How Many Ships are there in the World?

I was recently asked; how many ships are there in the world?

Like about 90% of people in shipping I reached for the latest copy of Clarksons Shipping Intelligence Weekly (SIW) and rattled off the latest figure, which at 1st July 2012 is 58,900 ships (and a recommendation on how to buy a copy of SIW). This number refers to cargo carrying vessels, but the inquirer was looking a number for all ocean-going ships. Then I referred to the World Fleet Monitor (WFM), which covers everything else (except fishing boats, naval and so on). The figure in the latest WFM is 87,483 ships.

But the question got me thinking. What if I was an ordinary member of the public and wanted to know the answer. I would Google it. So I did and the results are quite interesting.

There were only two meaningful answers to variations of the question; how many ships? In someone had posted the reply “”about 55,000” in October 2008. The other answer appears on the International Chamber of Shipping website and is from around the same time and roughly the same number. Looking back though Clarkson Research’s SIW it becomes clear the uncredited source in both cases is very likely to be Clarksons Research. So a member of the public would find a four year old figure for the cargo carrying portion of the fleet.

What if I was a member of the public that knew some of the shipping organisations, such as the IMO, and searched the same question? With such a big website it is not surprising the IMO search throws up several answers. The IMO Maritime Knowledge Centre report quotes a figure of 104,304 ships. Be careful, this is not comparable to the CLarksons figures above as it includes fishing boats and other small craft. This figure dates from 2011 and comes from IHS Fairplay, which is the main supplier of shipping data to the IMO is .

So it seems that it is not easy for the general public to find up to date figures for such a frequently asked question.

Copyright; Craig Jallal. All Right Reserved.

Regulation Timetable for the Shipping Industry

A timetable of the costly environment-inspired regulations to hit the shipping industry is surprisingly hard to find. I thought I had seen a table in a Clarksons’ publication, or in Lloyd’s List, but after some searching and Googling I couldn’t rediscover the document, so I have started a table myself. I need the table because I want to explore what will constitute a premium ship on the S&P market in eight or ten years time.

I am using the IMO “Action Dates” as a starting point, but I want to include other bodies with a regulatory impact on shipping. The EU is on the way to expanding the current ECA across the whole of Europe, but no regulations have been passed, yet. These are included in italics. Also in italics are the IMO ship recycling and water ballast regulations. The ship recycling is now with a few percent of acceptance, and very likely to happen. Most of the regulations on air emissions in any industry started off in California, so I have included CARB in the table. California was an early mover on ship emissions, and ports are now offering incentives for low emission ships. Meanwhile Alaska is challenging the imposition of the US ECA saying it will damage the local economy. I recall there was a local challenge to California State’s ability to introduce environmental regulation, but this was overturned.

The table is a work-in-progress, but if you want an Excel copy of the table for your own use let me know and I will whizz one over to you. Even better, send me some input, such as other regulations  and any errors or omissions.

See the Seaspout blog for a broader discussion of shipping air emissions.

Copyright: Craig Jallal. All Rights Reserved.

Seahorse Club Summer BBQ

Last Wednesday night saw a break in the 24/7 rain just long enough for the Seahorse Club of maritime media folk to hold its Summer BBQ at the Doggetts Coat and Badge pub by Blackfriars Bridge, London. The event was sponsored by DP World who brought along staff from Southampton to meet the press. I was invited along by Mark Warner of ShipServe. Mark is a proper internetista and within half a pint showed me how to use Twitter. Without him I would be just another Angry Bird – or am I mixing apps?

We arrived with Neville Smith of Mariner Communications. Immediately we bumped into Emma Murray of Meantime Communications and co-founder, Julian Pryke. To this list of ex-Informa colleagues I could add James Brewer and a few others. Current Lloyd’s Listers included liner specialist Janet Porter. No shipping event is complete without John Faraclas, of AllAboutShipping. New to me was Miriam Fahey of Fairplay, and I notice Fairplay has a widget to push shipping news onto blogs.

LNG-Power – will it inflate residuals?

The LNG Question

Last Friday I was sent a question via LinkedIn from Anna in Russia asking about LNG-powered ships. I didn’t know the answer to her question so I started researching the use of LNG as a ship fuel. No sooner had I started writing up my findings when I opened a post on the LinkedIn Lloyds List Group to see a link from Peter Garth of Naftrade pointing to a new report on LNG-powered ships. The report has been produced by James Ashworth of TRI-ZEN International in Singapore (Tel. +65 6734 5550 I admit I don’t know TRI-ZEN or James Ashworth, but the report “LNG Markets Perspectives” is excellent. I binned my own write up and will review the TRI-ZEN report instead, just adding in a bit of my left-over comments at the end. The TRI-ZEN report can be downloaded here.

