Archives for posts with tag: tanker sector

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.

SIW1242 Graph of the Week

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Bulkcarrier investors are generally an optimistic lot, with little time for pessimistic analysts. They know that however gloomy the forecasts, some time they will make a nice profit. After all, the ships last 30 years, especially small bulkers and a lot can happen in that time. But occasionally even they get gloomy and that seems to have happened today.

Bottom Fishing For A Bonus

It’s easy to see why. The Baltic Dry Index has hit all-time lows and Capesizes, which were supposed to be gold-plated investments in a world dominated by China, are looking decidedly tarnished. Nearly new ships have been chartering for well under $10,000/day and it’s been going on for a long time. These moments of deep negative sentiment are often a good time to invest, especially if finance is in short supply. It happened in 1986 when a new Panamax bulker cost $13.5m and a 5 year old ship cost $6m, and again in 1999 when new Panamax prices slumped below $20m and a 5 year old ship was sold for $13.5m. 10 years later these ships became profitable beyond the dreams of even the most optimistic investors, grossing over $100m in earnings and capital gains. Could this be another magic moment?

Gut-Based Gambling

Deep negative sentiment generally occurs when everything goes wrong at the same time. In the 1980s the world economy went into deep recession after the second oil crisis. Surplus bulker capacity was topped up by heavy deliveries, which the closure of shipyards did little to neutralise. Banks were too preoccupied with defaulting clients to consider new loans. In 1997-99 the Asia crisis, which coincided with a surge of deliveries after the brief 1995 bulker boom, left investors wondering if they would ever see light at the end of the tunnel. China was not even on the radar.

Today’s bulker outlook is also gloomy. The global steel industry is under immense pressure, and an increasing focus on clean energy is souring the outlook for coal consumption. Chinese dry bulk imports have dropped, and prospects for Indian coal imports have also worsened. So after a decade when seaborne dry bulk grew at nearly 200mt a year, in 2015 trade is set to decline. Meanwhile the surplus is being topped up by deliveries.

Searching For Silver

But there are a few positives. Cheap oil at $40/bbl is putting money in everyone’s pocket. Bulker ordering has slumped to 13m dwt this year; demolition is up 70%; fleet growth is down to 3%; and China seems keen on its ‘One Belt, One Road’ strategy, which could add to trade.

The Magic Number?

So there you have it. But there is one other interesting factor to consider. Somehow the tanker sector is generating very impressive earnings in a market which, on the basis of fundamental analysis, is also carrying surplus capacity. Slow steaming can help, and maybe that’s good advice. This may not be a magic moment like 1999, but, take it easy, keep your eyes open and maybe there’s a silver lining somewhere out there for the right ship. Have a nice day.

SIW1201