Archives for posts with tag: Panamax

In recent years, in generally difficult market conditions, it has been no surprise that many sectors have seen a significant removal of surplus tonnage. This has been particularly notable in the bulkcarrier and containership sectors, and in the case of the Capesizes and the ‘Old Panamax’ boxships, it has been a bit like the famous race between the tortoise and the hare but with even more changes in leadership…

At The Start

Back in 2012, Capesize demolition was on the up with the market having softened substantially in 2011 on the back of elevated levels of deliveries. Meanwhile, ‘Old Panamax’ containership demolition (let’s simply call them Panamaxes here) was also on the rise with earnings under pressure. Across full year 2012, 4.7% of the start year Capesize fleet was sold for scrap (11.7m dwt) and 2.6% of the Panamax boxship fleet (0.10m TEU). In both cases this was working from the base of a fairly young fleet, with an average age at start 2012 of 8.2 years for the Capes and 8.9 years for the Panamax boxships.

The cumulative volume, as a share of start 2012 capacity, of Capesize demolition remained ahead of Panamax boxship scrapping until Sep-13, by which time 7.3% of the start 2012 Panamax boxship fleet had been demolished compared to 7.2% of the Capesize fleet. In 2013 the Cape market improved with increased iron ore trade growth whilst the boxship charter market remained in the doldrums. In 2013, Cape scrapping equated to 3.2% of the start 2012 fleet (7.9m dwt); the figure for Panamax boxships was 6.0% (0.24m TEU). The fast starter had been caught by the slow burner.

Hare Today…

But by 2015, Cape scrapping was surging once more, regaining the lead from the Panamax boxships. By May-15 the cumulative share of the start 2012 fleet scrapped in the Capesize sector was 13.7% compared to 13.4% for the Panamax boxships. Iron ore trade growth slowed dramatically in 2015, whilst the Panamaxes appeared to be enjoying a resurgence with improved earnings in the first half of the year ensuing from fresh intra-regional trading opportunities.

…Gone Tomorrow

But the result of the race was still not yet clear. Today the Panamaxes are back in front again, thanks to record levels of boxship scrapping in 2016, including 71 Panamaxes (0.30m TEU) on the back of falling earnings, ongoing financial distress and the threat of obsolescence from the new locks in Panama. Despite a huge run of Capesize scrapping in Q1 2016 (7.5m dwt), the cumulative figure today for Capes stands at 22.3% of start 2012 capacity, compared to 25.4% for Panamax boxships, remarkably similar levels.


Where’s The Line?

So, today the old Panamax boxships are back in the lead, but who knows how the great race will end? Capesize recycling has slowed with improved markets, but Panamax boxships have seen some upside too, even if the future looks very uncertain. Hopefully they’ll both get there in the end but no-one really knows where the finish actually is. That’s one thing even the tortoise and the hare didn’t have to contend with. Have a nice day.

SIW1271

Strong demolition has been a prominent feature of the shipping industry this year, as challenging market conditions continue to drive a significant supply-side response in a number of sectors. Across the total shipping fleet, demolition could reach one of the highest levels on record in full year 2016, but which markets in particular have taken the biggest hits?

Revving Up

2016 has been an extremely difficult year for the shipping markets, with conditions in most sectors under pressure. Reflecting this, demolition has remained at elevated levels, and in January to November, 841 vessels of 41.3m dwt were scrapped. Demolition so far this year has already exceeded last year’s total of 38.9m dwt, and whilst scrapping volumes have picked up in most sectors, some markets have played a more important role in this year’s tally than others.

Bulker Beat

Amidst continued depressed earnings, bulkcarriers have accounted for the lion’s share of tonnage scrapped this year. Bulker scrapping set a new record in 1H 2016, and while demolition has slowed in recent months, 385 bulkers of 27.7m dwt have been scrapped in the year to date. Bulker demolition has been historically firm since 2011, but the pace of scrapping in most bulker sectors this year has still exceeded the 2011-15 average, with Capesize and Panamax recycling this year around 1.4 times this level.

