Archives for posts with tag: shipping markets

“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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In the last few decades, the shipping industry has generally been able to rely on seaborne trade as a fairly steady performer. However, the slowdown in volume growth since the financial crisis has focussed the industry’s thoughts on potential barriers to healthy long-term trade growth, so all eyes are on signs of a potential return to faster expansion in volumes…

Steady As She Goes

From 1988 to 2008 growth in world seaborne trade averaged an estimated 4.2% pa, a fairly robust level underpinning long-term demand for ships. Sure, the markets at times felt the impact of oversupply, but sustained weakness of demand growth wasn’t generally the problem. However, since 2009 the growth rate has slowed, averaging 3.2%, and just 2.8% since 2013. This still equates to significant additional volumes (1.8% growth in 2015 added 194m tonnes) but it’s still enough to get market players worrying.

Could Be Worse?

But should it? Maybe it depends on how you put the trend into context. Cycles can be long; Martin Stopford has famously identified 12 dry cargo cycles of more than 10 years back to the 1740s! The current cycle certainly feels like it has dragged on; it’s now more than eight years since the onset of the financial crisis. However, there are interesting historical comparisons. Between 1929 (the year of the Wall Street Crash) and 1932, the value of global trade dropped by 62% and didn’t get back to the same level until the post-war years. Now that really would have been a time to worry!

Getting Serious?

Today perhaps some of the anxiety is amplified by the seemingly wide range of factors that look threatening to seaborne trade’s supportive historical record. Protectionist tendencies, whether they be from the Trump presidency or the UK’s Brexit vote, slowing growth in China, ‘peak trade’, robotics and 3D printing: no-one really knows how things will pan out but everyone’s watching closely for anything to allay at least some of the fears.

Basket Case

So that brings us back to our old friend the ‘monthly trade basket’ (see graph and description). Six months ago we reported that this appeared to be showing a pick-up and this time round things are still looking positive. The 3-month moving average shows a generally upward trend since autumn 2015 with an average of 4% in the second half of 2016, hinting that the bottom of the demand cycle may finally have been passed. The current projection for overall seaborne trade in 2017 is still less than 3% with plenty of scenarios possible, but both market sentiment and the momentum right now feel a little more positive than that.

Feeling Any Better Yet?

So, while it’s quite right to try to assess the range of factors which appear to be lining up against a return to more robust levels of trade growth, it’s also far from incorrect to look for signs of a turn in the trend. Cycles in shipping can be long and sometimes it can take a while to identify them. That may not be helpful to hear but you can have a nice day trying…

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The shipping markets have in the main been pretty icy since the onset of the global economic downturn back in 2008, but 2016 has seen a particular blast of cold air rattle through the shipping industry, with few sectors escaping the frosty grasp of the downturn. Asset investment equally appears to have been frozen close to stasis. So, can we measure how cold things have really been?

Lack Of Heat

Generally, our ClarkSea Index provides a helpful way to take the temperature of industry earnings, measuring the performance of the key ‘volume’ market sectors (tankers, bulkers, boxships and gas carriers). Since the start of Q4 2008 it has averaged $11,948/day, compared to $23,666/day between the start of 2000 and the end of Q3 2008. However, earnings aren’t the only thing that can provide ‘heat’ in shipping. Investor appetite for vessel acquisition has often added ‘heat’ to the market in the form of investment in newbuild or secondhand tonnage, even when, as in 2013, earnings remained challenged. To examine this, we once again revisit the quarterly ‘Shipping Heat Index’, which reflects not only vessel earnings but also investment activity, to see how iced up 2016 has really been.

Fresh Heat?

This year, we’ve tweaked the index a little, to include historical newbuild and secondhand asset investment in terms of value, rather than just the pure number of units. This helps us better put the level of ‘Shipping Heat’ in context. In these terms, shipping appears to be as cold (if not more so) as back in early 2009. This year the ‘Heat Index’ has averaged 36, standing at 34 in Q4 2016, which compares to a four-quarter average of 43 between Q4 2008 and Q3 2009.

