Shipping has two jobs. One is transport, a painstaking task, which it performs safely and efficiently, moving around 8 billion tons of cargo last year. The other is to manage the investment needed to ensure that the world never runs out of shipping capacity.
A more challenging task, which involves betting billions of dollars on a future which seems to get ever harder to predict.
Thinking Outside the Box
The container business is particularly exposed to these problems. The operational side of the business is far more complex than bulk shipping, because, in addition to providing ships, liner companies have thouppsands of customers and must handle the administration involved in bills of lading, invoicing and door-to-door delivery. This requires a bureaucracy of thousands, generally topped off by a management board. Yet tough competition has, in recent years, drawn these companies into the world of speculative investment so familiar to the tanker and bulker markets.
The $200bn Question
Of course the container industry is used to heavy investment. In 1980 there were 600 containerships, in 1990 1,289, in 2000 2,624 and today there are 5,014 ships (compared with 5,543 tankers and 8,361 bulkers). As the ships got bigger capacity grew even faster, increasing from 4.4m TEU in 2000 to 14.6m TEU in May 2011, a 328% increase involving an investment of $197 billion.
The Volatility Club
Surging cargo growth helped with the risk of ordering billion dollar strings of ships, but today’s investment risk is very different from 10 or 20 years ago. One thing which has changed is volatility. For many years container lifts grew every year, boosted by new trades (e.g. China) and new commodities (e.g. forest products and reefer cargo). But the credit crisis took containers into new territory and in 2009, for the first time ever, the container trade declined by a staggering 9%.
Caught Off Balance (Sheet)
Meanwhile, control of the fleet changed. 20 years ago liner companies owned their ships. Today over 50% are chartered in from independents, mainly financed through the German KG system. This did three things. Firstly, it took assets offbalance sheet, improving returns; secondly, asset risk moved to independent investors; and, thirdly, the market in containerships became more liquid. All welcome to liner companies who could leave the “asset angst” to the independents and their bankers.
So there you have it. Over the last two decades the container business has joined the speculative shipping club, and rightly so. Today’s challenge is to decide whether the world economy will need to treble its capacity again in the coming decade (pushing the fleet up to 45m TEU). Or, are things are slowing down? Not an easy decision, but someone has to make it. Have a nice day.
The Baltic Exchange's main sea freight index, which tracks rates to ship dry commodities, fell for a fourth day on Friday as growing vessel availability outweighed demand for raw materials.
The index fell 1.06 percent or 14 points to 1,306 points. Prior to this week's falls, it had risen for seven straight sessions.
"Commodity supply is improving and global demand remains robust. Unfortunately for freight rates, however, the market continues to be bogged down by a large amount of available vessel and new-building deliveries," said Jeffrey Landsberg, managing director of dry bulk consultancy Commodore Research.
"Despite the very encouraging cargo outlook, most freight rates are likely to stay under pressure."
Brokers said the selling of freight derivatives contracts this week had added to the softer tone. There were also expectations that the onset of India's monsoon in June would reduce iron ore exports as the country's rivers rise, making it harder to transport goods.
"The cargo outlook for the next few weeks looks good. Major Chinese steel mills have not yet begun receiving reduced electricity allocations, so iron ore demand should remain high,"
"India will likely ramp up its thermal coal imports before monsoon season."
The Baltic's panamax index .BPNI fell 2.82 percent, with average daily earnings dropping for a third day to $13,797. Panamax vessels usually transport 60,000-70,000 tonne cargoes of coal or grains.
"We are seeing greater number of (panamax) vessels on offer, perhaps reflecting the developing pessimism in the near term," said broker Braemar Seascope. "There is little to encourage the market not to continue to drift off for the foreseeable future."
Brokers said the winding down of South America's grain export season would weigh on panamax availability.
The outlook for dry bulk rates has been grim, because rising ship supply has outpaced demand to ship commodities.
Floods and cyclones in Australia in February had hit coal production, and some producers are still struggling to return to normal operations, hurting capesize activity.
Weather-related and logistics problems at Brazilian ports have also disrupted iron ore shipments from there.
Operators were also watching for further signs that China's economy was slowing, given how dependent the dry freight market is on Chinese imports, especially of coal and iron ore.
Oil and metals extended a recovery on Friday as U.S. and European economic data dampened worries about growth and monetary tightening, luring investors back into commodities after a bloody rout.
The Baltic's capesize index .BACI fell 0.27 percent, with average daily earnings inching lower to $6,002. Capesizes typically haul 150,000-tonne cargoes such as iron ore and coal.