Boxship Bumps

Meanwhile, containership demolition has also made headlines this year, with increasingly young vessels being recycled. In dwt terms, boxship scrapping has totalled 7.9m dwt so far in 2016, but recycling volumes are already over triple that of full year 2015, with scrapping on track to reach a record 0.7m TEU this year. The pace of demolition of ‘old Panamaxes’ has been running at more than twice the five year average, whilst scrapping has accelerated firmly in the 3,000+ ‘wide beam’ sectors, with 6,000+ TEU boxships also scrapped for the first time.

Big Hits On The Bodywork?

By contrast, despite the softening in crude and product tanker market conditions this year, tanker scrapping has remained relatively subdued, at less than half of the five year average. However, while gas carrier scrapping remains limited in numerical terms, with just 18 ships recycled so far this year, LPG carrier demolition is on track to reach around double the five year average after earnings fell swiftly to bottom of the cycle levels. Meanwhile, car carrier scrapping has soared to 27 units of 0.14m ceu. This is already the second highest level on record, and on an annualised basis is four times above the 2011-15 average.

So, while total demolition this year is still falling short of 2012’s record 58.4m dwt, 2016 looks set to see yet another year of very firm recycling, eight years after the onset of the downturn. In some sectors, this strong scrapping is providing a helpful brake on fleet expansion. Furthermore, with bruising market conditions having clearly taken their toll, many owners are likely to be looking to the demolition market for a little while yet.

SIW1250

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

Back in early 1999 the price of a 5 year old Panamax bulkcarrier dipped to $13.5m, and ever since analysts have hailed purchase decisions made at that time as some of the most lucrative shipping deals ever seen. Today, with the price back at $13m, perhaps it’s a good time to reflect on how successful investors were back in 1999 and whether there are similar opportunities once again.

What Was The Deal?

The graph shows for each year since 1990 the return that would have been generated by the purchase of a 5 year old Panamax bulkcarrier at the start of the year, the subsequent operation for ten years at the prevailing one year timecharter rate and then the sale of the unit at the end of that period as a 15 year old (for units purchased in 2007 and later, disposal at start 2016 was assumed). At the end of 1999 investors could pick up a 5 year old Panamax bulker for $14m. Trading that vessel at the start year one year timecharter rate for 10 years would have generated estimated earnings of $66.5m (after opex), and then as a 15 year old unit in 2009 the vessel could have been sold for $12.5m. That’s a small loss of $1.5m on the asset but still a total return of $65m, and an impressive internal rate of return (IRR) of 26%.

Playing Snap

A few years later, 5 year old Panamax bulkcarrier purchases did perhaps even better. Buying a 5 year old in 2002, once again at $14m, trading at the timecharter rate and selling as a 15 year old would have generated total returns of $73.2m and an IRR of 41%, whilst the equivalent project in 2003 would have generated $66.1m and an IRR of 44%. These vessels would have generated boom earnings earlier in the project period, subject to a heavier weighting in terms of the internal rate of return calculation.

Not Always A Good Hand

However, not all investors are so lucky. In this example, 5 year old ships purchased since 2008 (and sold this year, so admittedly with less time to hit upon a period of boom earnings) generated negative returns, and those purchased pre-1995 an average IRR of 7%. Buyers in 2008 would have lost a whopping $82.1m on the asset. Nevertheless, there was clearly a golden period; in the years 1998-2006 investors would have achieved an IRR ranging between 20% and 44%.

Unlucky (Or Lucky) 13?

So for those who have had the stomach to buy in at difficult times, there have been more than ample rewards. Today the price of a 5 year old Panamax is back at $13m. Dry bulk fundamentals, particularly on the demand side with the Chinese economy maturing, don’t look helpful at all (see SIW 1207), but with the 5 year old price at almost half that of a newbuild, who really knows what the longer-term opportunity might be?

Fortune favours the brave, but they also say that fools rush in. The outlook seems scary but investors might also have half an eye on their peers who invested at low points in the price cycle in the past. That’s the beauty of volatile and cyclical sectors, but it’s tricky food for thought for shipping investors. Are they willing to party like it’s 1999? Have a nice day.