Feeling The Chill

Partly, of course, this reflects the earnings environment. The ClarkSea Index has averaged $9,329/day in the year to date and is on track for the lowest annual average in 30 years. In August 2016, the index hit $7,073/day, with the major shipping markets all under severe pressure.

All Iced Up

The investment side has seen the temperature drop even further. Newbuilding contracts have numbered just 419 in the first eleven months of 2016, heading for the lowest annual total in over 30 years, and newbuild investment value has totalled just $30.9bn. Weak volume sector markets, as well as a frozen stiff offshore sector, have by far outweighed positivity in some of the niche sectors (50% of the value of newbuild investment this year has been in cruise ships). S&P volumes have been fairly steady, but the reported aggregate value is down at $11.2bn. All this has led to the ‘Shipping Heat Index’ dropping down below its 2009 low-point.

Baby It’s Cold Outside

So, in today’s challenging markets the heat is once again absent from shipping. And, in fact, on taking the temperature, things are just as icy as they were back in 2008-09 when the cold winds of recession blew in. This year has shown that after years out in the cold, it’s pretty hard for things not to get frozen up. Let’s hope for some warmer conditions in 2017.

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As snooker players know, it’s hard to keep a good break going. In today’s conditions, the shipping industry needs supply-side re-positioning to help the markets back to improved health, and increased recycling in recent years has been a clear part of this. However, there’s still some way to go to better times, so it’s worth taking a look at how today’s ‘big break’ might leave the future potential scrapping profile.

The Big Break!

Since the start of 2009, a total of 206.6m GT of shipping capacity has been sold for recycling, compared to an aggregate of 63.1m GT in the previous seven years. This total includes 94.7m GT of bulkcarrier tonnage and 29.1m GT of containerships, helping to address oversupply in the volume shipping markets. But given such a prolific run of demolition activity, what does the future potential scrapping profile look like? Well, there are many measures that can be used to investigate this, including the metric featured in the graph. If the average age of scrapping is taken as a useful indicator of the current state of conditions facing owners in each market, then calculating the amount of tonnage remaining in the fleet at today’s average age of scrapping or higher might tell us something interesting, especially if ongoing market conditions persist.

What’s Left On The Table?

In the tanker sector, which up until fairly recently was backed by stronger market conditions, the average age of scrapping in the year to date remains relatively high, at 25 years for crude tankers and 27 for product tankers (bear in mind that not many tankers have been sold for scrap recently, and the average age may fall). Given that a lot of older single hulled tanker tonnage was phased out in the 2000s, the amount of tonnage above the average age today is limited. In the bulker and containership sectors, both under severe market pressure for some time now, the statistics are a little more revealing. Despite heavy recycling in recent times, the share of tonnage above the current average age of scrapping is 8% for Capesizes and 6% for Panamaxes. For boxships sub-3,000 TEU the figure is 10% and for those 3-6,000 TEU 12%. Of course if the average age of scrapping falls, then the picture changes again. In the 3-6,000 TEU boxship sector, the youngest ship sold for scrap this year was just 10 years old; around 50% of tonnage today is that age or older.

Cue More Demo?

What does this tell us overall? Well, using the sector breakdown shown in the graph, the statistics tell us that around 75m GT in the fleet is above the current average age of scrapping, 6% of the world fleet. At 2016’s rate of demolition, that’s another 2.4 years’ worth. And given the age profile of the world fleet, after another 2 years an additional 21m GT will have crossed the current average age mark and after 5 years another 77m GT.

Break Not Over?

So, what chance does the industry have of keeping the demolition pressure on? Well, obviously freight and scrap market conditions and regulatory influences will have a big say. However, it looks like, in today’s terms at least, the industry might be in a good position to keep the break going. Have a nice day.