The index has more than halved in the past six months to near levels last seen during the financial crisis in 2008.
Korea's three largest shipbuilders have seen their new orders soar, almost reaching the level of the last industry boom in 2007.According to data released by the industry on Wednesday,
Hyundai Heavy Industries, Daewoo Shipbuilding & Marine Engineering and Samsung Heavy Industries have won a combined US$21.7 billion in orders so far this year. That's nearly four times the $5.2 billion won by the Chinese shipbuilding industry during the period.
According to a forecast by Daishin Securities, the three Korean companies are expected to surpass $48 billion in orders this year, comparable to the $57.5 billion of 2007.
Despite being distant to a full recovery of the global shipbuilding industry, Korean shipbuilders' strong performance can be attributed to orders for large-sized container ships, drillships and LNG vessels, where Korean companies have taken the technological lead compared to China.
Korean companies have won 17 out of 24 orders for drillships worldwide so far this year.
As new ship orders appear to be slowing down following last year’s rebound and deliveries might have passed their peak, the challenge for shipbuilders in filling the expanded global capacity will begin to loom larger.
The urgency is still a little way off as the order backlog remains enormous by any historic standard, at over 400m dwt.
But such has been the expansion in capacity and the employment issues that go with it, especially in China, that the pressures to fill that capacity could have a significant effect on owners’ decisions.
It is clear that China’s market share is continuing to rise, mainly at the expense of Japan, but it is also increasingly battling with South Korea for more sophisticated and high value orders.
Speaking last weekend at a conference in China, Li Dong, vice-director of the equipment industry department of China’s Ministry of Industry and Information Technology, was reported as commenting that having become the world’s leading shipbuilder, China aims to become the leading builder of the most advanced ships by 2015, in accordance with the government’s current five-year plan.
He accepted that China still lags in terms of innovation and technology but it is making big strides in improving quality to follow its rapid rise in quantity. Chinese yards have already started to win orders for large hi-tech ships that until recently were considered the preserve of more advanced yards in Japan and South Korea.
Clarksons reported that new orders placed so far this year are running some 38% down on the same period in 2010 in compensated gross tonnage. This is partly due to the perceived risk of overcapacity and also due to greater caution by finance providers.
Some $24.7bn of new orders was contracted in the first three months of this year, a trend which if continued would mean about $100m being placed in the full year and more or less the same as in 2010. However, this must be considered in the context of lower newbuilding prices, which suggests that the volume of contracting could be even higher than last year.
Clarksons also pointed out that newbuilding output has started to decline from its peak in the third quarter of 2010, at 13.8m cgt with China producing some 5.2m cgt in that three-month period. In the first quarter of this year output eased to 10.3m cgt.
Clarksons commented that these trends mean that shipyard capacity is a big issue for owners and shipbuilders as yards try to attract new orders while owners face the dilemma of whether to succumb to the temptation of lower newbuilding prices being offered.
But the growing overcapacity in global shipbuilding is likely to lead to further price falls. Newbuilding prices increased slightly, having bottomed out in early 2010, and then appeared to stabilise, but recently there are signs that prices are easing again, although so far not dramatically.
China's shipbuilding industry is large but not strong, and independent innovation and establishing an integrated industrial chain are top priorities, an official told.
"Although China overtook South Korea and Japan to become the world's largest shipbuilder in terms of shipbuilding capacity, overtaking orders and new orders, the country's high value-added shipbuilding ability is far behind the two countries," Qian Xinnan, deputy director of the China Association of the National Shipbuilding Industry (CANSI), said.
China has been the world's largest shipbuilder since 2010.
Statistics filed with the Ministry of Industry and Information Technology show from January to December 2010, China's shipyards produced a total volume of 65.6 million deadweight tons, an increase of 54.6 percent from the previous year. And their newly received orders as of the end of last year exceeded 75.23 million deadweight tons, accounting for 54 percent of the world's total production volume.
"We must recognize the data is just about the volume of deadweight tons (a ship's carrying capacity with crew and supplies), not about their total value (the ships)," Qian said.
In the first quarter, South Korean shipbuilders signed new orders for 90 ships with a total worth of $12.8 billion. China received orders for 88 units with a total value of only $3.5 billion, according to the latest data from South Korea's Ministry of Economic Knowledge.
"China should complete its whole oceaneering chain, including the high-tech corollary equipment used on ships," Qian said.
