Archives for posts with tag: shipping market

Many of shipping’s asset markets appear to offer a fairly reasonable level of liquidity most of the time, but just like the “Karma Chameleon” in the 1983 No.1 song, sometimes this can “come and go” due to a variety of factors. Recently, it appears that S&P market liquidity has been coming on strong in the main volume sectors, and once again there appear to be a number of different drivers behind the changes…

You Come And Go…

As in all economic asset markets, liquidity can change its hue according to the market environment, depending on the appetite of potential buyers and sellers to transact at a given level against a backdrop of a range of factors, including the availability of finance. From much lower or dropping levels of liquidity just a year or so ago, it seems that today S&P market liquidity has been on the up, with things looking increasingly active recently. The graph indicates, for the three main volume sectors, the monthly level of liquidity in terms of the volume of reported sales (in vessel numbers) on an annualised basis, as a percentage of the existing fleet at the start of each month. A 6-month moving average (6mma) is then taken to remove some of the month-to-month volatility and illustrate the general trend.

By George! A New High…

The lines on the graph (unlike in the song lyrics they’re not “red, gold and green”…) show how quickly the liquidity has risen in the main sectors. For bulkcarriers the 6mma has jumped from 4.1% in Feb-16 to 7.2% in Apr-17. In the tanker sector, it increased from 3.3% in Apr-16 to 4.6% in Mar-17, and in the containership sector it has leapt from 2.3% in Feb-16 to 5.5% last month. On a combined basis across the three sectors, the 6mma has increased from 3.5% in Feb-16 to 6.0% in Apr-17, and the monthly figure for Feb-17 reached 9.7%. The 6.0% figure represents the highest 6mma level of liquidity since the onset of the financial crisis in late 2008 (the low point being 2.5% and the average across the period 4.3%).

S&P’s Big Hits…

However, on inspection the drivers look a little different. In the bulkcarrier sector, as has been widely reported, with some improvements in freight market conditions buyer appetite appears to be back, and has driven pricing upwards. Reported sales volumes in the first four months of 2017 stood at 277 units, up more than 50% y-o-y. In the tanker sector, liquidity appears to be coming back after a period in which, against easing markets, prices may have been too high for buyers’ tastes. Again, volumes in the first four month are up by more than 50% y-o-y. In the boxship sector, meanwhile, it’s different once again, with distressed sales to the fore after the cumulative impact of markets which have until now been in the doldrums for some time. Mar-17 saw an all-time record monthly level of containership sales (44) and the year to date figure is closing in on the full year 2016 total.

In The Culture Club?

So, S&P liquidity can come and go, and recently it has clearly been on the way up. For those trying to transact to access tonnage, or exit the market, that’s a big help, and it’s good news too for asset players, an enduring part of the shipping market’s culture. Have a nice day!

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In the high jump ‘the scissors’ was one of a number of techniques eventually superseded by Dick Fosbury’s ‘Flop’, which saw the American athlete win the gold medal at the 1968 Olympics in Mexico City. The container shipping market has seen a bit of ‘flop’ of its own in recent years but today a return to the ‘scissors’ appears to be providing some helpful support at last…

The Flop

It has been clear to market watchers that containership earnings have spent most of the period since the onset of the global financial crisis back in 2008 at bottom of the cycle levels. The Analysis in SIW 1,245 illustrated how cumulative earnings in the sector in that time proved a bit of a flop, and notably so in comparison to those in the tanker and bulker sectors. However, it’s fair to say that things have started to look a little bit better recently.

Jumping Back

The first building block was that the freight market appeared to bottom out in the second half of last year, with improvements in box spot rates on a range of routes backed by careful management of active capacity. In the first quarter of 2017, the mainlane freight rate index averaged 64 points, up 42% on the 2016 average. However, containership charter rates remained in the doldrums into 2017, with the timecharter rate index stuck at a historically low 39 points at the end of February, before the market picked up sharply during March taking the index to 47 (though since then market moves have been largely sideways). This change in conditions was partly supported by liner companies moving quickly to charter to meet the requirements of new alliance service structures, but how much were fundamentals also driving things?

Well, the start of some upward movement at last was to some extent in line with expectations, with demand growth expected to outpace supply expansion this year, and no doubt accelerated charterer activity helped too. However, the market received additional impetus from recent sharp shifts in supply and demand.

