Archives for posts with tag: world economy

On 26th June 2016, a landmark development for the shipping industry will occur with the opening of the new third set of locks at the Panama Canal. Around ten years in the making, the expansion will enable significantly larger ships to transit the Canal, which is likely to have a wide and significant range of implications across a number of shipping sectors.

Beam Me Through, Scotty!

Since opening in 1914, the Panama Canal has provided a key point of transit between the Atlantic and Pacific Oceans. Nearly 14,000 transits of the canal were recorded last fiscal year, carrying around 230mt of cargo. While this accounts for just 2% of total global seaborne trade, the canal is a key shipping lane for a number of vessel segments and cargo flows.

At a macro level, vessel upsizing trends over recent decades have significantly increased the number of ships that are too large to transit the canal. On the 20th June 2016, more than half (55%) of total dwt capacity in the world fleet was accounted for by ships too large to transit the canal. The new, larger locks will enable many additional vessels to transit, as the maximum permissible beam will initially be raised to 49m, up from 32.3m at the old locks, while the maximum LOA and draft at the new locks will be 366m and 15.2m respectively. On the basis of the ‘New Panamax’ dimensions, 79% of dwt tonnage in the world fleet will now be able to officially pass through the canal.

Walk On The Wide Side

The most significant impact of the opening of the new locks will be on the containership sector, which has accounted for around a third of all canal transits and half of the annual toll revenue. More than 1,400 boxships of 12.5m teu (63% of total containership fleet capacity) are too large to transit the old locks today, but only around 200 of 3.0m teu (15% of fleet capacity) will be too large to pass through the new locks. Vessels of up to and around 13,500 TEU will be able to transit, compared to around 4-5,000 teu previously. This is expected to drive significant changes in containership deployment, particularly on the Transpacific trade.

Let’s Go Wide

In addition, the opening of the new locks is generally thought likely to have an important impact on the LNG, LPG and car carrier sectors. All VLGCs will be able to transit the new locks, as will the majority of LNG carriers, compared to only a handful of small LNG carriers previously. This is expected to lead to an increase in LNG vessels transiting the canal, typically with exports from the US.

Locked In To A New Era

Clarksons Research is marking this important milestone through a number of data updates. Fleet databases now include vessel indicators for the ability to transit both the “New” and “Old” locks of the Panama Canal, which will be displayed on vessel profiles within Shipping Intelligence Network and World Fleet Register. Vessel segmentation within the containership sector will also be updated to best reflect the structure of the fleet in the context of the expanded canal. As the Panama Canal enters a new era, for many in the shipping industry it’s the perfect time to “go wide”. Have a nice day!

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Despite the many domestic and market challenges facing the Hellenic ship owning community, Greece has continued to strengthen its position as the largest ship owning nation in recent years. As the shipping community begins to gather for another Posidonia, Greek owners today control some 18% of the world fleet, with a 333m dwt fleet on the water and a further 40m dwt on order.

Greek owners continue to top the league table of ship owning nations with a 196m GT fleet and global market share of 16% (by GT), followed by Japan (13%), China (11%) and Germany (7%). In recent years this position has in fact been consolidated, with the Greek fleet growing by over 7% in 2015 – the most significant growth of all major owning nations. Aggregate growth since 2009 is even more significant; some 70% in tonnage terms. The big loser in market share in recent years has been Germany, while China’s aggressive growth in the immediate aftermath of the financial crisis has slowed (the Chinese fleet doubled between 2009 and 2012 as solutions were found to distressed shipyard orders). Athens/Piraeus also features as the largest owning cluster globally, with Tokyo, Hamburg, Singapore and Hong Kong/Shenzhen making up the top five.

Punching Above Their Weight!

Greek owners remain the classic “cross traders”, developing their market leading position as the bulk shipping system evolved in the second-half of the twentieth century. Today, the Greek owners’ share of the world fleet at 16% compares to a seaborne trade share for Greece of less than 1%. By contrast, Chinese owners control 11% of the world fleet relative to the Chinese economy contributing to 16% of seaborne trade.

