Archives for posts with tag: spot earnings

When shipping markets start to move into the next phase of the cycle following a downturn, sometimes the percentage increases in earnings can look very impressive indeed. But of course they’re generally from a low base. With some of the shipping sectors now moving into a new phase, how else might the improvements be put into a helpful context?

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

We may be in a recession, but some segments of the shipping market are doing better than others. In the last few months the dry bulk market has been plumbing the depths of despair, whilst large tanker owners appear to have hit the jackpot, with rates surging to over $60,000/day. Why is it that tankers are doing so well this year?

It’s All About Dynamics

Back in September VLCC tankers were earning less than $15,000/day, but over the winter the tanker market “slot machine” lined itself up with the four cherries needed to hit the jackpot. The first cherry was the seasonal cycle. Oil demand is generally higher in the final quarter of the year and in 2014 major importer demand was 2.2m bpd higher in Q4 than in Q2. The second cherry was the oil price, which collapsed just as the seasonal cycle got started. By the year end Brent at $50/bbl encouraged traders punting on physical oil, and where better place to put it than in a tanker? Cherry number three was slow steaming which meant that ships were at sea, not hanging around the loading zone. In December 2014 there was only one VLCC sitting spot in the Gulf on average, down from 12 in September 2014.

Fruity Number Four?

The fourth cherry was more subtle, but equally important; tanker owners seem to be better at “finding the floor” when the market tightens. In weaker periods, the theory runs, tanker owners are less likely to counter strongly in a tight market, for fear that charterers would turn the tables when the market slackens. When the supply-demand balance is more robust, as it appears to be today, they manage things more confidently. This sounds plausible, but is it true? To check, we analysed VLCC spot earnings since 1991, using the monthly average of VLCCs spot in the Gulf to indicate available supply. Splitting the data at 2000, we calculated the average earnings for each number of VLCCs sitting spot in the Gulf.

From A Position Of Strength

The results are shown in the graph. The blue line shows the spot/earnings relationship 1991-99 and the red line shows the same 2000-15. The lines suggest that with 7-20 VLCCs sitting spot in the Gulf, earnings were much the same in both the ‘weaker’ period (average earnings of $26,000/day 1991-99) and the ‘stronger’ period (average earnings post-2000 of $46,000/day). But with 6 or fewer spot ships, the earnings since 2000 have been 68% higher, suggesting that owners can  take greater advantage of a tight supply situation when the overall supply-demand balance is more positive.

How To Win The Jackpot

So there you have it – two conclusions. Firstly the number of ships in the loading zone is what matters, not any “theoretical surplus”. If ships are slow steaming, such a surplus only matters if they speed up. Secondly the analysis suggests that when the supply of spot ships is tight, the wider ‘strength’ of the market impacts how owners negotiate matters a great deal. Relative to spot supply, VLCC earnings in the stronger post-2000 period increased significantly compared with the weaker 1990s. As a result, the conclusion for owners could be “stay slow and be brave”. Have a nice day.

SIW1164

SIW1079“In July 1969 The Rolling Stones played a concert in Hyde Park and last week, 44 years later, they were back. “Were any of you here in 1969?” Mick Jagger asked the crowd and quite a few were. But in 1969 a lot of the crowd couldn’t hear much because the amps were so feeble and there were no screens. Today rock concerts have moved on; the technology is stunning and so is the band, despite their wrinkles.

Vintage Year For VLCCs

On the subject of historic gigs, this summer is the 40th anniversary of the 1973 tanker boom, the closest shipping has got to a rock festival. During the few months it lasted, shipping’s own heavy metal band, the VLCCs, gave a historic performance. The event got off to a slow start in 1972, but when the VLCC band tuned up in 1973, they were red hot. They opened with WS 260 in June, followed by WS 296 in August, WS 342 in September, and did WS 334 for the finale in October.

What Were They Smoking?

This was new territory and the punters went berserk. Tanker orders poured in, adding 105m dwt to the orderbook (60% of the fleet). But on 6th October the Egypt-Israel war started and the music stopped. Two weeks later OPEC cut oil production by 5%, and oil shot to $12/bbl. The festival fizzled out and the players went home, nursing a massive hangover.

They were heading for one of the toughest recessions in history. Earnings crashed from $54,000/day in 1973 to $2,400/day in 1975. Timecharter income ran out, LIBOR hit 16% in 1981 and crude oil trade fell by 30%. The graph shows earnings since then on a nominal and inflation adjusted basis, numbering the peaks. By 1983 modern VLCCs sold for $3m and in 1986 were still earning $6,000/day. It took another decade to get back to normal. During the mini-peak (2) in 1991 earnings edged up to $31,000/day, but after inflation they remained weak. Finally the 1997 peak (3) signalled the hidden surplus was gone and it was “back to normal”. In the 2000s (4 and 5) even better markets arrived but in inflation adjusted terms the best they managed was $16,935/day in 2008.

Yet through all this, investment continued. Between 1974 and 1996, 200m dwt of tankers were ordered. The lesson is that shipping cycles are not just about selfcontained peaks and troughs. The effect of major disruptions can be so drawn out that players start to think of them as the norm. However bad the disruption, business goes on: cargo moves, mini-booms happen, and new ships get ordered, even if profits remain scarce.

Wrinkles for Today’s Investors
So, tanker investors grew their fleet by 75% between 1972 and 1977 and then got unlucky. Demand went wrong and they spent the next 20 years squeezing out the surplus. More recently, the bulker fleet grew by 78% between 2006 and 2012, but so far demand and interest rates are OK. Investors will hope history doesn’t always repeat itself. Have a nice day