Archives for posts with tag: shipbuilding

There have been plenty of record breaking facts and figures to report across 2016, unfortunately mostly of a gloomy nature! From a record low for the Baltic Dry Index in February to a post-1990 low for the ClarkSea Index in August, there have certainly been plenty of challenges. That hasn’t stopped investors however (S&P not newbuilds) so let’s hope for less record breakers (except demolition!?) in 2017.SIW1254

Unwelcome Records….

Our first record to report came in August when the ClarkSea Index hit a post-1990 low of $7,073/day. Its average for the year was $9,441/day, down 35% y-o-y and also beating the previous cyclical lows in 2010 and 1999. With OPEX for the same basket of ships at $6,394/day, margins were thin or non-existent.

Challenges Abound….

Across sectors, average tanker earnings for the year were “OK” but still wound down by 40%, albeit from an excellent 2015. Despite a good start and end to the year, the wet markets were hit hard by a weak summer when production outages impacted. The early part of the year also brought us another unwelcome milestone: the Baltic Dry Index falling to an all time low of 291. Heavy demolition in the first half and better than expected Chinese trade helped later in the year – fundamentals may be starting to turn but perhaps taking time to play out with bumps on the way. The container market (see next week) had another tough year, including its first major corporate casualty for 30 years in Hanjin. LPG had a “hard” landing after a stellar 2015, LNG showed small improvements and specialised products started to ease back. As reported in our mid-year review, every “dog has its day” and in 2016, this was Ro-Ro and Ferry, with earnings 50% above the trend since 2009. Also spare a thought for the offshore sector, arguably facing an even more extreme scenario than shipping.

Buy, Buy, Buy….

In our review of 2015, we speculated that buyers might be “eyeing up a bottoming out dry cycle” in 2016 and a 24% increase in bulker tonnage bought and sold suggests a lot of owners agreed. Indeed, 44m dwt represents another all time record for bulker S&P, with prices increasing marginally after the first quarter and brokers regularly reporting numerous parties willing to inspect vessels coming for sale. Tanker investors were much more circumspect and volumes and prices both fell by a third. Greeks again topped the buyer charts, followed by the Chinese. Demo eased in 2H but (incl. containers) total volumes were up 14% (44m dwt).

Order Drought….

Depending on your perspective, an overall 71% drop in ordering (total orders also hit a 35 year record low) is either cause for optimism or for further gloom! In fact, only 113 yards took orders (for vessels 1,000+ GT) in the year, compared to 345 in 2013, with tanker orders down 83% and bulkers down 46%. There was little ordering in any sector, except Cruise (a record 2.5m GT and $15.6bn), Ferry and Ro-Ro (all niche business however and of little help to volume yards).

Final Record….

Finally a couple more records – global fleet growth of 3% to 1.8bn dwt (up 50% since the financial crisis with tankers at 555m dwt and bulkers at 794m dwt) and trade growth of 2.6% to 11.1bn tonnes (up 3bn tonnes since the financial crisis) mean we still finish with the largest fleet and trade volumes of all time! Plenty of challenges again in 2017 but let’s hope we aren’t reporting as many gloomy records next year.
Have a nice New Year!

As in many sectors of economic activity, provision of just the right amount of capacity is a tricky business, and the shipbuilding industry is no exception. As a result, in stronger markets the ‘lead time’ between ordering and delivery extends and owners can face a substantial wait to get their hands on newbuild tonnage, whilst in weaker markets the ‘lead time’ drops with yard space more readily available.

What’s The Lead?

So shipyard ‘lead time’ can be a useful indicator, but how best to measure it? One way is to examine the data and take the average time to the original scheduled delivery of contracts placed each month. The graph shows the 6-month moving average (6mma) of this over 20 years. When lead time ‘lengthens’, it reflects the fact that shipyards are relatively busy, with capacity well-utilised, and have the ability, and confidence, to take orders with delivery scheduled a number of years ahead. For shipowners longer lead times reflect a greater degree of faith in market conditions, supporting transactions which will not see assets delivered for some years hence. Longer lead times generally build up in stronger markets. Just when owners want ships to capitalise on market conditions, they can’t get them so easily. But lead times shrink when markets are weak; just when owners don’t want tonnage, conversely it’s easier to get. The graph comparing the lead time indicator and the ClarkSea Index illustrates this correlation perfectly.

Stretching The Lead

Never was this clearer than in the boom of the 2000s. Demand for newbuilds increased robustly as markets boomed. The ClarkSea Index surged to $40,000/day and yards became more greatly utilised even with the addition of new shipbuilding capacity, most notably in China. The 6mma of contract lead time jumped by 49% from 23 months to 35 months between start 2002 and start 2005. By the peak of the boom, owners were facing record average lead times of more than 40 months. In reality, as ‘slippage’ ensued, many units took even longer to actually deliver than originally scheduled.