Sticking With Wet And Dry

Although a number of Greek owners have diversified into other shipping sectors, Greek owners have generally retained a focus on the “wet” and “dry” sectors. Today, the Greek fleet is largely made up of bulkcarriers (47% by GT) and tankers (35%) with this combined share hovering around 85% for most of the past twenty years. There has been some development of the Greek owned containership fleet (up to an 11% share) and gas carriers (up to a 4% share) but this is still generally limited. By contrast, Norwegian owners have trended towards more specialised vessels (e.g. offshore, car carriers) and the German fleet has remained liner focused.


Asset Players

Greek owners have also retained their role as shipping’s leading asset players and today operate a fleet with a value of some $91 billion (actually third in the rankings behind the US due to the value weighting of the cruise fleet). In 2015, Greek owners were the number one buyers (followed by China) and number one sellers (followed by Japan and Germany) in the sale and purchase market. Greeks have not been quite so dominant in the newbuild market recently and in 2015, Greek owners ($6.9bn of orders) trailed Japan ($13.1bn) and China ($10.7bn) in the investment rankings.

So despite facing many challenges, Greek owners continue to “punch above their weight” as the world’s leading shipowners for yet another year!

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The global fixed platform “fleet” consists of over 7,700 installed structures, equivalent in unit terms to 58% of the mobile offshore fleet. Yet the significant role played by fixed platforms in generating requirement for offshore vessels and services (such as platform installation and IMR) is at times overshadowed by the role of the mobile offshore fleet. So what, then, is the current outlook for the fixed platform sector?

Back To Basics

Fixed platforms are immobile structures that are attached to the seabed and used to exploit offshore fields. All but 32 fixed platforms are located in water depths of less than 200m and the average water depth of the 7,744 installed units is 42m. Platforms usually consist of a ‘jacket’ (the legs) and ‘topsides’ (the decks), and are fabricated from steel, though concrete or wood have been used. Indeed, the first ever fixed platforms were wooden structures off California in the 1930s; these have been dismantled, but North America still accounts for 31% of the fixed platform “fleet”, a legacy of shallow water E&P in the GoM. Other major historical areas of fixed platform installation include the Middle East/ISC (15% of the fleet), SE Asia (22%) and the North Sea (7%). The North Sea is home to most larger structures, such as the 898,000t “Gullfaks C” gravity base platform. Most structures in areas like the Middle East and the US GoM, meanwhile, are at the opposite end of the scale – unmanned monopod/tripod wellhead platforms of less than 100t.

Construction Crunch

Historically, fixed platforms have been a core business area for a number of fabrication yards and EPCI companies. Installation of small structures tends to involve units like liftboats in the US GoM and crane barges in the Middle East. Larger structures (in the North Sea or West Africa) have required more robust transportation and heavy-lift vessels. At present though, the fabrication and installation outlook is subdued. As shown in the inset graph, 96 platforms were ordered in 2014, down 49% y-o-y; in 2015, 42 were ordered, down another 56% y-o-y. Most ordering has been for smaller units in the Middle East (14%, 2014-15) and SE Asia (39%): platforms like the 43,700t “Johan Sverdrup CPP” (North Sea) are exceptional. Reduced contracting is partly due to the weaker oil price, but it also reflects a longer term shift towards subsea developments and deepwater E&P.

A Shift To Services?

It seems, then, that outside of expansion projects in a few areas, the near term demand generated by fixed platforms is likely to be mainly from servicing existing units: facilities need maintaining, paint needs reapplication and so on. For example, long-term, multi-field IMR contracts have reportedly been awarded for platforms in the UK and Saudi Arabia in recent months. PSV and helicopter demand to supply manned platforms (and ERRV demand in the North Sea) will also persist unless fields are shut down. And even then, potential exists in platform removal: there are currently five planned decommissioning projects involving platforms, each project with a value of c.$400m.

So the fixed platform construction market is fairly challenged. But there are other ways in which fixed platforms can create opportunities. These may be quite niche or oblige EPCI companies to adapt, but with 7,744 units in place, the sector is in several regards still worth some attention.

