Archives for posts with tag: steel

Marvel’s Iron Man, as depicted in the 2008 film, features industrialist and genius inventor Tony Stark creating a powered suit, later perfecting its design and fighting evil. While it was a gold titanium alloy rather than iron which was used to make the futuristic armour, iron-based materials such as steel are used incredibly widely in the world’s industries today, with clear implications for shipping too.

Steel At The Heart

The strength of Iron Man’s suit was what helped turn Tony Stark into a superhero. The versatility and strength of steel has made it today’s most important construction material, with 1.6 billion tonnes of steel produced last year. Over recent decades, steel became one of shipping’s superheroes, with the unprecedented growth in Chinese steel production leading to a doubling of global steel output between 2000 and 2014, and helping to underpin the biggest shipping market boom in history. Growth in China’s raw material demand was explosive, and by 2014, global seaborne iron ore and coking coal trade totalled 1.6 billion tonnes, one seventh of total seaborne trade.

A Dangerous Weapon

But even superheroes have weaknesses, and reaching new heights was problematic for Iron Man, when the build-up of ice on his suit at high altitudes brought him back down to earth with a bump. A distinct chill in the air has recently surrounded the steel industry too. Slower economic growth in China, which uses half of the world’s steel, led Chinese steel consumption to drop 5% in 2015, undermining steel prices. Difficult economic conditions elsewhere also limited steel use, with consumption in Latin America and the Middle East declining 7% and 1% respectively last year, and overall, global steel output fell 3%. Weaker demand for steelmaking materials was a key driver of the fall in seaborne dry bulk trade in 2015, despite a 20% surge in Chinese steel exports. The steel market remains challenging with world consumption expected to fall again in 2016, and dry bulk trade still lacks the power to boost the bulker markets back into higher altitudes.

In Need Of A Shield

Of course, steel also impacts the supply side of the shipping industry. In Iron Man’s final showdown with the ‘Iron Monger’, in the end it all comes down to a good design and precise timing, concepts close to any shipowner’s heart. As the very fabric of the ships themselves, steel is a key cost for shipbuilders, but volatile prices have just as big an impact at the older end of the market. With continued exports of surplus steel from China maintaining pressure on steel prices, there is limited light at the end of the tunnel for owners scrapping ships in difficult market conditions for values around 50% lower than just two years ago.

Iron World

So there you have it. An Iron Man with a will of iron can save the world, whilst steel can bring the world’s shipowners fortune and challenges in equal measure. Steel may no longer be the superhero of seaborne trade growth, but it is still the glue that quite literally holds the shipping industry together and keeps 11 billion tonnes a year of cargo afloat. Now that’s a superhuman effort. Have a nice day!

SIW1239 Graph of the Week

Advertisements

Eleven years ago in 2003, when China opened its doors and the steel boom got underway, the shipping community was suddenly presented with an ‘Aladdin’s Cave’ of cargo. Unlike Japan and Korea, China had not locked in the fleet of ships it would need. So the escalating imports of iron ore soon turned into a gold mine for shipping. With so much cargo and a limited fleet of ships, Capesize rates surged.

Unexpected Riches

Shipping has always done well out of “miracle” economies, but the Chinese growth surge which followed was special. In the next decade, Chinese industry, especially steelmaking, grew faster than anyone could possibly have predicted. In 2003 the Chinese government thought steel production would reach 300mt in 2010. Actual output in 2010 was 627mt. The effect on trade was profound. China’s seaborne imports quadrupled, reaching 2 billion tonnes in 2013, by far the most any country has ever imported in a year. The freight boom this triggered between 2003 and 2008 was also arguably the best in the industry’s history.

Even after the Credit Crisis in 2008, China kept expanding, with just one short-lived wobble in 2009. This growth helped cushion shipowners from a 1980s style meltdown that might otherwise have hit the bulk and container markets.

Unavoidable Evolution

But in the real world, economies move on and there are many signs that change is underway. China is a very big country, and some provinces are still poor, but across the economy activity is slowing. Industrial production growth fell to 6.9% year-on-year in August and the dollar value of export trade, which for many years grew at about 20-30% pa, only managed 8% in 2013.

The real change this year has been in steel and construction. Official statistics suggest that floor space under construction is down 17% year-on-year and house completion is down about 30% this year. Some Beijing analysts are predicting much lower house building over the next two years. Although iron ore imports are up by 18% year-on-year, steel production is only growing at 5%. Not a good omen. Meanwhile steel prices have slumped another 5-10% and steel exports are up 37%. All signs of market weakness.