Shrinking Lead

The market slumped after the onset of the financial crisis, with the ClarkSea Index averaging below $12,000/day in this decade so far. Lead times have dropped sharply, with yards today left with an eroding future book. The monthly lead time metric has averaged 26 months in the 2010s, despite support from ‘long-lead’ orders (such as cruise ships) and reductions in yard capacity. Of course, volatility in lead time recently reflects much more limited ordering volumes.

Taking A New Lead

So, ‘lead times’ are another good indicator of the health of the markets, expanding and contracting to reflect the balance of the demand for and supply of shipyard capacity. They also tell us much about the potential health of the shipbuilding industry. In addition, even if shorter lead times indicate the potential to access fresh tonnage more promptly, unless demand shifts significantly or yards can price to attract further capacity take-up quickly, they might just herald an oncoming slowdown in supply growth. At least that might be one positive ‘lead’ from this investigation. Have a nice day.

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Shipping plays a major role in the world’s industries, facilitating the transport of large volumes of raw and processed materials. However, the maritime sector forms a much more important part of the global supply chain for some commodities and industries than others. Comparing world seaborne trade in a range of cargoes to global production helps to make this abundantly clear.

Still In The Limelight

Looking at a range of cargo types (see graph), less than 50% of global production of each was shipped by sea in 2015, with a significant share of output consumed domestically. However, seaborne transport still accounts for a sizeable proportion of many of these cargoes, and a wide range of factors influence the level of dependence on shipping of each.

Compelling Cues

One obvious driver is the location of production and consumption. Crude oil is the commodity most reliant on shipping, with some 46% of crude output last year exported by sea, with oil output concentrated in a relatively small number of countries. Similarly, around 41% of global iron ore production was shipped last year, with limited domestic demand in key producers Australia and Brazil. Absolute and relative regional productivity also has an influence. Just 15% of coal output was shipped in 2015, with half of the 6.5bt of coal produced globally last year output in China, nearly all of which was consumed domestically. Still, China was the second largest coal importer in 2015, with regional coal price arbitrages driving trade.

Another key factor is the availability and efficiency of other transport modes. Twice as much natural gas is exported via pipeline than in a liquefied state by sea, with just 9% of natural gas output in 2015 shipped as LNG. Meanwhile, the level of processing of materials also has an impact. Oil and steel products are less reliant on shipping than crude oil and iron ore, with refineries and steel mills often built to service domestic demand.

Raising The Drama

However, the growth of ‘refining hubs’ has raised the share of refinery throughput shipped by almost 10 percentage points since 2000. This kind of trend is an important driver of shipping demand. The share of output of the featured commodities shipped rose from an estimated 22% in 2000 to 26% in 2015, generating c.720mt of extra trade. This equates to an additional 1% p.a. of trade growth, boosting trade expansion to a CAGR of 3.7% in 2000-15. Trade in some cargoes is more sensitive to shifts in the share of output shipped than others, but across the featured cargoes, a further change of 0.5% in the share of output shipped could create another 130mt of trade, 2% of current seaborne volumes.

No Sign Of Stage Fright

So, while trade in even the cargo most reliant on shipping accounts for less than half of global output, the world economy today is still dependent on the seaborne transport of 11bt of all cargo types. Overall growth in production and the distance to consumers are also clearly important demand drivers for shipping, but for the world’s industries there’s no denying the main part that shipping still plays in the supply of raw materials. Have a nice day!

SIW1243 Graph of the Week

Looking at the ratio between newbuild and secondhand prices is a classic method of examining the state of various shipping sectors. But the metrics can be just as revealing at the older end of the market. Trends in the ratio between scrap values and secondhand prices for elderly vessels can shine further light on the health of the shipping markets, and can also have implications for fleet dynamics.

Health Check

Particularly stark signs of the current ill health of the key shipping sectors are apparent in the market dynamics for older units. With global steel prices determining ship scrap values (effectively the ‘floor’ for elderly secondhand vessel prices), the ratio of prices for older ships to estimated scrap values varies in line with market conditions. When markets are weak, investors may attribute little premium to the short-term earnings potential of elderly vessels, and secondhand prices for these ships can fall close to the scrap value.

On Life Support?

In the bulker sector, the ratio between assessments of 15 year old prices and scrap values has fluctuated dramatically. At end August 2016, amidst a depressed earnings environment, the price for a 15 year old Capesize stood at $8.0m, only 1.3 times the estimated Capesize scrap value of $6.2m, with the 20 year old price close to scrap value. These ratios have fallen in recent years as the market outlook has deteriorated, but even a 15 year old/scrap price ratio of over 2.0 in mid-2014 was a far cry from 2005-08 when 15 year old Capesize prices averaged more than 5 times scrap value, with ‘boom’ bulker earnings inflating asset values.

