Impact of More Chinese-Owned VLCCs


The Chinese-owned VLCC fleet has reached 59 vessels, making it the third largest VLCC fleet after Japan and Greece. There are reports / rumours that Chinese owners are looking to order up to 40 VLCCs (one report was 80 VLCCs!) at Chinese yards. I thought I would look at the possible impact on VLCC fixtures, as presumably one of the aims of ordering up a large fleet is to reduce dependence on foreign owners. So far this year Clarksons has recorded 472 VLCC fixtures in 2012 with a discharge port in China. The first thing that is noticeable is the dominance of Chinese charterers. Only 21 472 (to mid-October 2012) were recorded as having a non-Chinese oil company or trader as the charterer.

The second interesting fact is the regular appearance in the fixture list of Chinese-owned VLCCs. Of the 472 China discharge fixtures, 188 (40%) are Chinese-owned VLCCs fixed to other Chinese oil companies and traders.

But not all Chinese-owned VLCCs have been captured or reported in the fixtures. Around ten VLCCs do not make an appearance, presumably because they are on work that does not allow them to dip into the spot market. By my estimation the 188 fixtures above have been serviced by 45 Chinese-owned VLCCs. If another 40 VLCCs are added to the Chinese fleet a simple extrapolation suggests that this would have covered 80% of the current level of China-bound VLCC fixtures (assuming demand stays the same).

The losers would be the independent cross-trading VLCC owners, who have no cargo to trade and whose ships mainly work the spot market.

The vast majority of the fixtures (80%) are AG – China, and Chinese VLCCs account for 52% of these. Therefore, an expanded Chinese VLCC fleet would dig deep into this trade. Non-Chinese VLCCs have been pioneering the West Africa – China trade, where there have been 88 non-Chinese VLCC fixtures, compared to 8 Chinese-owned. China is cementing relationships in this region, and some of this trade could also be absorbed by new Chinese-owned VLCCs.

So where can the independent cross-trading VLCC owners expect to do business with the Chinese once the fleet is expanded? In 2012 there were fixtures for loaded VLCC voyages to China from the Yemen, Caribbean, Brazil, Turkey, Iraq and Iran (last reported fixture in May). These trades are likely to be left to non-Chinese VLCCs, but this will not sustain the previous level of VLCC spot activity.

Several of the independent cross-trading VLCC owners that fixed ships to China so far this year have VLCCs on order. The expansion of crude oil imports to China is a good story and one that is often used to justify ordering newbuildings. But a 40-ship order of Chinese-owned VLCCs will quickly sweep away the main market, leaving the independents on the margins of the Chinese VLCC trade.

Copyright Craig Jallal. All Rights Reserved.

Feed Your Inner Ship-Spotter


Such is my enthusiasm for shipping that I have been accused at dinner parties of being a ship-spotter. Given the dedication and knowledge of real ship-spotters and photographers (I am thinking in particular of Phil English and John Jones in Clarkson Research), I take the accusation as a complement. One of the publications they have put me onto is Maasmond Maritime, a Dutch/English language newsletter. It is a collection of commercial and naval shipping news clippings mingled with photos of shipping activity in the ARA belt. In the latest edition (293-19-10-2012) I have received, there is a striking photo by Dick van der Kraan of tiny, tiny men working on the huge propeller of the “BERGE STAHL” .

The reason I mention this is the email from Maasmond Maritime has recently been diverted to my “Junk” folder. Maybe this was a pun intended by Microsoft when it forced me off Hotmail and onto Outlook. So go ahead, feed your inner ship-spotter, just don’t mention it at dinner parties.

Copyright Craig Jallal. All rights reserved.

Chinese Industrial Production Higher than Expected


Chinese Industrial Production (IP) grew 9.2% in September (year-on-year), a higher level than expected. This is a welcome reversal of the downward trend in China’s IP growth since May 2012. Overall, Chinese IP growth this year is low. The average so far this year is 10.15%, compared to 13.76% in 2011 and a poor 2010 (11.1%) that saw a low of 3.8% growth in January 2010.  An increase in IP growth also indicates a return to stability in the Chinese economy, which is vital for shipping, . While it is too early to say this is a turning point for the shipping markets, it may indicate the floor is in sight.