Value-Added Production

Of course these trends could be cyclical, but China is a very different economy from 10 years ago. A new generation has grown up with computers, smartphones, cars, fashion and confidence. Environmental concern, which triggered the impending ban on high sulphur coal imports, illustrates the way these changes can trickle through into trade.

New Trend, Old Story

So there you have it. China’s sprint for growth is easing off and it is projected that imports will grow 5% this year. This is way below the 10-20% pa of the boom years. It happened to Japan and Europe in the 1960s and to South Korea in the 1980s and 1990s. So does that mean ‘Aladdin’s Cave’ is empty? Such a big cave with so many dark corners, makes it hard to say, but it’s a serious issue for investors. Have a nice day.

SIW1143

Currently, the news seems full of warnings about the health of the Chinese economy. If it’s not worries over the extent of lending by the so-called “shadow banking” system, pessimists would have us believe that China is on the brink of a catastrophic housing bubble, or point to the impact of pollution reaching new highs in major Chinese cities. How should the shipping industry evaluate these issues?

What’s At Stake?

Of course, anything which harms the Chinese economy will generally be bad news. As the Graph of the Week shows, the Chinese economic miracle has been built on an import/export boom some distance in excess of the rest of the world’s efforts at trade growth, with Chinese trade growth accounting for over 90% of global expansion in some commodities.

The two drivers of the Chinese economic miracle which has transformed the shipping industries have been consumer exports, fuelled by cheap labour, and infrastructure investment in construction in China. These two factors are mutually interdependent: the share of the Chinese population living in cities has increased from 35% to 50% since 2000. All these new urbanites need housing, boosting construction. And what does this require? Steel, of course. Construction of housing for urban migrants, along with factories to employ them and services from shopping malls to roads and railways, has spurred Chinese seaborne iron ore imports to nearly 900mt p.a. The effect on the Capesize fleet needs no repeating.

If You Build It They Might Come

The real problem is not all of the construction is where it is needed: there are several virtually uninhabited brand new cities in Inner Mongolia, and a replica of central Paris (with Eiffel Tower!) in Zhejiang province. Signs of a slowdown in these sorts of construction projects have contributed to iron ore prices at the lowest levels in nearly 2 years.

Much of the construction effort of the last few years has been fuelled by fairly easy access to credit, with less conventional “shadow” credit a worry for some. Consumers have also taken on debt to increase their spending power. As more citizens begin to drive cars, oil import demand is stimulated. As they gain disposable income, demand is also generated for goods which drive expanded intra-Asian container trade and a greater need for imported manufacturing materials.

Pollution is another problem China now seems to be taking seriously. This is a bearish sign for areas of heavy industry including iron ore and crude oil importers, particularly the large number of steel mills in Hebei province, near Beijing.

Bad News? Or Not?

So, negative talk about the Chinese economy abounds. But time and again in the last decade, China has surprised (sometimes with the help of a little fiscal stimulus, admittedly), and a controlled deceleration remains the most likely outcome. Reports suggest that GDP growth will struggle to meet Beijing’s target of 7.5% this year. But a near miss would still be a growth rate that most other economies would love to be faced with. Moreover, industrial production in June was up 9.2% year-on-year, the fastest rate this year: maybe China still has the ability to surpass expectations. Have a nice day.

SIW1132

SIW1115Big ships get lots of attention. How often do you read about the Valemaxes, Capesizes and VLCCs? Of course the big bulk trades are massively important and the five major bulks totalled 2.8 bt of cargo last year. But they’re not the whole story. The minor bulks are not so minor any more. This year they will reach 1.5 bt of small parcels that tie up lots of ships – probably about 200 m dwt.

Minor Bulk, Major Cargo

This seething mass of trades is the bedrock of the “handy bulker” business, but for analysts they are challenging. Clarkson Research tracks more than 30 “minor bulk” commodities, each a micro-business with its own drivers, trading partners and transport requirements. The smallest is less than 10 mt pa and the biggest nearly 300 mt. The best way to deal with so many commodities is to bundle them into groups that can be analysed together.

