Archives for posts with tag: vessels earnings

As the many Greek players in the shipping industry know well, the legend of Icarus tells us the dangers of flying too high. Merchant vessel earnings eventually found their 2008 heights just as unsustainable, even as some talked of a “new paradigm”. Most will be familiar with the lengthy downturn that has followed. But spare a thought for the offshore markets, now going through their own Icarus moment.

Flying On The Dragon’s Back

As with the expectations of some in the shipping industry that Chinese demand for raw materials would grow indefinitely, the consensus over the 2010-13 period was that oil prices were set to remain above $100/bbl. Oil demand growth seemed firm and supply growth scarce as decline in output from ageing onshore fields undermined growth from new deepwater offshore regions. The offshore sector attracted interest from shipyards in both Korea and China, and amongst traditional shipowners (including some Greek players).

The precipitous fall from grace of the main shipping markets in late 2008 seemed to presage a tough and lengthy downturn. As the graph shows, the ClarkSea Index (an indicator of merchant sector vessel earnings) fell by more than 80% in a matter of weeks, and offshore support vessel (OSV) and rig dayrate indices fell by 50%. Yet, by late 2009, the oil price had bounced back, and offshore units seemed like attractive investment opportunities for diversification away from over-supplied shipping sectors.

On The Right Path?

For some years, offshore investors seemed to have taken the correct turning, as dayrates for rigs and OSVs soared, and by 2013 were close to the heights reached prior to the financial crisis. Meanwhile, the ClarkSea Index remained earthbound, with earnings hampered by a sluggish world economy and phases of newbuilding activity, as government stimulus and low newbuilding prices combined to boost counter-cyclical orders.

For Icarus, the heat of the sun proved to be his undoing. In the case of the offshore markets, the heights they reached were dashed by an unexpected underground source of oil and gas. Few saw coming the game-changing effect that technological change would have on the oil supply-demand balance. Fracking produced 3.8m bpd of additional onshore oil supply from US shale by 2015.

Initially, the effect of this extra supply was hidden, by outages due to political instability in areas such as Libya, Russia, and Iraq. But as oversupply of about 2m bpd became clearer, Saudi Arabia refused to resolve the problem through a unilateral oil output cut.

Down To Earth

Today the offshore markets look to be in an equally or even more challenged position than the major shipping segments. Dayrates for both rigs and OSVs have fallen by 40-50% over the course of the last eighteen months. There is currently little positive sentiment, and many assume that the near future for these offshore sectors could come to resemble the ClarkSea Index’s recent past. But cyclicality, after all, has been a part of these industries for decades. As the best Greek asset players will tell you, the key is to ride a market upturn, but to get out before you get too close to the sun.

SIW1219

In the hit Disney movie ‘Frozen’, Olaf is a snowman who lives in a world of cold but dreams of experiencing the heat of the summer. The shipping markets have been, in the main, fairly icy in the years since the economic downturn, but during that time shipping market investors have intermittently dreamt of sunnier times and turned up the heat, so how ‘frozen’ up has the shipping market really been?

Taking The Temperature

Like the eternal winter in the film, the shipping markets have been fairly iced up in recent years. The ClarkSea Index has traditionally been a good way of taking the temperature of industry earnings, measuring the performance of the key market sectors. Since Q4 2008 it has averaged $11,933/day, compared to $23,663/day in the period from the start of 2000 to the end of Q3 2008. However, earnings aren’t the only ‘hot thing’ in shipping. Investment in ships can blow hot and cold, and funds invested in newbuild and secondhand tonnage give an idea of the ‘heat’ generated by investors. To take this into account, the analysis here has created the ‘Shipping Heat Index’, which reflects not only vessel earnings but also the level of investment activity.

Generating Some Heat

The graph shows quarterly ‘Earnings’ and ‘Heat’ indices together, and illustrates a number of points. Firstly it shows that in the post-recession period (relative to the average before the downturn) the ‘Shipping Heat Index’ has stood at a higher level (an average 63% of pre-recession ‘heat’) than the ‘Earnings Index’ (an average of 50% of pre-recession levels). Whatever the state of the markets, shipping investors have dreamt of greater warmth and invested in capacity, often attracted by counter-cyclical opportunities at historically low prices, or the perceived benefits of new ‘eco’ tonnage.