"Some automated electronic devices on China-made ships, for instance, are still imported from overseas," he told。
After years of development with the advantage of low labor costs, China's shipbuilding industry entered a period requiring more initial investment and intensive management. So, a significant amount of money needs to be invested in R&D during the process, with less consideration for short-term returns, according to Qian.
Qian also encouraged domestic shipbuilders to look "positively" for outbound investment opportunities and study advanced technology, citing an acquisition case between Chery and Volvo as a successful example of a domestic manufacturing company going outside the country.
"So far, few Chinese shipbuilders have begun outbound expansion while South Korea, for instance, is cooperating with countries like Russia and Brazil," Qian said.
China's shipping industry will experience a structural readjustment during the 12th Five-Year Plan period (2011-2015), Qian said.
Drillship newbuilding orders are expected to hit record-high this year.
To date in 2011, 17 drillships were inked worldwide, all at South Korean big 3 shipbuilders.
Samsung Heavy Industries booked seven, Hyundai Heavy Industries six and Daewoo Shipbuilding & Marine Engineering four.
The figure is already nearing 19 orders recorded in the entire 2008.
Considering optional contracts and expectation that drillship orders would go on amid high oil prices, new record of drillship orders looks almost certain for 2011.
Industry pundits forecast drillship order binge to reach 30.
Samsung and Daewoo have four optional contracts each and Hyundai has three optional orders.
Hyundai is also expected to sign a LOI for two drillships with Norway's Odfjell Offshore.
Meanwhile, some claim that drillship order spree is nearing to an end as speculative orders related to Brazil's Petrobras are not expected to continue any further.
As the week progressed charterers showed increasing interest in seeking VLCC spot coverage, and owners seized this opportunity to try to drive rates upwards, but their efforts have so far been in vain. Given the increase in bunker prices, owners´ daily earnings have, in fact, been reduced. With a well-stocked MEG VLCC tonnage list, owners have little chance to secure rate improvements unless a particular charterer has some special requirement limiting choice. The Atlantic VLCC market remained steady with no change in current rate levels. With a modest amount of activity prevailing, Suezmax rates in WAF weakened, particularly at the beginning of the week. The Med/ Bsea Suezmax market also exhibited a softer trend, and we don´t expect to see any firming in this market until activity resumes in earnest. For Aframaxes trading in the Med/Bsea rates continued to stagnate at breakeven levels in a market where there were not enough cargoes to effect any changes. In the Nsea and the Baltic Aframax rates are also making their way downwards, and with the ice season now at an end rates in this segment could soften even further. Even though there are still cargoes to be worked, the size of the tonnage list keeps charterers firmly in the driver´s seat.
Further pressure has been put on the freight rates in the West, with the going rate for MR vessels now hovering around ws220 for UKC/USAC basis 37kt. The position list is fairly long, with many ballasters coming in from both WAFR and USAC. Larger tonnage is seeing hectic activity with many cargoes shipped down to WAFR. Rates are not moving though, with LR1s Baltic/USAC keeping steady at around ws140 basis 60kt. Handies trading across NWEurope are under continued pressure with many spot vsls, pushing rates down to ws185 basis 30kt. Flexis cross-Cont are stable at ws210 basis 22kt. Activity is picking up in the Med and ex Black Sea, with rates around ws220 for cross-Med biz. Stateside rates keep slipping with Caribs upcoast fixing at ws175 basis 38kt, and backhaul voyages USG/UKC- Med slipping to ws110 level basis 38kt. The clean tanker market East of Suez remains stable this week. For LR1s trading MEG/JPN fixtures are being concluded at ws142.5 basis 55kt. On the LR2s, we have seen a flat market still fixing at WS 128 basis 75kt on the same route. We expect the market to remain at these levels in the near term. Rates for Jet fuel liftings MEG/UKC basis 65kt are now fixing at USD 2.05 million. MRs trading Spore/JPN are seeing rates around ws152.5 basis 30kt, whilst MRs trading MEG/JPN are seeing rates around ws162.5 basis 35kt.
Stable/flat with positive undertone in the Atlantic meaning more enquiry hitting the market today. Lack of prompt vessels. Trips to the Far East around usd 22-25k per day for Supras nevertheless a lot of actors are still assessing the market´s direction. The Pacific market remains quiet with holiday in Korea and monsoon setting soon in India closing WCI iron ore activity. For Indo-India, Supras in North China are getting close to 13.5k. WCI-China rates slided to 15k and from ECI around 13k but few ships seen ballasting to Indonesia as not much cargoes ex-ECI. Red Sea, ferts on Handymax/Supras are fixed at very mid 20´s pmt on voyage basis to WC India. Large Supras for RBCT/India round now asking 15k. Not too much activity on short period as market bit volatile and speculative and hear index type vessels fixed at mid-teens.