SIW1210

Analysts are busy updating their models for the new US budget year. If the big picture for tankers and bulkcarriers is what interests you, it’s not enormously complicated. Everyone uses roughly the same information, and data for running supply-demand balances is readily available. Of course it’s a complex world, but one conclusion is recurrent – overall, there’s still plenty of surplus shipping capacity.

Same Surplus, Different Rates

The fundamentals have not changed much over the summer. Comparing ‘raw’ supply and demand figures, both the tanker and bulker sectors appear to have a surplus of around 25%. These are the same numbers that have been cropping up for a while. But earnings statistics tell a different story. Over the last year tanker earnings averaged $29,000/day (VLCCs $50,000, Suezmaxes $43,000 and Aframaxes $35,000). But bulkers only managed $8,000/day (Capesizes $11,000, Panamaxes $8,000 and Supramaxes about $7,600). If both markets have 20-30% surplus capacity, what’s going on?

Could the statistics be wrong? It’s possible but it’s hard to see how. In tankers, for example, 2015 seaborne oil imports are only 6% higher than in 2008 but the tanker fleet is 33% bigger. These statistics are fairly easily verified. Bulk trade is up 38% since 2008, but the fleet has grown 93%. There may be some extra tonne-miles, but not enough to change the conclusion that both markets are carrying a lot of surplus ships.

A Slow Moving Mystery

Another possibility is our old friend ‘slow steaming’. Maybe tanker owners are getting smarter. The tanker fleet trading at 15 knots carries around 25-30% more cargo than at 11-12 knots. Supply-demand calculations are usually based on a ‘design’ speed, say 15 knots. So if the fleet trades at 11 knots, the ‘surplus’ disappears because the fleet is strung out around the world, with no surplus ships at the loading zones. Freight negotiations are based on prompt ships, so it’s the backlog that does the damage. If ships speed up, surplus capacity is released to undermine the boom. But if owners do not speed up, and are sufficiently aggressive, they can benefit from the supply curve kink until someone breaks ranks, and create market spikes.

Cargo Helps

Bulkers operate in a more complex market, with different charterers. Capesizes trading at around 11.5 knots have squeezed out a few short spikes in recent years, but the smaller ships haven’t. A market moving from demand growth to apparent stagnation does not help either. Owners have a better chance of pushing rates up when cargo volumes are rising.

Does It Matter?

So there you have it. Tankers are doing well today, but are they now a better investment? The red line on the graph shows the trend in the difference in earnings over 25 years. Tankers on average earned about $7,300/day more with a slight trend in bulkers’ favour. But what the graph really demonstrates is that it basically averages out in the end. Like poker, it’s not about the hand, it’s about the players. Have a nice day.

Seven years into the recession, the tanker market is blazing away, with VLCCs earning over $50,000/day and Aframaxes not far behind. It’s an amazing development which leaves investors pondering whether this is, in Churchill’s famous words, “not the beginning of the end, but maybe the end of the beginning”. Analysts now wonder if it’s worth the risk of going out on a limb and calling “turning point”.

Potential Paradigms

Whatever the outlook, it’s worth pausing to enjoy the moment – and, perhaps, reflect that nothing like this happened in the 1980s. So something has obviously changed, but over the long-term it’s hard to see what it is. Since 2007, the tanker fleet has grown much faster than seaborne oil trade. We know from experience that when there’s an underlying surplus, spikes rarely last more than a few months and paradigm shifts making “this time different” are rarer than hen’s teeth, if not impossible.

Disappointing Demand

Let’s start with the crude oil trade, which fell by 6% from 38.4m bpd in 2007 to about 36.3m bpd in 2014. OECD oil demand has declined since 2007, with North America down 8%; Europe down 12% and Japan down 13%. So there’s not much joy there. Add an extra 4.6m bpd of oil production in North America and seaborne crude imports dropped by 2.1m bpd. Of course, non-OECD imports have increased, as has products trade, but overall the oil trade has only increased 2.8%, from 55m bpd in 2007 to 56.5m bpd in 2014. A tonne-mile approach pushes the growth up to 7.9%, but that’s still only 1.1% pa.