The “Six Minor Bulks”

The six minor bulk commodity groups shown in the chart are agri-bulks; fertilisers; forest products; iron & steel; minor ores; and other minerals. This wide-ranging mix of trades displays good and bad points. On the positive side, the average volume trend since 1990 has been upwards. In the period 1990-2003 minor bulk trade grew at an average of 3% per annum, and this has risen to 4% in the years since then. Not so good was the volatility, growth swinging between 6-8% pa (for example 1994, 2003-4, 2006-7 and 2011) and zero or negative growth (1991, 1996, 1998, 2001 and 2008-09).

Cargo Diversity

There has also been a good deal of diversity in the growth rates of the individual commodities. Across the period in question agribulks and fertilisers, two solid trades of around 300 mt combined, grew at 3% per annum, which fits in with their agricultural base. But forest products, another 200 mt trade, have been quite flat, averaging only 0.9% growth since 1990. Iron and steel, which includes products, scrap, pig iron and DRI reached 426 mt in 2013. But trade growth has averaged only 2.8% pa and the trend is edging downwards. In contrast the minor ores, which include nickel, manganese and copper, are the stars of minor bulk. They have averaged 9.2% pa growth since 1990, accelerating to 15.7% in the last decade, backed by Chinese demand. Finally the other minerals include lignite, anthracite, cement, sulphur, salt, petcoke, limestone and lots of very small trades. Together they totalled almost 500 mt of cargo in 2013 – a challenge for analysts, but good business for small bulkers.

Real Life Shipping

So there you have it. Minor bulks don’t hit the headlines, but they provide business for an enormous range of shipowners at the smaller end of the dry market. Some are big and highly organised corporates, others are companies with just a few ships. And with each decade the trade gets bigger and more complex, which, on the whole, is good news for shipowners who like a challenge but not media attention. Have a nice day.

SIW1113Every so often we reach milestones in shipping that are worth pausing to celebrate and in 2014 the industry will achieve the no mean feat of moving 10 billion tonnes of international seaborne trade across the world’s open seas. Our Graph of the Week illustrates the strong growth of the past thirty years, with trade doubling since 1995 and tripling since 1984. The graph also highlights another industry milestone reached back in 2002, when the world fleet first transported more than one tonne per person globally. With China fuelling growth (it is estimated that at least half of the 4bn tonnes added since was China-related), this ratio has surged to the current figure of 1.4 tonnes per person.

Winners & Losers

So what are the “winners” and “losers” in the period between our two trade “milestones”? Reminding us that it has been very much at the heart of globalisation and a strong growth story despite its current travails, container trade leads the way contributing nearly a quarter of all growth with 931m tonnes. Iron ore, with 815m tonnes, and coal with 605m tonnes, are less of a surprise (with Capesizes the main beneficiary) and indeed over 50% of all trade growth was dry bulk related. Elsewhere there have been good contributions from steel products, grain, oil products and LNG. Crude oil has been disappointing however with growth of only 250m tonnes over the period and its share of trade dropping to 18%. A few trades have shown no growth at all over the period, for example phosphate rock, with fertiliser processing increasingly taking place at source.

Wildcards

Trade forecasters have been caught out more than a few times in recent years with major surprises in each of the key markets. Back in 2002, general consensus on China grossly underestimated the development of the steel industry and related import levels, while the turnaround in the US energy balance has been just as surprising and is significantly impacting the oil and gas trades. Container trade meanwhile generally grew (prior to 2009) at a few % points higher than the long term forecasts from the early 2000s. Throw in the financial crisis, when trade contracted for the first time since 1983, as a further challenge.

Another Ten Billion?

So where next for trade? In the 1980s growth was a sluggish 1%, before more encouraging growth of 4% in the 1990s and again in the 2000s. Some things seem more predictable – it’s difficult to look past China, India and Other Asia providing the majority of regional growth in the medium term, while most observers would expect gas to grow above trend – but other issues are far more uncertain. At 4% growth (a number we don’t feel is unreasonable for scenario planning on the basis of continued globalisation) we reach 15 billion tonnes by 2024 and 20 billion tonnes by 2031. Of course with shipping moving 90% of all global trade, the physical world rarely plays out like a smooth line on a graph and it’s the “wildcards” that often have the largest impact!

SIW1099It’s amazing what people throw away. London skips are full of stuff which, presumably, didn’t fit in with the latest loft style decor. Who’s got time to put it on eBay? So it just gets chucked out. Chucking away household oddments is fair enough, but chucking out ships that don’t fit the decor is a very different story.