A similar trend has emerged in the containership sector. With charter rates largely in the doldrums since start 2012, the 15 year old price for a 2,000 TEU boxship has remained close to scrap value. Particular stress is also evident in the ‘old Panamax’ sector, with the price for a 15 year old 4,400 TEU ship now assessed at $5m, in line with estimated scrap values. In contrast, ratios in the tanker sector have generally risen in recent years. The 15 year old VLCC price was 3.5 times scrap value in early 2016, up from 1.3 times in early 2015. However, the ratio has recently dropped in line with weaker tanker earnings.

Elders On The Edge

As well as illustrating market trends, these ratios also influence fleet developments. Weaker markets and lower price ratios typically lead to more ships being scrapped rather than sold secondhand, as the ‘market mechanism’ helps to reduce oversupply. Across the bulker and containership sectors, over 70% of transactions of vessels 15+ years old since start 2012 have been accounted for by demolition sales, compared to just 11% in 2005-07. Increasingly young vessels are also being scrapped as a result.

Looking Poorly?

So, price ratios for older units can prove a useful indicator of the state of the markets. For assets generally expected to have a lifespan of 25 years or more, the historically low ratios of even 15 year old vessel prices to scrap values in some sectors is a clear and sobering reminder of the challenges still being faced.

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During July 2016, the containership fleet reached a landmark 20 million TEU in terms of aggregate capacity. To many it only seems like yesterday when the boxship fleet passed the 10 million TEU mark, back in April 2007. It took less than 10 years to double in capacity to reach the new milestone. Sprightly fleet growth indeed, but how rapid is it when compared to other parts of the world fleet?

Compound Crazy

Albert Einstein once called the impact of compound growth the ‘most powerful force in the universe’, and containership fleet capacity is a great example of this power. Total boxship capacity doubled from 5m TEU in size (in April 2001) to 10m TEU (in May 2007) in 6.2 years, and since then it has doubled in size again from 10m TEU to an astounding 20m TEU across just a further 9.3 years.

This rapid growth of the containership sector is a fairly well known story. In many respects the box sector is still a youthful part of the shipping world; since the inception of container shipping in the 1950s, the fleet has grown quickly from humble origins as trade has flourished. At the same time the fleet has upsized at a phenomenal rate. The average size of containerships in the fleet stood at 1,807 TEU in April 2001 and increased to 2,425 TEU in May 2007. Today, with behemoth boxships of over 19,000 TEU on the water, the average size of units in the fleet is 3,832 TEU, and the average size of those on order is even larger at 8,030 TEU.

Maturing Slowly

In contrast, some other shipping sectors can seem more ‘mature’, growing at a gentler rate. Tanker fleet capacity took almost 21 years to double to reach its current size of 540.9m dwt. In relative terms, the trade is indeed fairly mature, with average growth in volumes of 2.2% per annum over the last 20 years in combined crude and products trade. But interestingly, this is a sector now seeing rapid capacity growth, with an uptick in trade growth in recent years driving tanker ordering. In the last 19 months tanker fleet capacity has grown by 6.5%.

Bulk Bulge

However, the bulkcarrier fleet comfortably illustrates that the boxship sector has not been alone in experiencing rocketing growth. Although the vessels themselves may not have seen the same upsizing as boxships, bulker capacity expansion has been extraordinarily fast in recent times. Astonishingly, it took just 8.6 years from January 2008 to double to its current capacity of 784.1m dwt (though it had taken around 21 years before that to double previously). Nevertheless, bulker capacity expansion has slowed now, as dry bulk trade growth has hit the buffers.

Boom Time

So, the latest instance of a rapid doubling of fleet capacity is not a one-off. The explosion of boxship capacity has indeed been rapid, but in a world where shipbuilding output was hitting all-time highs not long ago, such growth has been a wider phenomenon. The overall world fleet has increased by 55% in dwt terms in the period since the onset of the global financial crisis in September 2008 alone. That’s a robust compound annual growth rate of 5.1%! Have a nice day, Einstein!

SIW1236 Graph of the Week

This week, the Bank of England put into place its action plan following the UK referendum on 23rd June, which indicated the British population’s preference to leave the European Union. While the political dust has yet to settle, shipping market observers have had time to form their views on the impact of ‘c’ on the industry. This week’s Analysis attempts to put the UK and the EU’s role in shipping in context.