Why LNG Powered Ships?

The TRI-ZEN report answers the questions I was asking myself. The driving force behind LNG-powered shipping is emission compliance, and in time honoured IMO fashion the legislation is complex, but the TRI-ZEN report breaks this down into manageable chunks. By the end of page three I had a clear idea of the background and aims of the legislation.   The key points are a maximum of 0.1% sulphur fuel burned in ECAs (including US), and 0.5% sulphur globally from 2020. Ships powered by natural gas will meet these standards.

The analysis then moves onto the cost implications. Lower sulphur fuel is more expensive, and distillate even pricier. Operating a large Containership (TEU not specified) on LNG will save $12-20m compared to distillate, and the savings on a VLCC are between $6m and $12m. The report considers the costs on providing onshore LNG bunkering facilities and offshore using LNG lightering. There is also a section on the onboard capacity required for LNG tanks. The last section is a technical analysis of how LNG bunkering would be achieved. I assume from this emphasis that this report is a smaller version of a feasibility study for the physical delivery of LNG at a bunker terminal. I bet the port finance teams in the major banks are now very active in this area. It is a good story.

To the list of bullet points at the end of the report I would like to add my own findings. There are currently only 157 LNG-powered ships in the world fleet. According to Dr Martin Stopford’s “Maritime Economics” (p25), in 1852 there were only 153 steamships listed in Lloyd’s Register. It took fifty years for steam to replace sail, but the main hindrance was technology. Technology is not the issue today. Most LNG Carriers use boil-off as a alternate fuel. Kleven in Norway are specialist in building LNG-powered offshore vessels and all the major engine builders, Wartsila, MAN Diesel and MHI have or are developing duel-fuel and single fuel LNG designs. The main issue is infrastructure, but as the TRI-ZEN report shows, it is readily addressable. 

Will LNG-Power Inflate Residuals?

From my reading of the TRI-ZEN report I think impact on residuals will apply to those vessels trading in the post-2020 era of global low sulphur fuel. This is only eight years away, which for some vessel types, might be the last time they get bank financing (see previous blog about Capesize scrap sales). Furthermore by 2020 the IMO may have introduced more ECAs, such as the Malacca Straits. This choke-point, plus the English Channel and the Panama Canal would pretty much force all tramp trading ships into the Tier III category of emission control. So equation to be run between now and 2020 is the cost of fitting scrubbers, versus the cost of conversion to LNG, versus the cost of an LNG-powered newbuilding. I found the following references to costs. In a article an indicative cost of a scrubber for a 34mW engine was given as $3.4m. The conversion of the “BIT VIKING” is believed to have cost EUR 8m (DNV blog). Although scrubbers are cheaper, with most shipping sectors in the trough phase of the cycle, owners are going to have to go to banks to borrow for such upgrades (and ballast water monitoring). It is not an easy story to sell to banks. Therefore, I think there will be a two tier market by 2020, with a premium for LNG-powered vessels. These will show stronger residuals than scrubber-fitted ships

Threat to LNG-Powered Ships

Apart from the lack of infrastructure, the main threat might be the abundance of natural gas. Now that the US is an exporter of LNG due to the “windfall” of shale gas I can see a wholesale move toward LNG powered ships for exclusive operation in the US ECAs. I notice in the Wartsila annual report there is reference to the development of LNG-powered Cruise Ships, which would be very suitable to operation in the US ECA. Cheap and plentiful supply has led UBS to estimate the lower energy prices will add 0.5% for US GDP over the next five years. A leading developer of the required infrastructure is likely to be the US trucking industry. The gas equivalent price is $1.70/US gallon compared to $3.91/US gallon for diesel. For a typical 120,000 miles/year this would be a significant saving, according to a report by IHS CERA. In another report by Michael Stoppard of IHS CERA, he postulates that by 2030 one third of the fleet may be LNG-powered. This begs the question will LNG remain a low cost fuel if a large part of the shipping fleet and US trucking fleet becomes a consumer along with the use of natural gas for energy production?

Scrapping Young, Shrinking Finance?