Demolition Demographics

The idea that “obsolete” ships should be scrapped to make way for a new generation of “eco-ships” raises the key question of whether ships built in the cheap oil era really are obsolete. 20 years is the normal “sell by” date, but there are only 111m dwt of ships over 25 years old and another 69m dwt aged 21-25. With demolition of 58m dwt in 2012, that is not much. So serious scrapping would need to dip into the fleet under 20 years.

Pick Low Hanging Fruit

The positive message is that many of today’s older ships can be retrofitted to improve performance, often at a manageable cost. This argument was made eloquently by Maersk at the prestigious IMAREST NK Founders Lecture in London this week. Maersk have a unique platform to test the proposition. Their 1000+ ship fleet burns 10m tonnes of bunkers a year costing over $6 billion and their retrofitting programme covers 300+ ships.

Retrofitting can be productive because most ships in the world fleet were built to “maximum speed at minimum cost” and contract spec is a poor guide to actual performance. When Maersk analysed the in service operations of 21 designs they found some performed 15% better than contract, but others 15% worse. So sea trials don’t reproduce real world conditions. There has been no major technical change for new ships to exploit and the recent Royal Academy of Engineering report on “Future Ship Powering Operations” does not see any in the short term. But many fuel-efficient add-ons can be retrofitted to boost older tonnage. Better injectors, Mewis ducts, or raising a containership’s bridge to accommodate an extra tier of boxes are a few examples.

Benchmarking Bonanza

Information is the core of the Maersk philosophy. Improvements are meticulously planned and benchmarked. Then the operation of the ships is monitored day by day for benchmark deviations. For example, there is no point in fitting a waste heat recovery unit unless it actually produces the predicted savings. Of course, assessing the value is tricky, but small improvements accumulate and their tanker fleet upgrading yielded an 8% fuel cost saving – crucial cash in a weak market.

If It Ain’t Broke, Fix It

So there you have it. The era of anonymous floating steel boxes is over. At $600/tonne (or $1,000 for distillate) Maersk’s message is that eco-management is a game changer. And many owners will enjoy the “back to basics” challenge of running a tightly monitored eco-fleet which delivers cargo like clockwork and is green too. Have a nice day.

SIW1093In recent years large crude tankers are down having taken a good kicking, and today punters don’t seem to like the look of them. However, a survey of earnings in each major sector during the five years since the 2008 crash tells a slightly different story, which is worth looking at closely.

Method In The Madness

To calculate an “earnings ratio” for each ship type since October 2008, average monthly earnings were divided by estimated operating expenses (OPEX). The result is a percentage showing earnings as a multiple of OPEX. For example 300% means that the average earnings was three times operating costs, a good result. 100% would mean that the average earnings equalled operating expenses, with no “free cash”. This ratio was calculated for the 10 ship types shown on the graph and ranked with the biggest ratio at the top.

Who Would Have Thought It?

Top of the list with 300% are Capesizes. Investor sentiment backs this up, even if five years ago Capes looked like they were on the slipway to oblivion, with an enormous orderbook and doubts over Chinese steel demand. But the most interesting feature of this survey is that two of the top four places in the ranking go to types that popular sentiment does not appear to care for. Those primetime underdogs, VLCCs, come fourth, with a 223% earnings ratio and Suezmaxes are even higher in second place with 243%.

The middle ground is occupied by Aframaxes and Panamax bulkers, with ratios of 190% and 179%. Not such a bad result. Finally at the bottom of the table are the products tankers at 140%-160% and the containerships. MR products tankers have been recent favourites with investors, with more positive fundamentals today, but these figures (although precise earnings can be hard to track due to complex trade patterns) reflect some tougher periods in the last five years.

What’s The Message?

Technical issues aside, there are four points. Firstly, over the five years everyone made a bit of cash, mostly in the earlier years. Secondly there is a striking correlation between the earnings performance and size. Three of the top four performers are all over 100,000 dwt, with some midsize vessels in the middle ground. Thirdly, big tankers generally did little worse than bulkers, maybe due to the smaller orderbook. Finally, the worst performers were container charter ships, illustrating the danger of relying on “trickle-down” income from beleaguered liner companies.

Love Hate Relationship

So there you have it. Big tankers have performed relatively well since the crash, but now they’re on the rack of market sentiment and falling US imports. Of course the next few years could be a different story; with only 10.5% of the fleet on order and fewer contracts then deliveries, there’s not much wrong with future supply. The problem is on the demand side, but is that really as bad as it looks? You decide. Have a nice day.