Archives for posts with tag: Trade

Conventionally, the container shipping market is viewed as made up of two key elements: the freight market for moving boxes from A to B, and the charter market for hiring ships. Often these markets are happily moving in sync, but that’s not always the case. How does the relationship work and how closely have these markets moved in relation to each other, both in recent times and historically?

Happy Couple?

Let’s start with recent history. Improved fundamentals in 2016, when box trade grew by 3.8% but containership capacity expanded by just 1.2%, and into 2017, have had a twin impact on the container shipping markets. Firstly they helped the box freight market bottom out. The mainlane freight rate index (see graph) increased from 24 in Mar-16 to 73 in Jan-17, and this pattern has been mirrored across many trade lanes. Secondly, the backdrop eventually helped support a slightly improved charter market, with rates moving away from the bottom of the cycle in late Q1 2017. In theory, demand from freight market end users (shippers) filters down to the vessel charter market in the end, with additional volume driving charterers (liner companies) to access additional units (from owners).

Splits And Separations

But does the power of the fundamentals always drag the two markets along together? It is not always the case; they often move apart. Before the financial crisis, the freight market appeared somewhat less volatile than today, but that did not always see the markets in sync. Despite more than 20% cargo growth in 2005-06, and the freight market holding most of its ground, the charter rate index slumped by 47% from an all-time high of 172 in Apr-05 to 91 in Dec-06, as super-cycle peak rates proved unsustainable.

The post-downturn period has seen similar instances. The box shipping markets moved into an era of ‘micro’ management of supply (slow steaming, idling and cascading) and this has impacted both freight and charter markets. In both early 2011 and 1H 2015 charter rates rose as freight rates dropped like a stone. In 2011 the freight rate index dropped by 38% to 47 whilst the charter rate index rallied, as operators deployed additional capacity to the detriment of freight rates. But soon after the opposite occurred, and freight rates increased but charter rates dropped back to bottom of the cycle levels where they remained for the next three years.

Re-Coupling…

In the long-term, however, the two spheres do appear to be aligned. What simple inspection suggests, the numbers confirm. In only 33 of the months on the graph (21%) have the markets actually moved in opposite directions (excluding monthly movements of less than 1%).

Let’s Stick Together!

So, the two box markets do move independently at times but they often move in sync and when apart they tend to re-align (what econometricians might call an ‘error correction mechanism’). Perhaps this just confirms that ‘cargo is king’ and the supply side eventually adjusts. Whatever the case, box shipping’s famous couple can’t keep themselves apart for too long. Have a nice day.

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We’re well into the Year of the Rooster in China now, but trade figures for last year are still coming in and it’s interesting to see what a major impact China still had in 2016. Economic growth rates may have slowed, and the focus of global economic development may have diversified to an extent, but China was very much still at the heart of the world’s seaborne trade.

Not A Lucky Year

In 2015 the Chinese economy saw both a slowdown in growth and a significant degree of turbulence. GDP growth slowed from 7.3% in 2014 to 6.9%. Steel consumption in China was easing and growth in Chinese iron ore imports slowed from 15% to 3%. Coal imports slumped by an even more dramatic 30%. Container trade was affected badly too. China is the dominant force on many of the world’s most important container trade lanes and is involved in over half of the key intra-Asia trade. Uncertainty in the Chinese economy in 2015 took a heavy toll on this and intra-Asian trade growth slumped to 3% from 6% in 2014. Going into 2016, there was plenty of apprehension about Chinese trade, and its impact on seaborne volumes overall.

Back In Action

However, things turned out to be a lot more positive in 2016 than most observers expected. China once again underpinned growth in bulk trade, with iron ore imports surprising on the upside, registering 7% growth on the back of producer price dynamics, and coal imports bouncing back by 20%. Crude oil imports into China also registered rapid growth of 16%, supported by greater demand for crude from China’s ‘teapot’ refiners.

In containers, growth in intra-Asian trade returned to a robust 6%, and the Chinese mainlane export trades fared better too, with Far East-Europe volumes back into positive growth territory and the Transpacific trade seeming to roar ahead. Overall, total Chinese seaborne imports  grew 7% in 2016, up from 1% in 2015, with Chinese imports accounting for around 20% of the global import total. Growth in Chinese exports remained steady at 2%.

Thank Goodness

Despite all this, seaborne trade expanded globally by just 2.7% in 2016. Thank goodness Chinese trade beat expectations. Of the 296mt added to world seaborne trade, 142mt was added by Chinese imports, equal to nearly 50% of the growth. Unfortunately, this was counterbalanced by trends elsewhere, with Europe remaining in the doldrums and developing economies under pressure from diminished commodity prices.

Rooster Booster?

So, 2015 illustrated that a maturing economy and economic turbulence could derail Chinese trade growth. But China is a big place, and 2016 shows it still has the ability to drive seaborne trade and that the world hasn’t yet found an alternative to ‘Factory Asia’. 2017 might see a focus on other parts of the world too, with hopes for the US economy, India to drive volumes, and developing economies to potentially benefit from improved commodity prices. But amidst all that, China will no doubt still have a big say in the fortunes of world seaborne trade. Have a nice day.

