Frankly Speaking

A few years ago we wrote an article in Fairplay Magazine under the title “Do you believe in China?" The essence of this article was that as long as one believed in the Chinese economic miracle, the already good shipping markets would last for a long time.  Well, many did, but today it is, in our view, difficult to be a strong believer as an array of statistics and indicators point in opposing directions.

Single Hull tankers are facing a crunch as they are doomed for IMO’s phase out scheme or have been banned from certain waters already. Thus, we will not dwell on the inevitable but instead look at what these mature ladies are doing now.

At the turn of the century, oil production in the North Sea peaked at about 6.3 mb/d. During 1Q09 output was about 4.4 mb/d - a decline of about 30%, or 1.9 mb/d, and the outlook is not bright. This could, however, become a very positive stimulus to tanker demand.

...wrapped in a mystery, inside an enigma...to partly quote Winston Churchill in his famous speech about the Soviet Union in 1939. Now, we believe it is appropriate to use his words when describing the shipbuilding market these days. The market is flourishing with rumours, statements, and proclamations of all sorts these days. But what is the true situation? Sadly, we think nobody knows.

Nobody would argue strongly against the assertion that China has almost single-handedly been the main driver behind the past five years’ fantastic dry bulk market - this was especially true in the Capesize market with its almost insatiable appetite for iron ore. What now? We observe some ominous trends.

After the disastrous accident in South Korea on the 7th of October 2007, where more than 66,000 barrels of crude oil was spilled into Korean waters, governments and oil companies in various countries cried out with promises to stop using single hull tankers. The picture of oil slick beaches, dying sea birds and several hundred thousands of volunteers’ working day and night to clean up the spill was broadcasted all around the world. With demonstrations by local fisherman who lost their livelihood and general public outrage, the South Korean government indicated that they would reduce the usage of single hull tonnage and ban single hull vessels from 2011, or 2015 with permission from flag and port states. South Korean GS Caltex and STX Energy followed up by banning single hull vessels from 2010 from their import program. Other Asian nations followed suit with the Philippines banning single hull vessels from April 2008. China and Japan also stated that they would reduce the usage of single hull vessels into their ports.

With the year rapidly drawing to a close, it is a good time to look back briefly on shipping in 2008. At the time of writing dry bulk carrier earnings are, despite a recent increase, still very poor; the same can be said for container carrier rates whereas tanker rates are, for the most part, not bad at all.

Despite the fact that almost no bulk carriers have been ordered since August, the “official" order book still numbers almost 3,000 vessels, or 267 mdwt. About 90% of these ships are scheduled for delivery during the coming 36 months. If all these ships were to be delivered, this would, in our opinion, become a major catastrophe for the dry bulk market and result in a structural oversupply situation similar to what we experienced in the 1980s. However, the current financial crisis could be a blessing in disguise.

The Chinese have a love of gallows humour dating back to their hardscrabble ancestors. The story doing the rounds earlier this year was that the five rings of the Olympics represented five disasters for China during this year.

Whether you are in shipping or not, the month of September has really brought about enough action to last most of us a lifetime! In shipping markets the wheel of fortune has changed as tanker markets continue upwards whilst bulker markets head for the abyss. Now, most people are focused on developments in financial markets and with the U.S. House of Representatives voting “nay" to a rescue package yesterday, well…, where do we stand?

It took only about 4 weeks in July/August for the tanker market (measured by the BDTI) to virtually crash. The BDTI declined 40% whereas AG-East VLCC freight tumbled 72%. Measured by the VLCC market, this was the fourth steepest decline ever. The interesting part is that two of these "mega-drops" have occurred during the past 18 months. We cannot see any one single factor causing such dramatic declines especially since fleet utilization is still very high, but one should never underestimate the power of "psychological warfare" in the marketplace.

The summer period is usually pretty quiet when it comes to news - therefore we are not surprised that last week´s headlines about Americans driving almost 10 billion miles less in May (compared to May 2007) got so much attention. High gasoline prices and economic woes were blamed, but the US Federal Highway Administration´s main concern is that less driving and more fuel efficient vehicles will bring in less taxes. For those of us in shipping, however, the important question is how all of this will affect the tanker market if this is a lasting trend?