Doing The Scissors

The lines on the graph (see description) show y-o-y growth in box trade and containership capacity; this is where the scissors come in. In 2015, capacity growth reached 8%, and remained ahead of trade growth until Q4 2016 when the lines crossed. In 2017, with capacity declining by 0.1% in Q1, backed by historically high demolition, and trade growth, notably in Asia, pushing along nicely, a big gap between the two lines has opened up. Demand is projected to outgrow supply this year (by c.4% to c.2%), but not by quite as much as seen so far. Full year expectations may be a little more restrained, but it’s still a helpful switch.

Going For Gold

So, in the case of the recent changes in containership earnings, maybe a bit of extra heat from the charterers’ side helped, but it looks like fast-moving fundamentals have offered some support too. Perhaps it all goes to show that old methods can sometimes be as good as new ones, and right now boxship investors should be happy to forget the ‘flop’ and focus on the return of the ‘scissors’.

SIW1269:Graph of the Week

The fundamental lying beneath the shipping industry is cargo and its journey, and in many cases the cargoes are the world’s key commodities. In 2014, prices across a range of commodities took a sharp dive, but over the last year or so they’ve started to improve again. So, what do the trends in the prices of the commodities underlying the shipping markets tell us about the shape of things today?

Oiling The Wheels?

Most followers of commodities will be aware of the oil price downturn, with the price of Brent crude falling from an average of $112/bbl in June 2014 to reach a low of $32/bbl in February 2016. However, it has since improved, to an average of $52/bbl in March 2017, with the key driver the implementation of oil output cuts by major producers. Despite this recent price rise, in this case the underlying commodity price trend does not appear to be supportive for shipping, with seaborne crude oil trade growth subsequently slowing, having risen by an average of 3.9% p.a. in 2015-16, and tanker markets easing back. On the other hand, rising oil prices might start to help support an improved offshore project sanctioning environment, though the stimulation of increased shale production in the US poses a risk to its seaborne imports.

Bulk Bounce

On the dry bulk side, the iron ore price fell from $155/t in February 2013 to reach a low of $40/t in December 2015 but has since recovered robustly to an average of $87/t in March 2017. Meanwhile, the coal price fell from $123/t in September 2011 to a low of $50/t in January 2016 but has since improved firmly to an average of $81/t in March 2017. In China government policies and domestic output cuts drove shipments of ore (up 7%) and coal (up 20%) in 2016, helping to support international prices. Demand growth has continued in the same vein in 2017, with ore and coal imports up 13% and 48% y-o-y respectively in the first two months. Average Capesize spot earnings recently hit $20,000/day, and some industry players have appeared cautiously optimistic about the possibility of better markets.

Spending Power?

What does all this mean for the third main volume sector, container shipping? Well, in this case, the previous downward pressure on commodity prices had been felt in the form of pressure on imports into commodity exporting developing economies faced with reduced income and spending power. This had a clear negative impact on volumes into Latin America, Africa and eventually even the Middle East; overall north-south volume growth fell below 1% in 2016. Although it’s early days yet, the recovery in commodity prices should suggest a gradual improvement even if the benefits lag commodity pricing, and the positive impact might not be evenly paced across the regions.

From The Bottom Up

So, it appears that commodity prices have now departed the bottom of the cycle. Alongside the impression of a generally firmer background, inspection of the underlying drivers suggests a mixture of messages for shipping, less beneficial in some instances, but in many ways more positive for volumes. As ever, it’s interesting to take a look at what lies beneath…

SIW1267:Graph of the Week

The introduction of new environmental regulations is leading the shipping industry to look for ways of reducing its emissions of harmful gases. This week we focus on two separate but related issues: the way in which vessels are powered, and the type of fuel that they use. New technologies are being adopted, with certain ship types leading the way…

Electric Therapy

The majority (96%) of active merchant vessels are powered by mechanical systems in which a form of fuel oil powers a main engine (usually a 2 or 4-stroke diesel) which is connected to the propeller. Most other vessels are “diesel-electric”, in which the power generated by the (4-stroke) main engine(s) is converted to electricity before being transferred to propeller(s) or thruster(s) via electric motors.

By optimising the loading of the engines, diesel-electric systems can lower fuel consumption and emissions. These systems are well established in sectors such as offshore, tugs and passenger, where manoeuvrability, variation in power demand and engine noise are important considerations. For larger cargo vessels, where demand for power is generally higher and more consistent, conventional mechanical systems remain more efficient and cost-effective. Our Graph of the Week shows that against a backdrop of reduced contracting in the larger cargo sectors, electrically-driven ships have assumed a greater share of the newbuilding market, accounting for 22% of reported newbuilding contracts so far this year.