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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.

SIW1242 Graph of the Week

Checking The Basket

Annual projections of seaborne trade can be useful demand side indicators. However, often it is difficult to get a real understanding of short-term trade trends. A year ago (SIW 1189) we looked at a ‘basket’ approach, which took monthly seaborne trade flows for a range of commodities, to help show year to date global seaborne trade trends. Although monthly data can be difficult to use, is not comprehensively available, and is generally subject to a lag of several months, the same monthly ‘basket’ approach examined a year ago remains a helpful indicator of short-term seaborne trade trends.

Promising Contents?

The graph shows the ‘Trade Index’ (see description for details) up to June 2016. Clearly monthly data can be very volatile; in January the index stood at -1%, but four months later it reached 7%. Furthermore, the index has picked up compared to 2015 average levels, averaging 2.1% in Q1 2016 and 4.3% in Q2. Some of this trend is accounted for by a rise in dry bulk trade which fell last year, with China’s dry bulk imports growing 6% y-o-y in 1H 2016, following a 2% drop in 2015 (although risks remain over the sustainability of this improvement). An increase in box trade growth has also been apparent, with expansion in Asia-Europe trade back in positive territory and growth in intra-Asian trade picking up.

Elsewhere, seaborne crude and products trade, which were two of the fastest growing elements of total seaborne trade in 2015, expanded firmly in 1H 2016. This was underpinned by robust growth in crude imports into China (16%), India and the US, despite the disruptions to Nigerian crude exports in recent months.

Half Full Or Half Empty?

Taking a wider view, even since the financial crisis there have been clear peaks in the index. The peak in early 2011 was partly on the back of strong growth in Chinese dry bulk, oil and gas imports and box exports from Asia. The index picked up again in 2012, supported by several months of strong growth in iron ore and coal trade to Asia. The next peak was in late 2013, when once again coal imports into Asia grew robustly and expansion in intra-Asian and Asia-Europe box trade was very strong. Today, you might conclude, if you’re a ‘basket half full’ type, that we’re heading steadily upwards again. But, if you’re a ‘basket half empty’ person, you might note that the peaks each time have been short-lived and have been getting lower.

Is There Something In It?

So, our index appears to be on the up,  although still at a relatively moderate level in historical terms, and with a volatile track record behind. There’s something in the ‘basket’ for both the optimist and the pessimist! Have a nice day.

 

 

In many instances the shipping industry is all about growth, with trade volumes expanding along with the world economy and fleet capacity growing too. However, that’s not exclusively the case. Today, trade volumes in some commodities are stalling, and there are some parts of the fleet that are on the wane. What might a look at some of those shrinking sectors tell us?

Frozen Out?

There are a number of reasons that can drive fleets into decline. The first is technological substitution by another sector. The reefer fleet is a good example. Total reefer fleet capacity has been in decline since the mid-1990s as containerized transportation has encroached onto the territory once held by conventional reefers. In 2012 reefer capacity in cubic feet declined by 12%, and last year by 0.6%.

Upsized?

Upsizing is another driver that can cause capacity in certain sectors to decline. As larger vessels offer greater real (or perceived) economies of scale, smaller vessel sectors can get left behind. This has been most noticeable in the containership sector. The sub-1,000 TEU boxship sector, once home to the classic ‘feeders’, has been in decline in TEU capacity terms since 2009, with growth in the boxship sector as a whole focussed on much larger vessels.

All Change?

Another driver of decline in a fleet segment can be a specific development in infrastructure. The Panamax containership fleet is an example of this. Although there are 838 Panamaxes still on the water, Panamax fleet capacity, which once accounted for more than 30% of the containership fleet, has been in decline since 2013, and there are no units on order. The planned expansion of the Panama Canal has made the Panamaxes yesterday’s vessels, and when the new locks eventually open (currently slated for later this year) the prospects for decline look even more certain. 11 Panamaxes have been sold for recycling already in 2016.

Cycling Through?

Market cycles can also explain shrinking fleets, although in this case the trends may not necessarily be lasting. In the Ro-Ro sector, with markets softer, total lane metre capacity was in decline for most of 2010-14. When markets are weak there is often limited vessel replacement with earnings insufficient to tempt owners at prevailing newbuild prices. Eventually the cycle turns, and earnings improve, incentivising owners to order new tonnage leading to fleet growth once again.

What Goes Down, Must Go Up?

Happily, however, each of these drivers also explain fleet expansion, generally with other sectors benefiting from the same trends in technology, upsizing or infrastructure. World fleet growth has slowed but remains positive, although even here it’s worth noting the patterns; growth has been more focussed on tonnage than ship numbers. Nevertheless, the global fleet is a broad church, and not everything is growing all of the time. The interesting news, however, is that if there’s growth overall, and one part is in decline, then another part must be growing even more quickly! Have a nice day.