10 years ago, at the beginning of 1998, the world VLCC fleet counted 434 vessels. 63 were of DH construction, and about 172 TT´s, mostly built in the 1970s, were still trading. Over a period of about 5 years virtually all of the oldies were removed. Combined with deliveries of new tonnage during the period, the fleet actually shrunk 424 vessels during the period.Do we have a similar situation today?

With the inclusion of the latest VLOCs contracted by Vale in China, the current order book totals about 250 mdwt. This is about equal to the total deadweight tonnage of the entire bulk carrier fleet built before 2001. The average age of the fleet, at 12.3 years, has remained quite stable for the past 15 years, give or take a few months. The average age of ships being sold for demolition was quite stable at about 25 years before rising to an average of 29 years during the last four years.

Singer Katie Melua sang a few years ago that "There are nine million bicycles in Beijing..." and she was promptly and publicly corrected by physicist Simon Singh. Now, we believe there are 176 shipyards in China, however, we expect others to disagree with this figure. About 24 of these did not deliver any ships in 2007, but they have substantial order books - especially bulk carriers. The market is rife with rumours about lack of funding, potential bankruptcies, and eventual non-deliveries of ships. This will, it is said, alleviate net fleet growth in the coming years. Is this, perhaps, wishful thinking?

They say that Rugby football is a game for hooligans played by gentlemen, whereas soccer is a gentleman´s game played by thugs.

Tightening supply, high demand and rising prices have been the general rule for commodity markets the last years, and grains are no exception. One of the reasons for the increased demand is the new alternative uses for grain and other foodstuffs; namely biofuels. Biofuels have become a very trendy topic in the environmental debate, but not much focus has yet been given to the negative effects. Shipping is also affected by a shift towards biofuels by a change in commodity flows and trade routes. 

Even though the "R-word" is repeated more often nowadays and a majority of pundits are warning that the global economy, and the U.S. economy in particular, is close to a proverbial precipice, we see signs indicating that the fortunes of tanker owners may be about to change. Or, to be a bit more precise: the fortunes of DH tanker owners are about to change.

The Bali conference on climate change closed only a fortnight ago and, as far as we can see, little, if anything, was said about emissions of greenhouse gases from shipping. That is, nothing was said about CO2 (as NOX and SOX is already regulated). Emissions from marine transportation (as well as aviation) are not subject to limitations and reduction commitments under the Kyoto protocol. We are of the opinion that it is just a matter of time before marine transportation is included and the big question is how.

Since Wednesday last week, VLCC freight rates have basically doubled and are currently at levels not seen since January 2006. Why? What possibly could have happened while the Americans, who represent a major slice of the market, were out slicing and eating Turkey? Further, the question for market players is whether this spectacular spike in rates is an indication of an upcoming winter market much like the markets of winters past.

For at least a decade the Norwegian shipping community has lamented the rapidly ageing corps of officers and the difficulties involved in recruiting new seafarers. Given the attractive nature of shoreside careers in present-day Norway, a lifelong career at sea is probably not such an attractive option for Norwegians any longer, but as long as we have been able to recruit personnel from the Phillipines, India, the FSU etc., these ‘worries´ have not really been so important to worry about. But today the situation is quite different. Finding suitable personnel to man merchant vessels has become a global challenge given the fact that the total number of merchant ships is set to expand rapidly.

Yet again congestion has been named the culprit for the imbalance in the dry bulk markets. We have lately observed figures of up to 12% of the dry bulk fleet caught up in waiting to berth and load/unload cargo. This could very well be true. We believe the figure could be even higher. However, one important piece of information is missing while stating such figures: The time dimension of this phenomenon.

The exact timing of when the VLCC market became a two-tier market is hard to pinpoint to an exact date. However, Fearnleys started recording freight rates for SH and DH VLCCs in November 2005 as it became clear that charterers discriminated on hull type - at least for loading in the MEG.

Even the most casual observer of the crude oil tanker market cannot help but notice the strong discrepancies between tanker prices and time charter rates on the one hand and spot rate time charter equivalents on the other. 

Since 1975, the port of Ceyhan has been an important terminal for Iraqi crude oil exports. However, since 2003 the flow has been reduced to a mere trickle due to sabotage on the Kirkuk-Ceyhan pipeline. In the meantime, the Baku Tbilisi Ceyhan (BTC) pipeline has come into operation. Based on current projects and expectations, Ceyhan may become the major oil exporting port in Europe in a few years time.