The increase in activity and rates especially in the Atlantic from mid last week dropped somewhat as from beginning this week. T/a now largely steady and owners more reasonable and willing to repeat last done. More coal in Atlantic was the main reason for the positive upswing with rates pending between 15-16k. For ESCA the grain is still main driver with levels between 25,000 -26,500 + bb 550-600k. As more and more spot Capes offering in on Panamax stems, where this is possible, the result can influence negative on Panamax as well and predictions for coming weeks are more conservative. I the Far East rounds paying 14k and short period tic more.
The week has been fairly quiet, with steady levels. Although freight levels slightly down, levels are flat due to lower bunker prices. Still a good number of ballasters and some vessels waiting outside Brazil, with lack of fronthaul cargoes for May dates. For West Australia to China, levels remain unchanged around usd 7.50 pmt, last done today usd 7.40 pmt by FMG. It seems people in general accepting the difficult and challenging state of the Cape market, and that the situation will remain for some time.
It has been a reasonably eventful week in the VLGC market and more than anything else characterized by somewhat softer rates and a wait-and-see attitude. LPG prices have been rather jumpy lately - a reflection of crude movements - therefore there hasn´t really been any incentive to trade and charter too much physically. The latest fixtures MEG/Far East were concluded around USD 47.00 pmt which equals to about USD 17,500 per day. At the same time some MEG/India sub-fixtures return considerably higher numbers - the West market is also talked higher than the current MEG/Far East rates. The Baltic VLGC index has been in red every single day since before Easter, latest posted around the USD 47 mark bss Ras Tanura/Chiba, actually the lowest number since the beginning of March. There is no doubt there are more vessels than cargoes in the remainder of May which means only independent Owners´ can set the foot down and resist the downward freight movements as observed lately.
LNG is still in the hot seat, 5 LNG carries confirmed this week. All together 17 newbuildings reported, however, several of these are options or order swaps which have only recently been confirmed. Maran Gas swapped its existing VLCC order into LNG carriers at DSME, while Hong Kong based OOCL declared a option for a series mega sized container carriers at Samsung. Although little activity on the tanker and bulker side, newbuilding prices seems to be moving slightly up due to steel price and the currency situation.
Scrapping of older ships has picked up this year, but as is indicated by a lackluster dry bulk market, it’s still far from enough to help alleviate the oversupply issues that the market has been facing since late last year. Still, prices offered by scrapyards remain much higher than two years ago, when the ship demolition industry had grinded to a halt.
Looking at the past couple of weeks’ activity, although there were fears during the last days that the Bangladesh Enviromental Lawyers Association will show resistance against the recent lifting of vessels' ban for scrapping, hungry buyers in Chittagong continue their purchases. Shipbroker Golden Destiny reported that scrap prices in India remain firm at $500-$520/ldt for dry and $530-$540/ldt for wet tonnage, while Bangladesh levels are still not so competitive that the owners will risk sending their vessels for scrapping in Chittagong. China still tries to compete with its rivals at the low levels of $445/ldt for dry and $465/ldt for wet tonnage, while Pakistan is still on the sidelines paying less than India and Bangladesh and with no success for securing some more tonnage. Thus, India drives the market for one week more; as there is still uncertainty in Bangladesh and the temporary spike in levels do not yet offer comfort for the vessels’ beaching. The scrapping spree for capesize tonnage continues with two more large units heading to the scrap yards this week. The demo deal grasping the headlines of this week is for a VLOC “ALSTER N” 305,000dwt of 41,500 ldt fetching $510/ldt in Bangladesh. In general, bulk carriers seem to dominate the demolition scene due to sharp volatility of the freight market.
The previous week ended with 19 vessels reported to have been headed to the scrap yards of total deadweight 1,396,745 tons. In terms of the reported number of transactions, the demolition activity was almost the same however in terms of deadweight sent for scrap
there has been a 78% increase. In terms of scrap rates, the highest scrap rate has been achieved this week in the tanker sector by India for a tanker of 28,750dwt “WASEL” at 568/ldt. India this week attracted almost 58% of the total demolition activity. Comparing to a similar week in 2010, demolition activity has been decreased by 13.6%, when 22 vessels had been reported for scrap. China was leading the game by paying $400/ldt for dry and $425/ldt for wet cargo and Bangladesh was offering just $325/ldt for securing dry and $410/ldt for wet cargo.
