Archives for posts with tag: Technology

“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!


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

Generally, shipping industry watchers spend much of their time monitoring events out to sea: how fleets are evolving, trade volumes growing and freight rates performing. But occasionally it can be worth pointing the telescope in the other direction, and spending time considering how events on land can affect the industry. One such major land-based change has been the development of US shale oil and gas.

What No-One Saw Coming

Back in 2009, few would have dared predict that new fracking technologies would allow the US to add 10m boepd of unconventional output across a five year period. This is roughly the same net volume as was added to global offshore output between 2000 and 2015. The offshore markets have been amongst the hardest hit by the oversupply, and cuts in investment will make it harder to add to the 46.9m boepd set to be produced offshore globally in 2016. Since the oil price slump, rig rates have dropped by more than 50%, OSV rates by more than 35%, and today more than 300 rigs and 1,400 OSVs are laid up.

Shale In The Sights

One of the main factors which helped shale fracking to become widespread was the rapid recovery of the oil price after the 2009 downturn. This, of course, also helped the offshore sector have its day in the sun, before the downturn. But shale’s growth also had an impact on other shipping segments. US LPG exports grew at a CAGR of 71% in 2010-15. The growth of shale gas even led to proposals for the first transatlantic exports of ethane derived from it, and orders for ‘VLECs’ vessels followed.

The rise of shale gas also changed the LNG trade fundamentally. In 2010, US LNG imports were expected to be a major growth area. Today, the US has 117mt of under-utilised LNG import infrastructure (imports were just 1.86mt in 2015). Some projects have been converted to liquefaction, and up to 250mt of export capacity was mooted. One new project, Sabine Pass, is now exporting.

Telescoping Tank Capacity

Growth of US shale substantially reduced US import demand for light crudes. This primarily affected imports from West Africa. The transatlantic trade on Suezmaxes and Aframaxes fell from 1.8m bpd in 2010 to 0.3m bpd in 2014. But a 1975 ban on US crude exports prevented tanker exports of surplus oil, much of which is light grades for which US refineries were not ideally configured. US Jones Act tankers and tank barges benefited, as limited fleet supply for upcoast voyages sent coastal timecharter rates as high as $140,000/day in mid-2015, but there was no similar effect on international trade.

The US government has now eased the export restrictions, but this has come as lower oil prices have hit the rig count and output onshore. The lower oil price has caused shale to go into decline. Yet it has provided a nice boost for tanker trades, as low oil prices have stimulated oil demand from transportation and industry.

So, developments in the mid-west of America have had major ramifications for energy shipping and offshore markets globally. This is set to continue as the industry waits to see how shale responds to the slight oil price gain over Q2 2016. This only goes to demonstrate the need to keep this related land-based industry under surveillance. Have a nice day.


SIW1117In the 2000s new ships were the “in” thing. Public companies boasted about their youthful fleets and since ships were floating cash machines, who could argue? Why buy old ships that might break down during a boom, costing cash instead of coining it? But today youth weighs heavily on balance sheets and suddenly older ships look interesting.

Good and Old

But should they? With a surplus of tankers and bulkcarriers it would suit many investors if the old ships quietly left the market. That’s what happens in recessions – the new technology chases out the overage and obsolete ships, leaving a more efficient and eco-friendly fleet to lead the industry into the upswing. But, convenient though this would be for owners of new tonnage, realizing this scenario in today’s market faces two obstacles.

Not So Obsolete, Actually

The first is that ship technology has not changed much in the last 20 years, so well maintained old ships do not carry a big cost penalty, especially when slow steaming. On paper the new generation eco-ships might knock 10% off consumption, but many of the improvements can be retrofitted. The market seems to agree, bidding the price of a 10-year-old Panamax bulker up by 52% since the end of September 2013.

Meanwhile new ships face eye-watering capital costs. Although interest is low, bank lending margins are high and interest rates will probably rise. Also new ships face heavy depreciation. For example at today’s prices, depreciating a new VLCC, might cost $13,000 per day. Admittedly it’s not cash, but ignoring depreciation is a dangerous game.

Not Much to Scrap About

The second obstacle to ditching the old ships is that in these sectors there are not so many of them left. The normal scrapping age for merchant ships is 20-30 years, which today means ships built 1984-94. In those days there were few deliveries, and the age profile of the bulk fleet is very skewed. Only 79m dwt of bulkers and 28m dwt of tankers are 20 years old or above. At recent scrapping volumes that’s about three years of demolition. There’s another 127m dwt of 15-19 year old tonnage, but would investors pay $14.5m for a 15 year old Panamax if they thought it was a possible scrap candidate?

New Ships or Old?

So there you have it. The shipping market is in the trough and investors’ eyes are on the future. Shipyards have made headlines, recording orders for 158.2m dwt of new ships in 2013, almost 3 times as much as in 2012. With a sizeable overhang of surplus tonnage, the market is going to need all the help it can get to squeeze rates to a level which will provide some sort of profit for investors. In the last 3 years scrapping has helped by removing 37m dwt of tankers and bulkers a year. But the really old ships are now thin on the ground and the younger generation don’t look very obsolete. So don’t rely too much on scrapping to solve the surplus problem. Have a nice day.