According to brokers, the 1997-built, 171,978 dwt Capesize “SHAGANG SUNRISE” and the 1995-built, 151,283 dwt Capesize “STELLAR FORTUNE” have been sold en bloc by NYK for recycling to the cash buyer GMS. There must be at least another ten years of working life in these ships. Why are such young ships being scrapped and will this change the age limit that ships can be financed?

First, let’s put the sale into context. What is the average age of Capesize being sold for scrap? To analyse this we need a list of Capesize sold for scrap, and I am using Clarksons World Fleet Register (User Guidance – tick Demolition/Removals and the Vessels database. To calculate the average age you need to include “Built” from the Vessel Characteristics which is not in the default Demolition/Removals box, so we need to include “Custom” in the Data Grid to bring in this data. You could include “Age” but beware as Age defaults to calculate from today’s date – not the year the vessel was scrapped).

The average age of Capesize demolition in the last five years has been 26 years old, and so far 2012 the average age is 24 years old, so 15 years old is relatively young. But there has already been a sale of a 17-year-old, the 1995-built, 172,173 dwt Capesize “BET SCOUTER” was in June this year. Maybe the average in 2012 will dip lower still.

So we can see the latest sale is around ten years younger than the average for the last few years.

Let’s look at the ships. The “SHAGANG SUNRISE” and the “STELLAR FORTUNE” were both built at the Japanese yard of NKK Corp, and have been operated by major Japanese ship operator NYK throughout their life. This is an impeccable pedigree, and putting on a Sale and Purchase brokers hat, these ships are very marketable. Ok, the price would be low in this market, but there would be a queue of willing buyers in China and Greece. They would have gone for more than the estimated $9m each generated from the scrap sale.

Maybe it’s the economics of operating the ships? The”STELLAR FORTUNE” does seem to like a drop of the black stuff, running at 56.00 tonnes/day, compared to her peer group (type, size, age) average of 49.96 tonnes/day, a difference of 10%. But the “SHAGANG SUNRISE” has a reported fuel consumption of 49.80 tonnes/day, which is 11% lower that her peer group (55.51 tonnes/day).

The table shows the average fuel consumption of Capesize sold for recycling in recent years, and the lowest consumption. Of the two ships the “STELLAR FORTUNE” was perhaps the most vulnerable in the current high bunker price era.

Still, the sale for scrap goes against the usual pattern for Japanese operators like NYK, which, is to operate Capesize bulkers to the age of 15 years and then sell for further trading. By then the capital cost of the ship has been amortized down, and also the ship has completed the long-term charter it was built for. The ship no longer owes NYK any money and she is sold when its replacement is delivered. In the case of NYK, the buyer is usually an independent operator, or more recently a cargo owner/operator like Vale.

Maybe it is the Car Carrier story? The Car Carrier or PCC fleet is tightly controlled by a few operator/owners. At the end of life the ships  are scrapped to prevent competitors getting into the market. It maintains the high cost of entry. The costs of entry into the Capesize market are relatively low, and ownership and operation is fragmented. Indeed in 2011 NYK sold two Capesize into the secondhand market, one being 13-years-old (1998-built, 168,968 dwt “OCEAN CREST”) and one 17-years-old (1994-built, 149,380 dwt “SUMA”), so the change to scrapping young ships is recent.  NYK took delivery of 11 Capesize in 2011, and six so far in 2012. It still has eight Capesize in the fleet that are in the age range of the scrapped vessels. For NYK it makes sense to forgo the $2-3m extra over scrap a sale for further trading would have made. Here I think here we are seeing the application of Car Carrier model by the Japanese firms to the Capesize sector.

There may be a longer term change in ship finance indicated by the sale of these young ships for scrap. Banks usually look to loans of seven years with the expectation of refinancing at around year five. When the average age of scrapping was 30 years or more it meant there were several cycles of financing (and fees) once a Capesize came out of a Japanese fleet. If the average age of scrapping is now 24 years, as in the table above, it means after the initial 15 year charter backed financing with a Japanese operator, there is only one cycle of financing left, which is ok but is not going to generate repeat fees. What is more, if the ship is at the upper end of operating costs, she may not be competitive in the two tier high/low fuel consumption market. This would cripple the cash flow model, increase the probability of default, throwing a black flag out of the internal rating model (and note I am not saying that this happened in this sale). Rating models are not adjusted every time a sale takes place, but if the evidence mounts up that the end of life age for certain types of ships is moving lower, then the model will have to be adjusted and the age limit on what ships can be financed will come down.

