during the five years since the 2008 crash tells a slightly different story, which is worth looking at closely.

Method In The Madness

To calculate an “earnings ratio” for each ship type since October 2008, average monthly earnings were divided by estimated operating expenses (OPEX). The result is a percentage showing earnings as a multiple of OPEX. For example 300% means that the average earnings was three times operating costs, a good result. 100% would mean that the average earnings equalled operating expenses, with no “free cash”. This ratio was calculated for the 10 ship types shown on the graph and ranked with the biggest ratio at the top.

Who Would Have Thought It?

Top of the list with 300% are Capesizes. Investor sentiment backs this up, even if five years ago Capes looked like they were on the slipway to oblivion, with an enormous orderbook and doubts over Chinese steel demand. But the most interesting feature of this survey is that two of the top four places in the ranking go to types that popular sentiment does not appear to care for. Those primetime underdogs, VLCCs, come fourth, with a 223% earnings ratio and Suezmaxes are even higher in second place with 243%.

The middle ground is occupied by Aframaxes and Panamax bulkers, with ratios of 190% and 179%. Not such a bad result. Finally at the bottom of the table are the products tankers at 140%-160% and the containerships. MR products tankers have been recent favourites with investors, with more positive fundamentals today, but these figures (although precise earnings can be hard to track due to complex trade patterns) reflect some tougher periods in the last five years.

What’s The Message?

Technical issues aside, there are four points. Firstly, over the five years everyone made a bit of cash, mostly in the earlier years. Secondly there is a striking correlation between the earnings performance and size. Three of the top four performers are all over 100,000 dwt, with some midsize vessels in the middle ground. Thirdly, big tankers generally did little worse than bulkers, maybe due to the smaller orderbook. Finally, the worst performers were container charter ships, illustrating the danger of relying on “trickle-down” income from beleaguered liner companies.

Love Hate Relationship

So there you have it. Big tankers have performed relatively well since the crash, but now they’re on the rack of market sentiment and falling US imports. Of course the next few years could be a different story; with only 10.5% of the fleet on order and fewer contracts then deliveries, there’s not much wrong with future supply. The problem is on the demand side, but is that really as bad as it looks? You decide. Have a nice day.