During the week before, “on the demolition front, although permission for the beaching of the vessels has already been given the situation in Bangladesh is still vagueThere is still uncertainty regarding the start up of the breaking process. Some market sources suggest that the time lag from the time of beaching till the recycling process will be around 60 days. Furthermore, speculation surrounds the market that the Bangladesh Environmental Lawyer’s Association (BELA) could soon be heading back to court in order to re-challenge the recently issued order and there may be some form of closure after the conclusion of the next tide running from 4-7th May.
In terms of scrap prices, the opening on the Bangladesh has not still pushed prices at higher levels with India leading for the time being the market as both prices and number of transactions continues to head north. The price differential between levels offered from China and the weak rates in Bangladesh give one more advantage to Indian ship recyclers. Several vessels have been headed to the scrap yards of the Indian market before the traditional monsoon period begins in mid May and scrap prices begin their downward revision. It is worth mentioning that one more capesize of 127,825 dwt has been sent for scrap this week at
$485/ldt as is Gwangyang. Market rumours suggest that the vessel has been headed to Bangladesh but the final destination is not yet confirmed. During the year to date more than 20 capesizes have been reported for scrap, a record activity from 2010 levels. Bangladesh has been ranked in the third place behind China offering $485/ldt for dry and $515/ldt for wet cargo. On the other hand, Pakistan managed to win a tanker of 33,303/ldt and with the tightening of tanker regulations in Bangladesh we may see even more tanker scrapping business in Pakistan.
The week ended with 18 vessels reported to have been headed to the scrap yards of total deadweight 783,944 tons. In terms of reported number of transactions, the demolition activity has been marked with no change but there has been a 40% increase regarding the total deadweight sent for scrap. In terms of scrap rates, the highest scrap rate has been achieved this week in the tanker sector by India for a tanker of 12,637dwt “CASPER” at 1220/ldt incl 940tons of stainless steel. India along with Bangladesh has attracted 72% of the total demolition activity. At a similar week in 2010, 25 vessels were reported for scrap indicating a
negative yearly change 28%, in terms of the reported number of transactions, with most of the activity being centred in the tanker segment (44%), whereas demo countries were offering lower scrap rates than today’s levels, by $75/ldt less dry/general and $80/ldt for wet cargo” said the shipbroker’s report.
Chinese shipbuilders completed 14.46 million dead weight tons of shipbuilding orders in the first quarter of this year, remaining almost unchanged to the same quarter of 2010, according to statistics released by China Association of National Shipbuilding Industry or CANSI.
Of the completed orders, 12.2 million DWT were for exports, accounting for 84.4% of the total.
As of Mar. 31, China saw total shipbuilding orders reach around 190.04 million DWT in hand, up 3.2% year on year. Of the orders, 165.14 million DWT were for exports, accounting for 86.9% of the total.
In the period from January to March, the country had 1,518 shipping companies above designated size, which saw the gross industrial output value increase 24.1% year on year to RMB 167.8 billion, including RMB 129.1 billion in shipbuilding, up 22.5% year on year.
China exports US$10.05 billion worth of ships, boats and floating structures in the first quarter of 2011, 5.21% more than in the same month of last year, according to General Administration of Customs.
Of the total export value, US$5.74 billion or 57.11% were the export value of dry bulk carriers.
In the first quarter, the country saw its import value of ships, boats and floating structures increase 32.85% year on year to US$498 million.
Reportedly, China canceled 21 shipbuilding orders, most of which were orders for dry bulk carrier building, totaling 1.08 million DWT in the first quarter of this year, dragged down by the sluggish shipping market and the shipping overcapacity of dry bulk carriers.
Most of the shipbuilders also suffer cash shortage problems due to lower down payment for shipbuilding orders, said a person familiar with the matter as saying.
However, the Chinese shipbuilders has focused on the research and development, and manufacturing of LNG carriers.
The country's biggest shipbuilder China State Shipbuilding Corp or CSSC, the parent company of China State Shipbuilding Co Ltd, has started R&D on LNG carriers with maximum loading capacities up to 220,000 cubic meters.
China Rongsheng Heavy Industries Group Co Ltd, China's largest private-owned maritime equipment manufacturer, is also said to be developing drillships and LNG carriers.