 

Craig Jallal.

Another Fall in China’s Industrial Production?


The Reuters poll of 43 economists shows a median growth of 7.4% for the Chinese economy (GDP) in September 2012. This would be the lowest growth in three years. The final September GDP figure will be released on Thursday, along with the Industrial Production (IP) figure. It is the IP figure I am waiting for. In a previous blog (IP Growth Slowing in China) I pointed out how Chinese IP growth was a useful indicator for shipping. Based on the GDP survey of economists I have inserted an IP growth figure of 8.5% growth into the chart below.

This would be the lowest level of Chinese IP growth since March 2009, and far below the 1991 to 2012 average of 14.16% growth.

Copyright Craig Jallal. All Rights Reserved.

Way out of Line


A quick and dirty rule of thumb to get a feel for a S&P project is roughly calculate how long it would take to pay off the loan. We can do this by dividing the current timecharter rate by the loan required. If we assume the loan is 70% of the price, and divide this by the annualized one year charter rate, this gives a rough guide to the number of years to pay off the loan. Of course, this excludes important factors, such as amortization or fees and so on. But on the other hand it can be done on the back of an envelope (“rule of thumb”, “on the other hand”, “back of an envelope” – I must have eaten too much cliche muesli this morning).

For example, the September indicative price for a five-year old Capesize is $32.5m (Clarksons). It is unlikely at the moment that a European bank would offer a loan of 70%, but I am using this as an average across a long time series. A loan of 70% of the price is $22.75m. The one-year timecharter rate (used as a proxy for future earnings – see “Looking for Turning Points”), for Capesize in September was $10,875/day. If this is annualized at 350 days income, this produces a sum of $3.0m/year. Therefore it would take nearly six years to repay the loan. The average repayment time between January 1980 and September 2012 (using blended rates and prices) is around three and three-quarters years (3.72). The chart below shows the averages for different vessel types, ranked by the current levels.

In order to fall back in line with the long term average the price of a five-year Capesize will have to decrease from $32.50m to $20.25m. This is the “Adjusted Price” in the table below. The last time Capesize were at this Adjusted Price was back in the 1980s.  The Panamax sector too, would have to see prices return to 1980s levels. This could be seen as an indication that these sectors are still over-priced compared to the available rates and a substantial re-adjustment needs to take place. At the other end of the scale, the Handysize sector is closest to its long term average. Indeed, less than four years to repay seems reasonable, but there is still a 20% gap between the adjusted price and the current price.

In the tanker sector the range of disparity between the Adjusted Price and Current Price is not as wide. The five-year old price in the VLCC sector would need to fall to under $50m to fall in line with the long term repayment level, prices that have not been seen since 1995. The most reasonable appears to be the coated 75k dwt tanker, which is close to its long term average repayment level, but what is the demand for this ship? The best looking sector is the 47k MR. Product Tanker, which is almost on the average of 3.6 years, and is one of the ships in demand at the moment.

The container sector shows some interesting results based on current prices and rates. The 2750-TEU sector is so over-priced compared to the current timecharter rates that to re-adjust to the long term repayment levels the secondhand price would need to fall to below any prices recorded in the long term time series. On the other hand, the smaller sectors look very interesting. Both the 1700-TEU and 1000-TEU are under the long term averages. The future value information contained in the timecharter rate indicates that these ships are under-valued, as seen by the Adjusted Price being below the Current Price. The 1000-TEU looks especially encouraging, as on current timecharter rates the repayment time is only three years.

So the quick and dirty S&P rule of thumb would suggest that the S&P deals that can fly in the current market lie in the Handysize dry bulk, the 47K dwt Product Tanker and the 1700-TEU and 1000-TEU Containership sectors. In the other segments owners / banks that need to sell will have to seriously lower expectations to attract buyers at the current rates.

Copyright Craig Jallal. All Rights Reserved.

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