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One of the major drivers behind the challenges currently facing many of the shipping markets has been slower demand growth. World seaborne trade grew by less than 2% in 2015, the slowest pace since 2009, with trends in China pivotal. After the emergence of plenty of disappointing demand-side data last year, what do the indicators of Chinese trade so far in 2016 reveal?

A Surprising Start?

It’s a vital question. Chinese seaborne imports reached a massive 2.1 billion tonnes last year, accounting for 20% of global imports. But in 2015, growth in Chinese imports eased to just 1%, from an average of 9% p.a. in 2011-14. However, data for the first quarter of 2016 provides some pleasant surprises. After slowing for four consecutive years, growth in Chinese seaborne imports in tonnes appears to have picked up pace in Q1 2016, increasing by 6% y-o-y.

Picking Up Speed

Iron ore trade, which last year accounted for 45% of total Chinese imports, has driven much of this growth. Iron ore imports had a strong Q1 2016, rising by 7% y-o-y to 239mt. This was supported by restocking of iron ore inventories in line with improved steel demand and prices in recent months, following government support for infrastructure projects. This has been despite total steel production continuing to contract y-o-y, by 4% in Q1. Meanwhile, Chinese coal imports appear to have stabilised recently, following a sharp fall in 1H 2015, and the pace of decline in imports in Q1 2016 eased to 6% y-o-y. Growth in China’s minor bulk imports also improved marginally in Q1.

Some improvements have also been apparent outside of the dry bulk sector. Expansion in China’s crude oil imports has accelerated, with imports up 14% y-o-y in Q1 to 84mt, following robust growth of 9% in 2015. Imports have been boosted further this year by the liberalisation of the crude oil import market, opening up imports to independent refiners. And although Chinese gas demand came under pressure in 2015 from weaker industrial use, recent cuts to domestic gas prices have supported demand and LNG imports grew 17% y-o-y in Q1 2016 to 6mt.

Mixed Results

Meanwhile, indicators of Chinese exports remain mixed. Container trade on the key Far East-Europe route grew slightly in Q1, after falling 4% in 2015; the impact of adjustments to European inventories and falling Russian demand is likely to moderate this year. However, growth in China’s steel products exports has slowed, partly reflecting greater domestic steel demand.

A Question Of Endurance?

Overall, it would still be fair to say that the seaborne demand environment is still highly challenging, and that volatility clouds the picture in China and elsewhere. Moreover, questions remain over the sustainability of recent developments in some of China’s industrial sectors, and major obstacles to trade volume growth clearly remain. Nevertheless, there are some areas where improved Chinese volume growth has provided a nice surprise so far this year. Against a troubled background, shipping market players will hope these trends at least have a little mileage. Have a nice day.

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The volatility of the shipping markets has always presented opportunities and pitfalls for investors (see SIW 1210). Getting the timing right is key, and newbuilding decisions can prove especially difficult given the need to look further forwards into the future – always a tricky task. The challenging state of many shipping markets suggests that owners have struggled to find the right balance when planning ahead.

Changeable Winds

Accurately forecasting future shipping market developments is clearly fraught with difficulties. Owners making newbuild investments may be renewing their fleets, or building for dedicated business, but for those ordering more speculatively, the investment might reflect expectations of future demand and market conditions.

These trends are hard to predict. Economic and political developments, amongst many others, can shift quickly and change trade patterns. Combined with supply factors such as newbuild pricing or finance availability, it is easy to see how the volume of tonnage ordered can be misaligned with the requirement.

Clouds Gathering

Comparing historical contracting to the volume of ‘required’ deliveries shows that investment has frequently ‘overshot’ the need for additional ships. In 2003 for example, global contracting totalled 117m dwt. Assuming that these ships take two years to be delivered, trends in 2005 could indicate whether this level of ordering was lower than or surplus to requirement. Global demolition totalled 6m dwt in 2005, and world seaborne trade grew by 4.5%, which based on estimated fleet productivity in 2003, could have required an extra 42m dwt of tonnage to transport. So ordering in 2003 may have been 70m dwt greater than the estimated volume of deliveries needed in 2005. The surplus was even greater in 2007, when 275m dwt was ordered, but with seaborne trade dropping by 3.7% in 2009, there was no ‘requirement’ for any additional tonnage to be delivered that year.

