Influence of the Chinese New Year on Shipping


The Clarksea Index hit an all-time low last week when it fell $223/day to $7,111/day. Of course, shipping slows down each year with the arrival of the Chinese New Year, when the whole country closes down and everyone goes on holiday. Each year, as China’s influence on shipping has grown, so has the impact of the holiday. This year the difference between the last working week and the first week of the holidays was a drop of -2.74% in the Clarksea Index. This is a relatively small amount compared to the last five years (see chart), but then there is little fat left in the Clarksea Index, which has already lost nearly 20% of its value since the start of 2013.

Influence of the Chinese New Year on Shipping (Feb 2013)

This begs the question how low can the Clarksea Index go? The Clarksea Index is made up of the average weekly earnings of the main shipping sectors weighted by the number of vessels in those sectors. Generally, the diverse sectors tend to balance one another out. A bad week in VLCCs can be cancelled out by a good week for the Capesize or the VLGCs. This can lead to steep falls. During the Boom the Clarksea Index fell over $5,000/day in one week in early 2008, but this only brought it to $37,606/day and few heeded the warning sign.

 We are a long way from those heady days, and the Clarksea Index, which is the heart rate monitor of the industry, is now worryingly low. My gut feeling is that $6,000/day is the lowest it could possible go. However, it is not usual for individual routes to go into negative earnings, pulling down that sector. Last week, for instance, the VLCC route Middle East Gulf (MEG) to Europe and MEG to US Gulf fell to Worldscale (WS) 18.0 and WS 18.5, respectively. If any VLCC was to fix at these rates the equivelent earnings per day are a loss of around -$17,000/day. The tanker sector is not the only one showing negative earnings last week. Some of the Capesize routes and Panamax dry bulk routes went negative. Fortunatley this downward drag was halted by buoyancy from the gas sector (pun intended). But in theory it would be possible for enough routes to post negative earnings for the Clarksea Index itself to go negative. Then the Year of the Dead Duck will be upon us.

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Capesize Orderbook down to 17% of the Fleet


The Capesize orderbook has shrunk from a high of 117% of the fleet in Q4 2008 to just 17% today. Of course, in the meantime the Capesize fleet has swollen from 141.84m dwt (817 ships) to 278.87m dwt (1505 ships), according to Clarkson Research data. Nonetheless, the slowdown in new orders brings the orderbook as a percentage of the fleet down to the level of Q3 2003. There is still another 36.4m dwt to be delivered in 2013, which is actually larger than the total Capesize fleet of thirty years ago.

Clarkson Research list three Capesize thirty year old or older as still live on their database. These include an Odense Lindo-built vessel, the 1982-built, 136,999 dwt “RAM PRASAD” operated by Essar Shipping. After launch she worked for the Danish electricity producer Elsam for twenty years. Clarksons report the vessel was bought by Goldenport Holdings in June 2002, when the Capesize fleet as a mere 88.9m dwt (orderbook 8.1% of the fleet) for $5m. In March 2008, when the Capesize orderbook stood at 93% of the then fleet, Goldenport sold the 25-year old ship to Chinese interests for $25m. Goldenport booked a $20m profit on the sale of the “SAMOS” as she was then called, and traded the ship through one of the best Capesize cycles ever. Seven months later the Capesize market crashed. Shipping, like comedy, is all in the timing.

VLCCs Benefit From Fuel Oil Arbitrage


Platts reports that at least two VLCCs have been chartered to carry High Sulphur Fuel Oil (HSFO) from Rotterdam to Singapore. The 2002-built, 299,222 dwt “ASTRO CHALLENGE” is reported by Platts to have been fixed by Litasco for loading 29 September on a $3m lumpsum basis.

VLCC carrying cargoes of bunkers from Rotterdam to Singapore are quite rare. According to Clarksons SIN, there were three reported VLCC fuel oil fixtures from Rotterdam to Singapore in 2011, ranging from $2.8m to $3.3m lumpsum. So far in 2012 there have been two similar voyages, plus the two upcoming voyages. The difference between Rotterdam 380cst Fuel Oil has drifted out to $28/tonne in the last two weeks of August.

The stars on the chart indicate the occasions when VLCCs have been fixed for similar cargoes of fuel oil from Rotterdam to Singapore between May 2008 (when Clarkson Research first started recording lumpsum prices) and September 2012. On average the lumpsum for reported voyages has been around $3.55m, with a low of $2.25m for a 280,000 tonne cargo in April 2009. The average lumpsum for the whole period was $4.22m. The average spread between Rotterdam and Singapore fuel oil prices during that period is $23.81/tonne, but the average on the actual reported voyages is slightly lower at $20.33/tonne. Therefore it doesn’t seem to be the arbitrage in the cost of the cargo, but the low cost of freight. Furthermore, the spread between Rotterdam and Singapore in the summer of 2008 reached over $50/tonne, but the VLCC market was healthy and the indicative lumpsum rarely fell below $6m. No reported fixtures took place during this period. Therefore, it would seem that when the lumpsum falls below $4m and the spread is over $20/tonne, and then the marginal gains are worth the risk of shipping a 270,000 tonne of fuel oil half-way across the world.

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.

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 wiki.answers.com someone had posted the reply “”about 55,000” in October 2008. The other answer appears on the International Chamber of Shipping website marisec.org 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.

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…?
(polls)

Copyright Craig Jallal. All Rights Reserved.

The Clarksea Index – The Heart Rate Monitor of the Shipping Industry


The Clarksea Index – The Heart Rate Monitor of the Shipping Industry

I use the Clarksea Index as the starting point for most presentations. It is the one slide that clearly shows the current state of the shipping industry. The Clarksea Index acts as the heart rate monitor of shipping, covering all the main sectors. As the name suggests, the Clarksea Index is produced by Clarkson Shipping Research (www.clarksons.net), and was developed by Dr Martin Stopford and Cliff Tyler. The Index shows the average earnings in $/day of the whole fleet. To do this is takes into account the average earnings that week of VLCCs, Suezmax and Aframax in the Tanker sector. In the Dry Bulk sector it includes the average earnings of Capesize, Panamax, Handymax and Handysize. The Liner sector is represented by 1700-TEU Containerships and the Gas sector by VLGCs. The Index is weighted by the number of ships in each of the sectors.

The Clarksea Index goes back to 1st Jan 1990, when it was assessed as $17,683/day. Last week the Clarksea Index reached $11,625/day and between 1990 and last week has averaged $16,743/day. So straightaway we can see the shipping industry today has a sluggish pulse, due to too rich a diet in the boom years. The chart shows the Clarksea Index since its inception and reveals the boom years were far beyond anything experienced before.

The current trough in the shipping cycle is not as dire as you might think. The second chart shows that on average 1992 was much worse, less than $10,000/day. Or if you are pessimistic, you could say that with half a year to go, 2012 could also dip below $10,000/day on average. However you look at it, we are bumping along the bottom of the trough of the shipping cycle. Indeed, I didn’t expect the trough phase to last this long, and a year ago I was expecting the end 2012 to be around the long term average of $16,500/day.

Today, I feel we will be lucky to have a Clarksea Index of $12,000/day at the end of the year. This would put 2012 in popular company.  A Clarksea Index between $10,000/day to $12,000/day range has appeared the most frequently, accounting for nearly a quarter of the weekly results between 1990 to the present day.

Author: Craig Jallal.

Copyright Craig Jallal. All Rights Reserved.

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