Battery Charged

The next step for electric power may be more widespread adoption of batteries in main propulsion systems. There are 22 vessels in service and 14 on order that use batteries, mostly alongside either conventional diesel or dual-fuel generating sets. As well as reducing emissions when using battery power, these can enhance efficiency by optimising engine loads and transferring surplus power to or from the batteries as required. For smaller ferries intended for short routes, all-electric propulsion systems are feasible.

Gas Treatment

LNG has been identified as a cleaner fuel capable of reducing vessel emissions in line with new regulations. Clarksons Research’s World Fleet Register currently identifies 542 merchant ships in the fleet and on order capable of using LNG fuel. 351 of these are LNG carriers, which can use cargo boil-off to fuel a choice of turbine, dual-fuel diesel electric or dual-fuel 2-stroke main engines. In other sectors LNG fuel has taken longer to gain market share, but there are signs that where ship designs and the supply of bunkers allow, it is becoming more popular. Out of the 130 contracts recorded so far in 2017, 21 are for vessels capable of using LNG fuel. These include 4 Aframax tankers, the largest vessels other than LNG carriers to adopt dual-fuel 2-stroke engines.

More efficient power systems and cleaner fuels are two examples of how the shipping industry is responding to the challenges set by new environmental regulations. Alongside other developments in vessel design and operating practices, shipping is steering towards a more efficient and cleaner future. Have a nice day!

SIW1266:Graph of the Week

After a long cycle of build-up in capacity in the 2000s, shipyards hit a new peak in global output in 2010. Since then, the impact of reduced vessel ordering on shipbuilders worldwide has been a key issue for the industry, and it’s clear that global output has dropped significantly and shipyard capacity has diminished. But how far can those shipyards still active look ahead today?

Looking Forward

‘Forward cover’ is one basic indicator of the volume of work that shipyards have on order, calculated by dividing the total orderbook by the last year’s output (in CGT). Unsurprisingly, after a period of extremely low ordering in 2016, forward cover has shortened. Currently, global forward cover stands at 2.3 years having declined throughout 2016, as the orderbook shrank by 25% in CGT terms. Global forward cover was as low as 2.1 years at the start of 2013 (but delivery volumes in 2012 were 37% higher than in 2016) and peaked at 5.6 years in 2008.

Looking around the shipbuilding world, yards in Korea currently have the lowest level of cover at 1.5 years. European yards, meanwhile, bucked the trend in 2016, increasing their forward cover on the back of cruise ship orders (and falling production volumes) to 4.2 years.

Less To Go Round

Fewer fresh orders have also led to a greater number of yards ending the year without receiving a single contract. During 2005-08, the number of yards to take at least one order was on average equivalent to 87% of the number of yards active (with at least one unit on order) at the start of the year. In 2009-15, with ordering generally lower, the figure averaged 49%. In 2016 this fell further to 28%, with just 133 yards receiving an order. In China, 48 yards (26 of which were state-backed) won an order in 2016 compared to 284 yards in 2007. In Japan, 22 yards took an order in 2016 compared to 60 as recently as 2015. In Korea, 11 shipyards took an order last year.

Out Of Work?

Whilst many yards have tried to cope with the lower demand environment by slowing production or working outside their traditional product range, the statistics clearly point to huge challenges. In 2016, 117 yards delivered the final unit on their orderbook. The peak production level of these yards, many of them smaller builders, totals around 4m CGT. However, 163 yards are scheduled to deliver their current orderbook by the end of 2017 (although in reality slippage may mean some of the work runs on past the end of the year). Statistically, this represents 43% of the number of yards active at the start of the year. Although these yards have been reining back capacity and outputting less in recent years, the peak production level of this set of yards totals as much as 12m CGT. Offshore builders of course face huge pressures too, with about half of those active scheduled to deliver their final unit on order this year.

Global shipyard output and capacity have fallen significantly since the peak years. However, many remaining yards still don’t need to look too far ahead to see the end of their current workload. The shipbuilding industry will be hoping to see a return to a more active newbuilding market sooner rather than later.

SIW1263

We’re well into the Year of the Rooster in China now, but trade figures for last year are still coming in and it’s interesting to see what a major impact China still had in 2016. Economic growth rates may have slowed, and the focus of global economic development may have diversified to an extent, but China was very much still at the heart of the world’s seaborne trade.

Not A Lucky Year

In 2015 the Chinese economy saw both a slowdown in growth and a significant degree of turbulence. GDP growth slowed from 7.3% in 2014 to 6.9%. Steel consumption in China was easing and growth in Chinese iron ore imports slowed from 15% to 3%. Coal imports slumped by an even more dramatic 30%. Container trade was affected badly too. China is the dominant force on many of the world’s most important container trade lanes and is involved in over half of the key intra-Asia trade. Uncertainty in the Chinese economy in 2015 took a heavy toll on this and intra-Asian trade growth slumped to 3% from 6% in 2014. Going into 2016, there was plenty of apprehension about Chinese trade, and its impact on seaborne volumes overall.

