Russia Joins WTO; a Boost for Shipping Like China?

Unfortunately the impact on shipping will be small. In 2001 China joined the WTO and by 2011 was the second largest economy in the world. The impact on shipping was phenomenal. China joined the WTO with a cheap and plentiful labour force and manufacturers were quick to close factories in Europe and US and move them to China, creating a need for vast export based shipping network. Russia joins the WTO with a completely different economic profile. Russia relies heavily on energy exports for foreign income, and these are not subject to WTO limitations anyway, so tariffs will remain the same. Besides, even if energy export tariffs were lowered or removed, the boost to exports by ship would be small, as most energy exports go via pipeline. Russia’s manufacturing base is not geared to exports (when was the last time you bought something “Made in Russia”), and labour costs are higher than other BRICS. The key growth under WTO membership will be imports. Under its membership agreement with the WTO, Russia will gradually lower tariffs on imported goods, such as cars. By 2019 the tariff on an imported car should be half of today. Lower prices of foreign goods will suck in imports, but the bulk will come overland by rail and truck. Finland has built a vast truck park at the border to come with the expected increase in traffic. Although Russia has large ports like St. Petersburg, it is has nothing like the potential Shanghai had in 2001. Overall, the impact on shipping is likely to be an increase in containers flowing into Russia. The main shipping beneficiaries are likely to the hub ports in Europe, such as Rotterdam and Hamburg, and the inland shipping waterway companies.

Copyright Craig Jallal. All Rights Reserved.


IP Growth Slowing in China – More to Come?

Shipping economists tend to prefer Industrial Production (IP) over GDP and other indicators as IP is more relevant to things that go into ships. And a lot of things that go in ships are made in China, so it is worthwhile keeping an eye on China’s IP growth in particular. The China Daily website reports that IP growth in China fell to 9.2% (monthly growth year-on-year) in July. The forecast for July was for a small increase to 9.7% from the 9.5% in June. This is the fourth month in a row IP growth in China has been recorded in single figures. This is worrying, as the pattern shows that once Chinese IP growth dips into single figures it tends to stay there for at least eight months (see chart – Mar 1999 to Jan 2001, July 2001 to Feb 2002, Oct 2008 to May 2009).

Therefore, we could have another four months at least of single digit IP growth in China, which is not good news for shipping.

Copyright Craig Jallal. All Rights Reserved.

Capesize Scrapping Candidates

Is there a pattern to the Capesize recently sold for recycling and can we use this to predict the likely candidates?

While researching the sales of Capesize sold for scrap for an earlier blog, I noticed there was a pattern to some of the sales, and it was not just age related. Certain ship specifications and yard of build feature more often than others. Of course, the most prolific shipyards are bound to rank high in the lists, as they built the most ships. But as a percentage of sales for scrap to ships built, certain yards stand out. Scrapping sales in the last 18 months have been driven by weak freight rates, high fuel costs, a chunky delivery schedule and the incentive of a high scrap price. For owners of “rarer” Capesize another reason may be the difficulty in finding spare parts for ships built in yards no longer operational.

Going through the Capesize sales for recycling one-by-one over the last 18 months leads me to believe that Capesize from the yards in the table are scrap candidates within the next 12 months, if not sooner. Most are European yards with only a handful of ships remaining in the fleet. Taiwanese shipyard CSBC was a prolific builder of 149,999 dwt Capesize, and these now feature a lot in the sales lists. The small capacity no longer finds favour, and I think these pre- 1996 ships (after that the series changed to 161,000 dwt) are strong scrap sales candidates. In the cases of Hitachi Zosen and Sumitomo H.I., not all ships built in those yards are included as candidates, only the ones similar in specifications to the known sales. Altogether the number of yard-related candidates amounts to about 4% of the current fleet.

The second group is the tanker conversions. In the last 18 months, ten tanker conversions to Capesize have been sold for scrap, which is around 9% of those known to have been converted. Another 78 conversions of just less than 2.0m dwt in total (approximately 8% of the current fleet) remain in service. The youngest is 16-years old and the oldest 23-years old. Most, if not all these were sold for conversion to take advantage of the high freight rates pre-2008 when there was a shortage of newbuilding slots and an excess of high-powered single-hull tanker tonnage available. But by the time they entered the fleet the boom had passed. Rebuilding a VLCC to VLOC configuration included fitting new tank tops and hold walls to take the impact of loading high density iron ore cargoes and strengthening the deck for the hatch openings. Ironically this was virtually making the old VLCC double-hull; although it would be too expensive to re-convert a tanker back to Marpol 13G compliant tanker specifications.

Owners will argue these are virtually new ships, but in a poor freight market with a plentiful supply of newer tonnage these will be the last choice of charterers. Some of these “new” VLOCs have been scrapped within five years of conversion. This suggest to me that it is not just the freight market, but underlying operational issues that are seeing these vessels sold for scrap as the surveys approach. Therefore I think all these conversions are scrap candidates ahead of Capesize and VLOCs of similar original vintage. These two patterns of Capesize sale, by yard and conversion, point to a total of around 12% of the current Capesize fleet being scrap candidates before age is taken into account.

Copyright Craig Jallal. All Rights Reserved.

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