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Once upon a time, in Germanic languages the number 1,200 represented ‘the long thousand’ and was a traditional way of measuring large numbers. Well, today Shipping Intelligence Weekly is 1,200 issues old, and that seems like a long time indeed. How have the shipping markets fared in that time and what do the ‘long cycles’ show when the ‘SIW era’ is split into parts?

A Long, Long Time Ago

The 1,199 previous editions of SIW (stretching over 22 years back to 1992) provide us with a huge amount of useful historical data, including the ClarkSea Index, our weekly indicator measuring the health of earnings in the four main shipping markets. There are many ways in which the history of the index can be analysed but one interesting view can be generated by lining up historical ‘cycles’. The graph featured here shows the result of lining up two periods of 400 SIW issues (about 8 years each) and comparing them to the performance of the index over 300 issues (6 years) since then. What this seems to tell us is that after 300 issues of the first two cycles something pretty dramatic happens!

Moving Along

Looking at the first period, issues 100-400 don’t show a great deal of variation in terms of what was to follow. Between January 1994 and December 1999 the index peaked at $15,149/day and the lowest point was $8,679/day. However, following issue 400, the index took off, peaking at $24,395/day in early 2001, before crashing back down later in the year to $8,877/day by December 2001 as the dotcom bubble collapsed, and the impact of problems in Asia and 9/11 were felt by the global economy.

A Long Time Coming

The second period really illustrates shipping’s great ‘super-boom’. Just prior to issue 500, China joined the WTO and global trade took off. On the back of rapid demand growth driven by Asia, the index headed up from around $9,000/day in late 2001 to a record peak of $50,701/day in December 2007, bang on issue 800! This time the cycle held on past 300 issues and the peak was almost regained in May 2008, but drama was just around the corner in the form of the ‘Credit Crunch’. By April 2009 the index had plummeted to $7,442/day.

How Long Will It Go On?

The last 300 issues have seen the ‘long downturn’ with substantial deliveries of new capacity and the index stuck between $20,681/day and $7,520/day (a bit like the 1990s). Despite the index surpassing $18,000/day this year there’s been no sustained respite from the downturn yet, and as of issue 1,199 (last week) the index had fallen back to $13,348/day.

Won’t Stop For Long

So, the previous two periods definitely offered up drama after 300 issues. Today, we’re at a crossroads again. Supply growth looks to be under some degree of control at last but the big story of 2015 has been the erosion of demand side growth with seaborne trade expansion slowing to around 2%. There are a range of possible scenarios but one thing is for sure: nothing stops for long in shipping.

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We’re not sure if you can buy a ship on Alibaba, but the way merchant ships get traded is one of the shipping industry’s most distinctive features. These assets fluctuate wildly in value, providing shipping investors with a unique opportunity to take a flutter in terms which consign most other gamblers to the little league.

Astonishing Volatility

Since 1985 the published price assessment for a 5 year old Panamax bulker has fluctuated between extremes of $5.5m and $92m. Few assets in the global economy offer this sort of extreme pricing, in a liquid market. Of course these extremes are now part of shipping folklore and they don’t happen every day. But it leaves shipping searching for turning points and wondering whether today’s prices are a good or bad deal.

Three Sources Of Asset Value

Lots of factors determine the price of a 5 year old ship, but three stand out. The anchor is the newbuild price which can set the ceiling. But the new ship is not ready for a couple of years, so the price also includes an assessment of short-term earnings. Also the newbuild price may include a discount or premium, depending on the market. So there’s an element of market sentiment on both sides of the equation.

Old Ships Versus New

The graph plots the price of a 5 year old ship as a percentage of the newbuild price over 25 years from 1990. The average comes to 80% for the Aframax tanker and 86% for the Panamax bulker, which with all other things being equal implies an expected life of 25 years for the tanker and 31 years for the bulker, reflected in the generally higher age at which Panamaxes have been scrapped. The tanker and bulker prices follow different cycles. In 2008 the tanker index stood at around 100%, so the 5 year old ship cost the same as a newbuilding. But the 5 year old Panamax price shot up to $89m, compared with a newbuild price of $55m, giving a ratio of 162%. So the market expected the ship to earn $34m by the time the newbuilding had been delivered. A difficult premium to justify and strongly influenced by market sentiment.

Cheap Bulkers, Dearer Tankers

Today the opposite is happening, though on a more modest scale. This time it was the bulker index which fell from 80% in June 2014 to 69% in August 2015, below the historical average of 86%. Meanwhile the tanker index rose from 67% to 87%, above the historical average of 80%.

Gambling On The Margins

So there you have it. This really is a highly volatile and big ticket market. However the long-term trends show that, like in all good casinos, the odds pretty much average out in the end. So maybe the message is that today’s tanker values have now edged above the historical trend, whilst bulkcarrier prices have moved in the other direction and are looking decent long-term value on the basis of this kind of analysis. Of course in the end it’s a matter of finding the right ship and the money to buy it. You could try Alibaba, but a shipbroker would be a safer choice. Have a nice day.

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