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.

Looking for Turning Points

Buy low, sell high is the asset play mantra, but timing is crucial. Can we spot when to buy, and sell?

In 2005 Amir Alizadeh, Nikos Nomikos and Stefan Van Dellen of Cass Business School in London produced a paper “Investment Timing and Trading Strategies in the Sale and Purchase Market for Ships” examining a method for timing sale and purchase activity. The model is based on the Price / Earnings ratio (P/E), familiar to investors in the stock markets.

Investors in shipping are looking for two sets of gains, the capital gain from ship price appreciation (the buy low, sell high) and gains from trading the vessel (earnings). The two gains are linked, as it is the increase in earnings that drives the expectation the price will rise.  This can be seen in the chart of the long term relationship between price and earnings. It illustrates the lead out (to use cycling terminology – I am still on an Olympics buzz) of earnings, and then the “sprint” in prices. The researchers found that just before any significant market recovery, the spread between earnings and prices tends to narrow. This is can be seen clearly in the run up to the boom.

The model uses this theoretical relationship and gathers information on the difference between the long term mean P/E ratio and current P/E ratio. Slow and fast Moving Averages (MA) are used to filter the information and it is the spread between the differences between the MAs and the long term mean P/E ratio that throws up the buy or sell signal. A positive difference indicates the start of a price appreciation era, and a negative difference indicates the start of an era when the price will fall. The researchers tested the theory against a buy and hold strategy (it fared better) and for statistical anomalies. They also ran Monte Carlo simulations on the trading rule and found that overall it fared better than a buy and hold strategy.

The original paper was published in 2005, and I wanted to see if the P/E ratio theory could tell us something about market today. The original paper measures the P/E ratio for several sizes of bulk carrier, using the five-year old price, and the one year time charter rate as a proxy for earnings. In the model the one-year timecharter rate is used instead of spot earnings because this contains information about future expectations. I have stripped down the model to just the Capesize vessel, and extend it to the end of August 2012 (the data in the original paper ended in 2004), to see what the indicators are showing today.

The table below shows my application of the P/E ratio trading rule theory to five-year old Capesize prices. Any errors and omissions are my fault, not that of the original researchers, Cass Business School or anyone else. I did not test it against a buy and hold analysis, nor have I done a Monte Carlo analysis of the rule. This is not investment advice and you should do your own research and due diligence. The table is for illustration and entertainment purposes only.  What the table illustrates are 11 Buy / Sell phases indicated by my version of the P/E Ration theory.

Two of the Buy / Sell phases would have produced a negative result. In the first, (May 1994 to November 1995), the timecharter rate steadily rose during the period, so there may have been a positive operating result to balance the capital loss. The second loss period (September 2011 to March 2012) had declines in operational gains and capital gains. In both cases the Sell indicator was triggered around six months too late. But the investor would not have sold then as the sale price was below the initial purchase price. Most likely the sale in these eras would have occurred on the respective peaks. In five of the Buy / Sell phases, the timecharter rate declined during the hold period. Also the indicators seem to miss the peak price realizable during the hold period, so the gains were not optimized. Altering the fast and slow moving averages or introducing other filters (as in the original study) would probably give a clearer picture.

The researchers in 2005 found the trading rule correctly identified the buy signal when in the 2003-2004 market when earnings increased sharply compared to ship prices. This comes across in phase six. Later, in phase eight, trading on the buy and sell figures would have produced the biggest capital gains of $79.5m, and dragged the investor out of what was to become an illiquid sale and purchase market. But most of the time the capital gains were small, or another way of looking at it, is that the losses were controlled.

The latest buy indicator was triggered in August this year. Overall Capesize rates and prices are similar to those of the 1990s, and I expect that when the Sell indicator is triggered, the capital gain will be relatively small, too.  I will let you know.

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.

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.

Shipping Research Data Survey

Just how much shipping data is out there?

This is a question that has long intrigued me. To answer this question I have started a survey of all the shipping data providers I can think of. The list includes all the usual suspects, such as Clarksons, SSY and Fearnleys, plus many other less well known names gleaned from Google searches. Each data provider will be sent a spreadsheet with a matrix of 40 shipping sectors, and 80 data points. I fill in as much of the spreadsheet as I can from what I know from my past dealings with the organisation and from details from their website.

I will publish the results in an ebook, which will be a guide to other shipping analysts searching for that hard to find data. We all have our favourite sources for the standard sectors like VLCC or Capesize, but where to go for car carriers timecharter rates or product tanker price forecasts?

Therefore, if you are from a shipbrokers or a shipping consultancy, check to see if you have received an email from me. If not, then drop me a line.

The sectors I am looking at are:

1 VLCC
2 Suezmax
3 Aframax
4 Panamax Tanker
5 Handysize Tanker
6 Small Tanker
7 Specialised Tanker
8 LR1 Product Tanker
9 LR2 Product Tanker
10 MR Product Tanker
11 SR Product Tanker
12 Small Product Tanker
13 Capesize DB
14 Panamax DB
15 Supramax DB
16 Handymax DB
17 Handysize DB
18 IMO II Chemical Carriers
19 IMO III Chemical Carriers
20 VLGC Carriers
21 Medium LPG Carriers
22 Small Semi-Ref LPG Carrier
23 Ethylene Carrier
24 Small Fully Press LPG Carrier
25 VLPP Containership
26 Post-Panamax Containership
27 Panamax Containership
28 Handysize Containership
29 Feeder Containership
30 Handysize MPP
31 Small MPP
32 Short Sea
33 Inland Waterways
34 Passenger Ferry
35 Freight Ferry
36 Car Carrier
37 LNG Carrier
38 General Cargo
39 Reefer
40 Cruise Ship

And the data points are;

1 Spot Rates
2 Spot Earnings / TCE
3 Timecharter Rates
4 Trip Charter Rates
5 Own Brand Indices
6 Secondhand Prices
7 Resale Prices
8 Delivered Prices
9 S&P Activity
10 Newbuilding Prices
11 Scrap Prices
12 Fixtures
13 FFAs
14 Port Costs
15 Opex
16 Repayment Estimate
17 Contracting Activity (new orders)
18 Fleet Size
19 Fleet losses
20 Fleet Additions
21 Conversions
22 Demolition Activity
23 Ships used for Storage
24 Laid Up / Idle
25 Slow Steaming
26 Fleet Availability
27 Ship / Fleet Efficiency
28 Average Speed
29 Average Consumption
30 Open Vessels
31 Congestion
32 Trade (Imports / exports)
33 Economic Data
34 Currencies
35 Vessel Movements
36 Port Throughputs
37 Commodity Prices
38 Commodity Production
39 Commodity Consumption
40 Commodity Storage
41 Tonne-miles
42 Spot Rates
43 Spot Earnings / TCE
44 Timecharter Rates
45 Trip Charter Rates
46 Secondhand Prices
47 Resale Prices
48 Delivered Prices
49 Newbuilding Prices
50 Scrap Prices
51 Contracting Activity (new orders)
52 Shipbuilding Capacity
53 Fleet Size
54 Fleet losses
55 Fleet Additions (inc conversions)
56 Conversions
57 Demolition Activity
58 Trade
59 Economic Data
60 Currencies
61 Vessel Movements
62 Commodity Prices
63 Commodity Production
64 Daily
65 Weekly
66 Monthly
67 Quarterly
68 Annual
69 Special Report
70 Presentation
71 Public
72 Internet Download
73 App
74 Bespoke
75 Cost – Low
76 Cost – High
77 Own Broker in Sector
78 Quality Assurance
79 Live Streaming News
80 News Archive

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 1^st 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.