Holding On

Once upon a time, of course, Britannia ‘ruled the waves’ and Great Britain, with its colossal maritime heritage (remember the British Empire?) was one of the world’s leading lights in ship ownership and shipbuilding. Today the story is a little different. UK owners account for just 2% of the global fleet in GT terms. The EU as a whole, however, remains a significant player, with 36% of world tonnage. While market share has shifted to the Asia-Pacific (39%), EU owners have held their own, led by the world’s largest owner nation in Greece, which has not been subject to its own ‘Grexit’ just yet.

Sailed East

Historically, Europeans were leading shipbuilders too, but in the modern era shipbuilding is dominated by Asia. In 2015, EU builders took 1.9m CGT of new orders (over 1,000 GT), 5% of the global total, and today account for 8% of the orderbook in CGT, whilst China, Korea and Japan together account for 84%. Europeans are now largely builders in the niche markets, dominating the cruise sector and maintaining a focus on small ships. Within the EU, the UK’s contribution is limited, with just two merchant vessels over 1,000 GT built since 2011.

Big Bloc

In terms of trade, the UK, given its status as the world’s 5th largest economy, accounts for a significant volume of imports and exports. However, in a global context these account for a relatively modest share. The UK’s imports account for an estimated 2% of global seaborne trade and its exports 1%. The EU, meanwhile, is much more significant, as befits its role as the world’s largest trading bloc, accounting for an estimated 16% of seaborne imports and 12% of exports.

Service Culture

One area where the UK and Europe maintain importance is as service providers. The UK is the world’s 14th largest flag and EU flags account for 18% of world tonnage. Lloyd’s Register in the UK is still a leading class society and along with DNV-GL and BV, the EU’s heavy-hitters, class 44% of the world fleet. Furthermore, London still remains one of the world’s pre-eminent maritime business hubs at the forefront of legal services, insurance and shipbroking too!

Wider, Still & Wider

However ‘Brexit’ plays out, it won’t go without notice. In fleet ownership or trade terms, the UK alone is not so significant (though the EU as a whole is). Perhaps the more important impact might be the wider fallout of uncertainty (or worse) surrounding one of the world’s largest economies. Meanwhile, the UK will be hoping that London can retain its role at the centre of commercial maritime affairs. Leaver or Remainer, have a nice day.

SIW1233 Graph of the Week

Down the years, shipbuilders have always entered and exited the business as cycles have progressed, but over the past decade developments have been dramatic. Back in 2007, 220 shipyards secured at least one order for a unit of 20,000 dwt or above in size, but in 2015 just 101 yards were successful in doing so. What have been the characteristics of such acute changes in the shipbuilding landscape?

Following The Plot

 ‘Fatal Attraction’ was an 1980s thriller movie in which a weekend affair resulted in a tricky predicament. Having had its fling with investors, it could be said that the shipbuilding industry has also found itself in severe distress. At the climax of the newbuilding investment boom in 2007, 220 yards took an order (for a vessel of 20,000 dwt or above), up 80% on the number in 2005. However, the global economic downturn ended the ‘affair’ and the number of yards to take an order fell 45% in 2009. Chinese state subsidies reignited old flames in 2010, when 190 yards attracted an order (62% were located in China) and countercyclical ordering helped support around 130 yards in 2013 and 2014, but the general trend has been a steady fall in the number of shipyards successful in attracting orders in the recent investment environment.

Character Development

In 2015, 1,083 orders (20,000 dwt and above) were placed at 101 yards globally, and of the yards who took an order in 2007, only 80 (36% of the total) were successful in doing so last year. Shipbuilders who ‘left the scene’ in this period included many Chinese yards (87), generally focussed on the bulker sector, as well as a number of European yards (17) finally ceding to Asian competition.

The solid line on the graph represents the number of yards taking 20 or more orders each year. This number has fluctuated less than the total number of yards taking orders, reflecting the more consistent part of the industry, including established Korean yards and ‘top tier’ Chinese state yards (27 different yards have appeared in this grouping since 2010). The dotted line shows yards who have received five or less orders each year, and reflects the more vulnerable end of the business, making up 51% of yards who took an order in 2007, but accounting for an average of 37% of the total between 2013 and 2015. 62% of yards in this grouping who took a contract in 2007 have not received an order since 2012.

No Alternate Ending?

On a more positive note, despite the fall in the number of yards to take a contract in 2015, six of the 18 yards to take 20 or more orders took their largest number of contracts since 2007 last year. For the first time this decade the largest number of these yards were in Japan (7).

Nevertheless, the environment clearly remains severely challenging. In 1H 2016, 97 orders were reported placed (for units 20,000 dwt or above) across just 27 yards. Though there may be some late reporting, and optimism from some quarters that 2H 2016 could see increased contract volumes, changes to the industry landscape appear to have been stark (and for some ‘fatal’). Over the second half of this year, market observers should continue to watch the drama closely

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