SIW1084It has been well documented that for the last few decades container trade has been one of the fastest growing parts of world seaborne trade. In tonnage terms it has grown from an estimated 237 million tonnes in 1990 to 1.5 billion tonnes in 2012, increasing its share of global seaborne trade from 6% to 15%. Like any emerging phenomenon the early years of containerization were marked by rapid growth, following the inaugural voyage of the Ideal-X in 1956.

Great Expectations

The next question was how long it would take the industry to mature and what growth rates could be ex-pected in each phase. We now have plenty of data to examine the progression. The graph shows the historical growth rate of container trade back to 1974, based on estimated ‘A to B’ trade from 1997 onwards and global container ports lifts (a useful available proxy) prior to that. It also shows the growth rate of the volume of world trade in goods (not just those in containers) back to 1980.

Early Growth Phase

The 70s and 80s were really still part of the early phase, and the conversion of the carriage of goods from general cargo to containers sustained rapid growth. In the 70s/80s the average annual growth rate in box volumes stood at 11.7%, and in the 80s the average rate was more than double that of world goods trade.

By the 90s, although many commodities had been container-ised, the trend continued and equally importantly the commodi-ties forming the bedrock of box cargo were representative of the fastest growing part of world trade (i.e. manufactures). In the 90s the average growth rate stood at 9.3%.
Phasing East

In the 2000s the pace of the growth was bolstered by a key trend – the outsourcing of production from developed to developing economies, notably from the US and Europe to China. As western companies rushed to set up shop in or source production from Asia, this boosted volume growth. In the 2000s average box trade growth stood at 7.8%, but prior to the downturn in 2008 it was 10.3%, 1.4 times the growth in world goods trade. The average rate in the 2010s so far has slowed (7.0%) on the back of the downturn, but not (yet) quite as heavily as some expected.

That’s A Lot of Boxes

What’s next? For a new transporta-tion technology, 57 years old is still young, and there’s still non-containerized general cargo out there. But the outsourcing boom and the peak of containerization have passed, and a betting man might expect growth to mature to 5-6% pa in the next decade. Though it’s hard to predict precisely, a lot of capacity will likely be required. Boom period deliveries have ranged between 1.0 and 1.5m teu, but with today’s fleet and orderbook totalling 20m teu, 6% pa growth would soon require 1.2m teu of extra capacity every year just to keep up, before the replacement of old and obsolete tonnage. That’s a lot of food for thought for the shipping industry’s builders and financiers.

SIW1064imagelIn 2012 US sales of electric and hybrid cars doubled, and we are told that before long more and more of us will be driving electric cars. The motor industry’s response to rising fuel costs and environmental legislation has been to develop new technology aimed at reducing emissions and fuel consumption. Sound familiar? What about electrically-powered ships?

Shock to the System

In electrical propulsion systems the power generated by the engines is converted to electricity before being transferred to the propeller(s) via electric motors. In conventional ships the engine is connected mechanically to a propeller either directly or via a reduction gearbox.

Vessels powered by electric systems are already well established in certain sectors. Our Graph of the Week shows that following a dip in 2008-09, contracting numbers for these ships have quickly recovered to levels seen during the height of the shipping boom. In 2011-12 464 new electric ships were contracted compared with 453 in 2006-07. Last year 1 in 8 new vessel contracts was for an electrically-powered ship.

Current Trends

Electric power is well suited to dynamically-positioned offshore development and support vessels, where manoeuvrability is a key factor and there is a large variation in the demand for power between transit and station-keeping. Increased demand for higher-spec units within these sectors, for example to explore and develop oil and gas fields in deeper waters, has helped to boost the share constituted by electric vessels.

Lower noise and vibration and the greater flexibility in terms of engine size and location makes electric-power well suited to cruise and seismic survey ships, while dual-fuel diesel electric systems are widely used on modern LNG carriers. Vessels that operate on short voyages and close to shore such as ferries and dredgers are also equipped with electrical propulsion, while higher torque at low speed can make these systems suitable for vessels operating in icy conditions, for example.

Against the backdrop of much lower contracting in the larger “volume cargo” sectors, the outlook for a number of specialised sectors has remained more robust, and this changing product mix is reflected in the growing share of electric ships seen in the graph.

What’s the Charge?

Cost and power limits mean that until now electric propulsion has not been a viable option for large vessels with heavy cargoes. However, with the market placing a greater emphasis on fuel efficiency, a number of innovative designs are being seen incorporating hybrid mechanical/electric propulsion, waste heat and exhaust gas recovery, alternative fuels and high voltage shore connection being adapted for larger cargo ships. Could this be the start of a long-term trend towards the increasing electrification of the whole fleet? Maybe the future is electric?