Archives for posts with tag: Shipping Intelligence Network

Since remote antiquity the essential importance of energy to human civilization has been well appreciated: in ancient Greek mythology for example, it was the secret of fire that the Titan Prometheus stole from the gods and gifted to mankind. Today the still increasing energy needs of humanity are greater and more diverse than ever before. And in this energy tale, shipping of course plays a titanic role…

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

 

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Shipping is a cyclical industry and for shipyards the current trough in newbuilding orders has put further pressure on capacity. While the scale of the current surplus appears huge, this is not the first time that the shipbuilding industry has grappled with excess capacity. Looking back to the past, and specifically the shipbuilding cycle of the late 1970s, what can be learnt from previous experience?

Enjoying The Highs

The shipbuilding industry has a habit of ramping up production capacity rapidly. In 2010 shipyards broke all previous delivery records, outputting 53.2m CGT (in dwt and GT terms deliveries peaked in 2011). Compared to 2004, early into the most recent ordering boom, this was a 122% increase in deliveries. Looking back to the mid-1970s, there was a similar burst of activity as strong newbuild demand saw yard output double between 1972 and 1976 to 10.2m CGT.

What Goes Up…

As in the late 1970s, economic downturn and its impact on the shipping markets led to a significant fall in yard deliveries after their peak in 2010. The initial decrease in output was faster and sharper in the 1970s, with deliveries declining by 64% between 1976 (Year 0) and 1979 (Year 3). The current cycle has seen a more gradual fall in deliveries, declining 34% between 2010 and 2014 with 178 yards reported to have completed delivery of their orderbooks in 2012 (Year 2).

…Must Come Down

Shipyard output is still in decline. Though the surge in ordering in 2013 has helped support delivery volumes, current estimates are for an 18% fall in shipyard output in 2018. Many anticipate that the current delivery cycle will dip around 2019 (Year 9), suggesting a shorter cycle than before. It also seems unlikely that delivery levels will fall by as much as in the late 1980s, as the same pattern would imply a further 47% reduction in output from 2018 estimates to around 15m CGT.

Time To Recover?

After the 1970s crash, it took over a decade for shipbuilding output to recover. Today, following one of the weakest levels of newbuild contracting on record in 2016, the overcapacity which has characterised the global shipbuilding industry in recent years is even more prominent. While 353 shipbuilders currently have a vessel (1,000 GT or above) on order, almost half of these shipyards have failed to win a contract since the start of 2016.

If the current shipbuilding cycle were to follow the same pattern as in the 1970s, we would only be 7-8 years in, with a full recovery still some way away. However, the situation will improve if contracting levels increase. Trade growth, the replacement of older, less efficient ships and stricter environmental regulation could support yard capacity in the future through a recovery in newbuild demand.

Looking back at the shipbuilding cycle of the 1970s, it is clear that the industry has faced similar challenges in the past. It seems unlikely that we have reached the bottom of the current cycle, and pressure to remove capacity remains. Shipbuilders will be hoping that newbuild demand drivers come through quickly to stem the duration of this particular downturn.

SIW1278

This month marks the 25th anniversary of the publication of the very first edition of Shipping Intelligence Weekly. So, this week we take a look back to 1992 and compare the shipping industry then to its profile today. If this reveals anything it’s that whilst many things change dramatically, in an industry like this some things don’t appear to change too much at all…

SIW1257

Wonderful World Of Trade

Seaborne trade provides the platform upon which the shipping industry operates. Back in 1992 world seaborne trade stood at an estimated 4.6 billion tonnes and in comparison current projections suggest that in 2017 it will reach 11.3 billion tonnes. That’s 2.5 times bigger than 25 years ago (see table). Iron ore trade is projected to be 4.3 times larger than back in 1992, LNG trade 4.5 times larger and container trade a mighty 6.3 times more voluminous. The 2017 seaborne trade estimate represents about 1.5 tonnes per person on the planet. That’s quite some performance all round and keeps the world of shipping turning.

My How Big You’ve Grown

Meanwhile, shipping capacity has also expanded equally rapidly. The fleet has grown by a multiple a little greater than that registered by trade over the 25 year period. At the start of 2017 the global fleet totalled 1.86 billion dwt compared to 621 million dwt at the start of 1992. That’s a multiple of 3.0 times larger. Of course, over the period there have been changes to vessel productivity, not in the least the moderation of service speeds in many sectors in the post-Lehman downturn.

What Things Cost These Days

Alongside these significant changes, the value of shipping assets has seen more mixed trends. A 5 year old VLCC was 8% cheaper at the start of 2017 (in current terms) than at the start of 1992 but such is the state of play in the bulkcarrier market that a 5 year old Capesize is 43% cheaper. Adjust these for inflation and the values look even lower. On the other hand the scrap value of ships is higher than in 1992 on the back of an 81% higher $/ldt ship steel scrap price.

Economic Activity

Despite the recent commodity price downturn, raw materials overall are substantially more expensive than back in 1992.  Brent crude stood at $54.8/bbl at the start of 2017 compared to $18.2/bbl in early 1992 and iron ore at $76.3/tonne compared to $33.1/tonne. Bunker prices (380cst Rotterdam) have increased from $69.0/tonne to $312.5/tonne.

Elsewhere only $1.24 of shipping’s universal currency is now needed to buy one pound sterling, compared to $1.83 back in 1992, but USD borrowing (6-month LIBOR) is much less dear at 1.3% rather than 4.2%. The world economy is still growing more quickly than back in 1992, projected at 3.4% in 2017 compared to 2.3%, and is over 3 times bigger at about $79 trillion. The size of the Chinese economy has rocketed from $0.5 trillion to $12.4 trillion, and the world’s population has expanded from 5.5 to 7.4 billion.

Nothing Changes?

Last of all, some things never seem to change. At the start of 1992 the ClarkSea Index of vessel earnings stood at $11,700/day. At the start of 2017 it stood just 5.2% lower at a remarkably similar $11,092/day. In between the index once tipped over $50,000/day; that’s a cyclical business for you! Now let’s see what changes the next 25 years throw up. Many happy returns SIW!