Poll Question; Is the Sale for Scrapping of a 15-year-old Capesize…?

Copyright Craig Jallal. All Rights Reserved.

Libor Scandal and Shipping

Is your every keystroke, phone call, email, BBM and Yahoo! message recorded? Is there CCTV above your desk recording what you are reading and who comes to talk to you? Do you have to pass mandatory online compliance tests or risk being locked out of your computer? Are you subject to random drug and alcohol testing? Can you be fined and jailed for failing to report suspicious behaviour or transactions? Then you are working for a bank.

Which is why there is so much evidence against the traders manipulating Libor, and why Barclays choose to settle early (see Why Lie about Libor and Eurobor?).

So how does affect shipping? First, there were two manipulations of Libor going on (see this NY Times link for explanation of Libor). The first was a cartel of banks quoting higher or lower rates to make a profit on the derivatives side or their business. This was easy money as Libor is only an opinion on the interest rate a bank might have to pay other banks to borrow funds on that day. Derivatives traders were breaching the Chinese Walls within banks to tell the analysts the rate they required to be quoted. The beauty of this deal is that Libor was a benchmark invented to give an indicative rate when there is no liquidity. So as long as the rate fixing bank wasn’t in the market to borrow funds then who is to know? And even if it did enter the market, only the counter party would be aware of the actual interest rate paid, and it was in no one’s interest to report actual rates. In order for the manipulation to work a large number of the 18 banks setting Libor had to be involved. Finally, there was no back testing of Libor so statistical oddities were not being investigated.

The second manipulation was to fake the level a bank had to borrow funds from other banks to as to disguise the level of distrust in its ability to repay. The defense here is that it was for the common good, or there would have been a run on weaker banks. In the case of Barclays there is some suspicion that there may have been hints from on high that not quoting the actual rate at the time might be a good thing all round, old boy.

So going back to shipping, what is the impact? First, for borrowers up to 2007 it seems Libor may on the whole have been manipulated upward (some estimate manipulation of Libor has being going on for 15 years), so pre-2007 borrowing costs may have artificially higher. In the crisis from Lehman Brothers onward it seems the manipulation was toward lower interest rates, so borrowers may have been paying less. But during this period owners would have been asked to put funds on deposit to get a high enough internal rating to be considered for a deal, so then they would have lost out on the lower interest rate. Second, and potentially the biggest liability for banks, are derivatives, such as interest rate swaps. Does an owner have to stand by the swap that is out of the money now we know the rate was manipulated? Can owners claim for the losses on all derivatives, such as bunker hedging, commodities futures and FFAs? Third, owners are only going to sue if they are out-of-pocket, but banks can hardly sue the owners who profited from the banks illegal activities. After all, even in a low rate environment, moving the rate by a few bps would generate huge income for the bank’s derivative department (see Why Lie… again). As a result, shipping departments in banks, which are only asset lending on low margins, may be hit with more losses from owners pulling out or sueing over derivatives, which they were asked  to cross-sell.

Finally, the slack rules around Libor will trigger another wave of finance regulations, and these may be applied to all benchmark rate setting and indices which are used as, and / or derive financial instruments, and this could include shipping exchanges and shipping indices. New rules may include only reporting actual rates or agreed statistically derived alternatives in times of low liquidity. Increasing the number of reporting institutions on a benchmark panel to ensure a rate can be reported. Back testing and investigation of statistical oddities. So; is your every keystroke, phone call, email, BBM and Yahoo! message recorded? Is there CCTV above your desk recording what you are reading and who comes to talk to you? Do you have to pass mandatory online compliance tests or risk being locked out of your computer? Are you subject to random drug and alcohol testing? Can you be fined and jailed for failing to report suspicious behaviour or transactions? Then you are working for a shipbroker.

Copyright; Craig Jallal. All Rights Reserved.

Panama Canal Paper

Paul Stott will be presenting a paper at the 2nd Low Carbon Shipping Conference in Newcastle on 11th and 12th of September this year. His work on low carbon shipping includes the impact of the expansion of the Panama Canal and he will be sharing his thoughts on the future size of Panamax ships. As part of the Low Carbon Shipping Consortium he has been examining ship life cycle costs. I hope to be there, as not only as there are interesting papers being given, but to sample Newcastle’s legendary nightlife.

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