Twin Peaks

Secondly, it is clear that the ‘Shipping Heat Index’ has had two discernable peak periods in the post-recession era. In 2010 and early 2011 it stood well above the ‘Earnings Index’, peaking at 95 in Q1 2010 compared to the latter’s 67. It did the same in 2013 and 1H 2014, peaking at 89 in Q4 2013 (compared to 56). In these periods investment in capacity surged, with investors generating heat even if earnings looked a bit more frosty.

Freezing Up

Thirdly, in Q4 2014 the relative position of the two indices has switched for the first time since Q4 2008. The Q4 value of the ‘Shipping Heat Index’ stood at 53 with the ‘Earnings Index’ at 59. The ClarkSea Index topped $16,000/day in November, with tanker earnings surging and gas carriers still performing strongly. Meanwhile, the investment scene has frozen up a little, with newbuild ordering now a lot slower than in 2013 and early 2014.

Don’t Melt!

So, even when shipping markets appear ‘frozen’, investors can still generate ‘heat’, and even in icy conditions snowmen dream of summer. With earnings rising, dreamers might be tempted again next year. The only danger is that too much heat can lead to a spot of melting if you’re not careful! Merry Christmas.

SIW 1152

When the shipping market boom of the 2000s came to an abrupt end with the onset of the financial crisis in late 2008, vessel earnings underwent a severe and well-documented downturn. Almost six years on, it may seem there have been ups and downs since then, but for the shipping markets as a whole, to what extent has this been the case?

Cashflow Crunch

Since the onset of the downturn in Q4 2008, although residual asset values have survived relatively well (see the analysis in SIW 1134), vessel cashflow has struggled. The graph makes this clear, showing the quarterly average of the Clarksea Index since the start of 2007. Following the huge recalibration of earnings in late 2008, the average of the ClarkSea Index in Q1 2009 stood at $11,516/day. After five and a half years of painful downturn, in Q3 2014 (to 22 Aug), the average was $10,900/day, just 5% different. Are we back to square one?

Well, although it is the case that there have been some interesting moves in the markets since end 2008, the average value of the Clarksea Index has moved within a quite narrow band. The quarterly average of the index peaked $5,522/day above the ‘post-downturn’ average (since end 2008) and has dipped as far as $3,078/day below the average. Across this period, the average divergence of the quarterly average from the post-downturn average has been just $1,864/day, with 14 of the 23 quarters seeing the index within $2,000/day of the average ‘line’.

Bouncing Up (And Down)

The post-downturn period can be split into phases. In Phase 1, late 2009 through to mid-2011 the index ‘bounced’ from its post-crash trough on the back of Chinese government stimulus driving the bulk markets and the rapid reactivation of boxships idle in the immediate aftermath of the downturn. During this phase the quarterly index averaged 19% ‘above the line’. But in the face of hefty supply side growth it wasn’t to last and during Phase 2 (2012 and 1H 2013) the gains ebbed away and the quarterly index remained resolutely between $8,623 and $10,767/day, averaging 20% ‘below the line’.

Great Expectations?

Phase 3 in 2H 2013 was relatively short-lived. Big bulkers and tankers staged a rally in late 2013, a year in which investors seemed to have started to scent the bottom of the market (leading to 2,818 new ship orders in all, up from 1,506 in 2012). In Q4 13 and Q1 14 the quarterly index values were ‘above the line’ by $1,089/day (9%) on average.

Still At Square One (Or Not?)

But in Q2 and Q3 14 the index averaged 12% ‘below the line’, and has now moved within a $4,650/day range for the last 15 quarters. On 22 August the index stood at $11,249/day, more or less where it was in Q1 2009. Analysts point to improving fundamentals, and some sectors are seeing traction, but in overall terms we’re still waiting for take off from market conditions too close to subsistence for many. Despite resilient asset prices, helped by itchy investors and low interest rates, industry cash flow has remained within a narrow band for the last six years. Here’s hoping for a lucky number 7!

SIW1136