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The rise of deepwater E&P constituted a boon for the offshore fleet, helping to drive, for example, 180% and 60% increases in the FPSO and floater fleets from 2000 to 2015. However, deepwater development has lagged exploration, and so the offshore sector is fairly exposed to projects with high breakevens – problematic, given the oil price. But could the downturn actually help deepwater E&P in the long term?

Deepwater Exploration

The first deepwater offshore discovery was not made until 1976, by which point 1,018 shallow water fields had been discovered and 350 brought onstream, and it was only in the late-1990s that deepwater E&P really took off. Oil companies began pushing deeper into the US GoM, while the internationalization of the industry in the 2000s saw a spate of deepwater discoveries off West Africa and Brazil. A robust and rising oil price helped sustain rising deepwater E&P until 2015, with India, Australia and East Africa becoming important frontiers too. The average water depth of global offshore field discoveries passed 200m for the first time in 1996, 500m in 2004 and 800m in 2012, and the number of deepwater discoveries averaged 55 per year from 2005 to 2015.

Deepwater Production

However, as the main graph shows, the mean water depth of discoveries rose much faster than did that of start-ups: the former stood at 734m in 2015, the latter at 377m. Indeed, by 2016, out of a total of 998 deepwater finds, just 27% had started up, with deepwater start-ups averaging 19 per year from 2005 to 2015. The divergence was in large part because technological barriers and cost overheads in deepwater production – subsea, SURF and MOPU – are more complex and expensive than in exploration, and efficiency gains seem to have been more limited to date as well. Deepwater project sanctioning was therefore relatively inhibited, and due to limited sanctioning, the backlog of undeveloped deepwater fields grew at a faster rate than that of shallow water fields, as indicated by the inset graph. Thus over time, the overall backlog of potential projects has become more costly and complex. Indeed, some reports suggest oil project average breakevens have risen by c.270% since 2003.

Deepwater Challenges

This is partly why the offshore outlook is challenged at present: deepwater fields have relatively high breakevens (usually $60-$90/bbl) yet also form a major part of oil companies’ portfolios. Some major oil companies have indicated that 2016 E&P spending cuts are to bite deeper off than onshore, where costs are lower (even for shale, in many cases). In January 2016, Chevron decided to axe outright Buckskin, a US GoM project in a water depth of 1,816m with a breakeven of c.$72/bbl. ConocoPhilips, meanwhile, is planning to exit deepwater altogether.

However, in order to make deepwater viable again, many companies are trying instead to cut project costs. Statoil, for example, has reduced the CAPEX of Johan Castberg by 48% and the breakeven by 40%. Some cost savings (in day rates, for instance) are likely to be cyclical; others, such as in subsea fabrication, yielding improved deepwater project economics, are likely to be more lasting. So while exposure to deepwater projects is clearly a challenge given the current oil price, cost cutting now could be to the benefit of deepwater E&P in the long run.

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For good or for bad, shipping market analysts have looked at trade growth ‘multipliers’ for many years. In 2015 global seaborne trade is estimated to have grown by 2.1%, in a year when the world economy grew by 3.1%. As a result the ratio of trade growth to global GDP expansion dropped below 1.0. What do trends in this ‘multiplier’ mean for shipping in a wider context?

Multiple Storylines

Whilst hardly an advisable way to project trade growth for a specific year (year to year the statistics are notoriously volatile), examining the ratio between world seaborne trade growth and the expansion of world GDP (‘the multiplier’) over longer time periods tells us something about the key demand drivers in shipping. As the graph shows, in the period 1990-94 the multiplier averaged 1.3 and in 1995-2010 averaged 1.1.

There were a number of drivers behind this ‘top up’ effect. The increasingly globalised economy supported growth in world trade which benefitted seaborne traffic. In the 2000s, outsourcing of production from more mature regions to distant developing world locations and then shipping goods back to consumers also generated a multiplier effect, and speedy economic growth in China hoovered up raw material cargoes at a rapid rate (maintaining support for the multiplier above the diminishing long-term trend).