During the past three years, deletion (read: scrapping) of bulk carriers has dried up almost completely. This has resulted in a significant change in the age structure of the bulk carrier fleet. So far this year, more than 40 mdwt of bulk carrier orders have been placed at shipyards and quite a few wonder whether this will result in an "over-tonnage" situation in a few years.

As we look at the prospects for tanker owners in the coming years, it is not uncommon for most observers to point out that the expected growth in the size of the tanker fleet is probably not a good sign.  And indeed, the order book is considerable, and this is, obviously, worrying.  But the question remains, why do owners seem so happy?  Are tanker owners just ignoring the inevitable problems that an increase in the size of the tanker fleet will create or do they know something that the rest of us mere mortals do not?  The answer is probably a little bit of both.  If we look at the crude carrier fleet, we see the following situation between January 2007 and January 2010:

One year ago, most pundits predicted doom and gloom in the dry bulk market. As we predicted precisely the opposite, the current strength of dry bulk markets did not come as such a surprise to us. However, we did not foresee the phenomenal contracting activity we have witnessed during 1Q07: 23.5 mdwt contracted during the course of 90 days!!

Less than a week ago Fearnleys, in association with Global Insight in Paris and Holman Fenwick & Willan in London submitted a report to the European Commission entitled "Legal and Economic Analysis of Tramp Maritime Services". In addition to describing the tramp shipping market in detail, the report provides an in-depth competition law analysis of various horizontal cooperations in the industry, in particular the shipping pool.

A little more than a week ago President Bush delivered his annual State of the Union Address. Most of this speech covered topics not directly relevant to shipping, however, a few moments were spent on drawing up a vision for future energy supplies that, if carried through, will have a great impact on tanker markets in the coming decade.

After newbuilding prices bottomed out in late 2002, prices have more or less doubled in terms of dollars during the past four years. After some quite difficult years, most shipyards are now making money but, alas, costs have increased substantially as well.

On the very last day of November, reading tanker fixture reports and rate assessments is relatively depressing. Compared to the 30th November last year, crude tanker rates are on average down more than 60%. For most routes we have to go back five years to find lower rates for this part of the year. How come?

The Capesize market has strengthened considerably over the past few months. Measured by the BCI, Capesize freight has risen about 80% this year. It seems that quite a few have been taken by surprise as many pundits predicted doom and gloom as late as in 2Q06. We are not surprised at all as we believe this upturn came as expected.

Seaborne oil trade has traditionally either been shipped separately inside one of the two basins or as a Pacific-Atlantic cross trade from AG. Besides the West African light crude oil, which has been shipped to both basins since mid 90´s, the other export areas in Atlantic has primarily targeted consumers in the same basin. Our latest shiptracking might show a change in this practise.

Or 107 feet, is the maximum permissible beam of a vessel transiting the Panama Canal. This transversal restriction on vessel size has been a governing factor of mid-size bulk carrier design for decades, and today there are almost 1,300 Panamax bulk carriers constituting some 25% of the dry bulk fleet.

Back in April I wrote a piece in which I postulated that the predictions of the current tanker market´s imminent demise may be exaggerated. Since then, we have now come into the period often known as the summer doldrums which is mainly characterized by the fact that many of the major movers and shakers in the market are enjoying their summer holidays.

A few weeks ago, news arrived of further delays to the Thunder Horse field start-up. In addition, worries about delays to the neighbouring Atlantis field have been voiced. In the short term this is good news for tanker owners. But, in the not too distant future - 2007 - tanker owners may experience a severe recoil.

If possible, shipowners would nearly always seekto reduce time in ballast through triangulation. This increases revenue-making days and increases the productivity, or efficiency, of a vessel. Triangulation has been common in the dry bulk trades for ages, however, lately it has been maintained that it has become customary in the VLCC market as well. Or has it?

As we all know, the law of gravity generally applies to markets equally as much as it applies in the physical world. Certainly, during the first five years or so of this century,the tanker market has afforded excellent returns for shipowners, and this is, without a doubt, one of the longest sustained periods of this type in the last 30 years or so, i.e. within the memory of even the oldest of us still actively engaged in the tanker business. Whether these good times can continue is a hotly debated question, and the answer will depend upon more factors than are apparent at first glance. Let us examine the evidence.