Back In Action

However, things turned out to be a lot more positive in 2016 than most observers expected. China once again underpinned growth in bulk trade, with iron ore imports surprising on the upside, registering 7% growth on the back of producer price dynamics, and coal imports bouncing back by 20%. Crude oil imports into China also registered rapid growth of 16%, supported by greater demand for crude from China’s ‘teapot’ refiners.

In containers, growth in intra-Asian trade returned to a robust 6%, and the Chinese mainlane export trades fared better too, with Far East-Europe volumes back into positive growth territory and the Transpacific trade seeming to roar ahead. Overall, total Chinese seaborne imports  grew 7% in 2016, up from 1% in 2015, with Chinese imports accounting for around 20% of the global import total. Growth in Chinese exports remained steady at 2%.

Thank Goodness

Despite all this, seaborne trade expanded globally by just 2.7% in 2016. Thank goodness Chinese trade beat expectations. Of the 296mt added to world seaborne trade, 142mt was added by Chinese imports, equal to nearly 50% of the growth. Unfortunately, this was counterbalanced by trends elsewhere, with Europe remaining in the doldrums and developing economies under pressure from diminished commodity prices.

Rooster Booster?

So, 2015 illustrated that a maturing economy and economic turbulence could derail Chinese trade growth. But China is a big place, and 2016 shows it still has the ability to drive seaborne trade and that the world hasn’t yet found an alternative to ‘Factory Asia’. 2017 might see a focus on other parts of the world too, with hopes for the US economy, India to drive volumes, and developing economies to potentially benefit from improved commodity prices. But amidst all that, China will no doubt still have a big say in the fortunes of world seaborne trade. Have a nice day.

OIMT201702

With the ClarkSea Index around $9,000/day, and many if not most of the major shipping markets under severe pressure, it’s hard to escape the conclusion that the shipping markets are a tough place right now, with limited pickings to share between owners. However, everything’s relative, and from one angle the size of the ‘pie’ might just be bigger than it seems…

How Big’s The Pie?

Last week the ClarkSea Index stood at $8,743/day, and during 2016 as a whole the index averaged $9,441/day, taking into account earnings in the tanker, bulkcarrier, gas carrier and containership sectors, across a selection of over 21,000 units at the start of the year. Estimating the aggregate annual earnings for the basket of vessels in question, that works out at $72.5 billion in full year 2016. To put this in context against the boom years of the 2000s, in 2007 the ClarkSea Index averaged $33,061/day across a basket of over 15,000 ships, generating aggregate earnings of $189.1bn, over two and half times more than in 2016.

In terms of average earnings levels, 2016 actually compares more equally to 1992, 25 years ago, when the ClarkSea Index averaged $9,786/day, or 1999 when it averaged $9,855/day. But of course the fleet has grown since those days and, in dwt terms, the basket of ships in the index in 2016 was 159% bigger than in 1999 and 219% larger than in 1992. Aggregate earnings in 1999 reached $43.6bn and in 1992 were $36.1bn. 2016’s total was 66% and 101% larger respectively. In today’s challenging markets it is food for thought that the earnings stream is still that much bigger than at similar earnings levels in the past.

A Bigger Bake

And furthermore, there’s a wider world of shipping outside the scope of the ClarkSea Index basket which is (hopefully) generating income too. If, for instance, the 2016 earnings of the ClarkSea Index basket were extrapolated on a $/dwt basis (it stood at $48/dwt) across the whole of the 1.7bn dwt world cargo fleet, the overall earnings of that wider fleet would have come to $85bn. That’s roughly the size of the economy of Ukraine!

Rising Cost Of Ingredients

However, having said all this, it’s not just about earnings. Costs need to be taken into account too. Using a weighted index of OPEX across the ClarkSea Index basket and subtracting it from aggregate earnings would imply an overall net cash flow in of $23.4bn in 2016 (this compares to around $150bn in 2007 and 2008). Helpfully, in recent decades fleet expansion has outweighed growth in OPEX so the net cash flow pie has grown compared to previous downturns too.

A Slice Of The Action

So, whilst market conditions are as challenging as any seen in the last few decades, the revenue ‘pie’, though hardly tasty yet, is at least significantly larger than it was last time that earnings were at a similar level. For the industry that means a larger pie to be shared around. In today’s difficult markets that could be helpful, but of course you have to get a big enough slice. Have a nice day.

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