Boxes’ Big Top Up

Container trade is one specific area where the multiplier has come into very clear focus. Across 1995-2010 the ratio of container trade growth to world GDP expansion averaged a robust 2.3. Global trends and outsourcing supported this too, backed by other drivers. Trade in box-friendly manufactures was a fast growing part of overall trade, containerization of general cargoes continued to provide a boost, and multi-location component processing of manufactures became the norm in Asia, supported by wage differentials and cheap box shipping.

Looking For Support?

But these multipliers have been sliding. Across 2011-16 the seaborne trade multiplier averaged less than 1.0, and the box trade multiplier just 1.3. 2015 marked a particularly weak year, with the respective figures at 0.7 and 0.8. Something is missing from the drivers previously providing the top up to economic growth. World sea trade grew by just 2.1% last year; Chinese growth rates and raw material imports have slowed, outsourcing may have peaked, and containerization is more complete than not. Multipliers have slowed; nothing lasts forever and some of the old supports appear to be no longer there. The industry will be hoping that a golden age has not just passed by.

However whilst some drivers may have run their course, others are still going strong and 2015 might not be totally representative of the trend. The economy is as global as ever with ‘Factory Asia’ still at the centre of production supporting intra-regional activity. And might there still be huge potential to unlock? Developing world consumers account for 1.2 tonnes of seaborne imports per person, leaving them a long way to go to catch up with the developed world (3.1 tonnes). The shipping industry will be looking that way for its next top up. Have a nice day.

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In the nativity story, the three ‘Wise Men’ each come bearing a gift for the baby Jesus. Today, gifts are more likely to have been transported by containership than by camel, but the boxship market itself has still been subject to a number of demand-side ‘humps’ this year. Unwrapping these trends suggests three rather unwelcome ‘gifts’ that the containership market has received in 2015.

Gifts From The East

Prior to the last 7 years, container trade growth had been rapid, averaging 9.6% per annum in 1996 to 2007 – an astonishing performance given the average 4.1% per annum expansion in global seaborne trade in the same period. Box trade flourished, as further cargoes were containerised and manufacturing was rapidly outsourced from the west to Asia (particularly in the 2000s). Container shipping became the planet’s chosen (low cost) way for moving general cargo around. The first major blip in the story was in 2009, when box trade fell for the first time in the history of containerisation, dropping 10% on the back of the global economic downturn. 2015 currently looks set to be the worst year since then, with trade growth expected to reach just 2.5%.

Hardly Gold

Three key factors have driven slower trade growth this year. The first is the contraction of the key Far East-Europe trade, reflecting a combination of the weak euro, continued challenging economic conditions in some European nations, and a stark fall in Russian volumes. It seems that this year has also seen some inventory de-stocking, bolstering the downward trend. Peak leg Far East-Europe trade is projected to drop by 3.8% in 2015, limiting total expansion in mainlane trade to around 0.4% this year.

The second factor has been the slowdown in the estimated rate of growth in intra-Asian volumes. This is an important bloc of container trade (around 50m teu) and has been one of the fastest growing parts in recent years. This year, the turbulence and slowing rate of growth in the Chinese economy, combined with issues in other Asian economies, has seen the estimated rate of intra-Asian growth slow in 2015, with total intra-regional trade now projected to grow by 3.6% this year, down from 6.0% in 2014.

Looking Myrrh-ky

Thirdly, the collapse in commodity prices, including crude oil, has had a heavily deleterious impact on box volumes into economies particularly dependent on commodity exports for income. Notably, growth in box imports into economies in Africa and South America have slowed, and total North-South trade is now expected to grow by only 1.8% this year, whilst Middle Eastern imports are also coming under pressure.

Frankly Incensed

So the world of container trade has indeed received three ‘gifts’ this year, but the outcome for containership demand has not been a joyful story. The Christmas season is usually prime time for thoughts of presents shipped by container around the world, but it seems that the boxship sector may have to wait beyond this year’s festivities to find a brighter-looking star on the horizon.

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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.

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