Gusts From The East

Since 2000, more years than not have seen ‘excess’ ships ordered. After the financial crisis hit, surplus capacity led to weaker markets and changes in productivity, such as slow steaming. Ordering in 2009-12 was closer to estimated ‘requirement’, but surged to 178m dwt in 2013, with hope in some sectors that the bottom of the cycle had been reached.

Yet 2015 saw seaborne trade growth slow to 2.1%, led by trends in China. With 39m dwt scrapped in 2015, and an estimated 36m dwt needed to ship the additional trade volumes, ordering in 2013 could have ‘overshot’ by 100m dwt, exerting further supply pressures.

An Unsettled Climate

The story clearly varies across sectors, but shipping investors seem an optimistic bunch, and are now being let down by underperformance of seaborne trade. At times, this optimism has raised demand for shipyard capacity, but has still created a surplus, with lower ordering in 2014-15 still possibly excess to requirement based on current projections. In such a changeable climate as shipping, it’s clear that checking the forecast is vital, but it seems that getting a clear view ahead is hard.

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For many of the markets covered by Shipping Intelligence Weekly, the first part of 2015 was relatively kind. Rates for crude and product tankers were riding high, boxship charter rates picked up for the first time in years and VLGC rates have hit levels above 2014 averages. Even Capesizes have recently shown signs of life. But spare a thought for the offshore sector, the hardest hit by the oil price decline.

Price Drop

Back in the downturn of 2008/09, most commodity and shipping markets felt the negative impact and the offshore markets were no exception, with dayrates dropping by an average of around 35% (see graph).  Moving forward to the current time, however, the 50% decline in oil prices since mid-2014 has brought some relief for merchant vessels, in the form of cheaper bunkers, and stimulated oil demand, helping trade. But cheaper oil has meanwhile put heavy pressure on the offshore sector, where field operators already faced cashflow problems as field developments ran late and over-budget. The response has been sharp cuts in exploration and production (E&P) budgets. It is estimated that spending on offshore E&P will fall by 19% this year.

Investment Cuts

This means investment decisions on new projects have been deferred, whilst expenditure to enhance recovery from existing fields has also slipped. Accordingly, drilling demand has fallen, just as deliveries of new jack-up and floating drilling rigs have accelerated. Rates for ultra-deepwater floaters are now almost 50% below their late 2013 peak, at around $300,000/day. This reflects the reduced demand in frontier areas for exploration and appraisal drilling, not helped by the corruption investigations in Brazil. Meanwhile, jack-up drilling rig rates have been equally hard hit, with shale gas production killing demand in one of their traditional major markets, the shallow water Gulf of Mexico. Utilisation of jack-ups is below 80%, and rates have fallen more than 35% to around $100,000/day.

Less Support For Vessels

This has had rapid knock-on consequences. The 5,365 vessels and 1,133 owners in the OSV market are also exposed to the downturn in exploration drilling and operational field maintenance. Fewer active rigs harms the AHTS market for rig towage and positioning, whilst PSVs rely on the growth in active offshore installations (drilling rigs, plus mobile and fixed production platforms) to add to demand. Rates for OSVs are down in all regions, by over 35% on average in terms of the index on the graph. PSVs have a further problem of a robust supply growth to contend with (and close to 40% of the fleet on order for the largest units over 4,000 dwt).

Of course, markets are cyclical, and the offshore sector had its moment in the sun during 2012/13, at a time when several of the merchant shipping markets were in the doldrums. Although the current oversupply in world oil markets of around 1.5m bpd is a clear short-term hurdle, projected demand trends suggest that higher oil prices remain a likely prospect in the long-term, and the improvement in other sectors suggests that there will eventually be light at the end of the tunnel for offshore too. It’s just that it could be a little way off yet. Have a nice day.
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