The Flighty Fleet

Meanwhile the tanker fleet has been buzzing. At the end of 2007, when the credit crisis was just getting started, it was 383m dwt, but since then it has grown by one third (126m dwt) to 509m dwt. Of course, macro statistics are always a bit fuzzy, but an increase of less than 10% in trade and 33% in ships tells a pretty clear story that there is probably lots of ‘surplus’ tonnage tucked away.

A Logical Disconnect?

Such a surplus should surely “cap” rates. But clearly this is not happening, so what’s going on? There are a few explanations. Firstly, seasonality; global oil demand was 2.1m bpd higher in Q4 2014 than in Q2. Assuming most of that is translated into trade, that’s a 4% increase which, over a short period is enough to get things started. Add to that the surge in speculative cargoes held at sea, and demand is motoring. Finally, throw in the reluctance of owners to speed up, and the limited growth in the crude tanker fleet in recent years, and the recent rates look more convincing.

Cyclical Or Structural?

So, simple numbers don’t always give you the whole answer, but there’s never any harm in looking at the big picture. If the simple interpretation is right, things might ease off. But the real dilemma is probably the underlying surplus. Are today’s speeds the ‘norm’ for the future? With bunkers at $300/tonne, the answer is “maybe”. But given time, it could well become a key question. Have a nice day.

SIW1168

SIW1155In the famous novel a young Oliver Twist pleads in vain with Mr Bumble at the workhouse “Please Sir, I Want Some More”. In early 2014, containership owners would have been looking for the opposite of the young Oliver – anything but more of the prevailing conditions. Yet once again challenging markets prevailed, and by the end of the year boxship players had probably “had enough”.

Anything But More

After five years in the doldrums, 2014 was essentially more of the same for the liner sector. With the global economic downturn having cut harder into demand in the box sector than almost anywhere else, half a decade on and containership operators were still found wrestling with the need to find ways to absorb potentially surplus capacity. The fully cellular containership fleet expanded by around 6% to 18.2m TEU in full year 2014, and trade growth in the same ballpark was not enough to push the market balance back into a more positive direction.

Fed Up Yet?

Box freight market conditions remained extremely volatile with liner companies in an ongoing battle to manage incoming capacity. Average spot freight rates for the year were up a little (7%) on the Far East-Europe route but down a little (3%) on the Transpacific. Few liner companies (except the market leader) made substantial profits, although towards the end of the year falling bunker prices at least started to reduce liner company costs.

If anything, the story was even worse on the charter market. Earnings remained depressed for yet another year, with only limited gains on historically low levels. Cascading of capacity from the mainlanes, allied to idle capacity, kept the pressure on charter owners, although later in the year there was some relief in the Panamax sector where unexpectedly robust redeployment onto intra-regional trades and a declining fleet provided more substantial support for rate levels than in other size sectors. Panamaxes also bucked the trend against generally falling asset prices in the boxship sector, with end year 10 year old secondhand prices up over 20% on end 2013 levels.

Ready For A New Twist?

So, if everyone has “had enough” and can’t take any “more”, what might change? Well, the industry consensus suggest things are getting a little tighter now. Plenty of capacity has been absorbed by slow steaming (with no sign yet of lower bunker prices changing things, though this needs to be watched carefully), much less capacity is idle (around 1.3% of the total fleet today) than in previous winters and the orderbook looks much more manageable at 18% of the fleet. Demolition remains historically high, with 0.4m TEU scrapped in 2014. Meanwhile, port congestion, most obviously on the US West Coast, may start to soak up significant amounts of capacity.

More And More

This might be enough to convince some investors that there’s no more (pain) to come and it’s time for a change in fortunes. But at the same time, liner companies still have plenty of big ships scheduled for delivery (and look set for another spending spree, placing orders for a new wave of ships of 20,000 TEU and above). Whatever the view of the optimists, extra capacity to be added, allied to economic headwinds in a number of parts of the world, will certainly pose challenges for the sector. Containership market players will have to artfully dodge the obstacles if they don’t want to be asking why they have had more of the same this time next year. Wish them luck. Have a nice day.