"Man is an animal that likes to live in cities". So said Aristotle in the fourth century B.C. But not even Aristotle could have predicted the tsunami of urbanisation that is engulfing the world at the beginning of the twenty first century.

In many ways, the shipping community has become used to China being the engine in the freight markets. Especially in the dry bulk sector where Chinese imports of iron ore have driven freight to unprecedented levels. In the liquid markets, the development in Chinese imports have been more mixed. However, we see a good potential in petrochemical feedstock demand in the coming years.

2005 turned out to be yet another year with handsome earnings for tanker owners. On average, VLCCs made more than 90,000 dollars per day and Suezmaxes and Aframaxes earned about 62,000 and 47,000 dollars per day, respectively, on representative routes. Having completed the year and revised our growth figures for supply and demand we find the results to be somewhat paradoxical. Demand rose only 3.2% (measured in tonne-miles) whilst supply of tankers rose a substantial 7.5%. Theoretically, we should have seen the tonnage balance weakened by more than 4 percentage-points, and yet this resulted in the second-best tanker year since 1973.

Lately, we have observed a changing trend with respect to bulk carrier sizes. The Very Large Ore Carrier (VLOC) has re-entered the scene. One could always discuss where to set the lower limit for a VLOC, however, if we use 250,000 dwt as such a limit, we have not seen any VLOC´s delivered since 1997,...but 23 such vessels have been ordered during the past 20 months.

As of end November, US oil production and refinery operations are far from restored to the output levels before "Katrina" and "Rita" struck at end of August and September, respectively. More than 0.5 mb/d oil production is still shut in and more than 0.8 mb/d of refinery capacity is out of operation. At the same time PDVSA has signed a deal to supply China with crude and fuel oil. How will these factors impact next year´s tanker market?

The global steel market has recently been overheated, with much higher production than consumption. Steel stocks increased and prices fell back. In sharp contrast, raw material prices are locked in at very high prices,  resulting in severe losses for many steel producers. After self-imposed steel production cut-backs in several countries, Chinese authorities in late October announced a 4th quarter cut of 10 million tonnes in the country´s production of certain steel products. That corresponds to more than 15 million tonnes of foreign iron ore.

In the oil and grain markets it is much more important to talk about the weather than listening to macroeconomic massaging of impacts of rather marginal GDP changes. Once again, extreme weather conditions have caused big havocs in the US Gulf area, the heartland of the US oil industry and the main outlet for the country´s grain exports and a very busy import and export area in general.

After a long period of decline the dry bulk market bounced back in early August, with the Baltic Dry index increasing 51% in just three weeks before easing somewhat to end the month up 44% from end July.

In July, the IEA revised its forecast for world oil demand growth in 2005 down from 2.2% to 1.9%, whereas estimates for last year were revised up from 3.4% to 3.6%. World oil demand in 2Q was only 1.0% higher than last year, after a growth of 2.0% in 1Q. The most striking feature is that China´s oil consumption is reported to be down 1.0% in 2Q this year, against a growth of 23.4% in the same quarter last year.

We can´t help experiencing a  sense of déjà vu noting that the Capesize market bounced back a little in the closing days of June. Considering the robustness of China´s economy, at least as perceived from Hong Kong, there has always seemed to be an inevitability about some sort of market recovery by the autumn.

Most leading flag states have minimal shipping involvement apart from providing an "open registry" or a "flag of convenience". About two thirds of the world merchant fleet is today registered under other flags than the domicile of the shipowners and only 34% fly national flags.  National pride or sentimentality is not much reflected in the choice of flag in shipping, which is more globalized and outsourced than most other industries. The colours of the flag have become much less important than the issue of where the shipping companies are operated from and where decisions are made.

Gazing into the proverbial crystal ball is an important part of any market analyst´s life. Traditionally, shipping analysts have approached this kind of activity with caution, and have, for the most part, limited their predictions to future fleet development based on knowledge of shipyards´ order books. Tallying up vessels on order is, therefore, an important task in this regard.  The question remains, how do the various tallies produced by different analysts tally with each other?

The well-being of the dry bulk, tank and container markets is increasingly linked to developments in China. Warnings of cooling down an overheated economy along with an apparent enormous momentum in the country´s key industries open for quite some confusion and repeated upward revisions of shipping demand forecasts.

Even the most casual observer cannot help but notice that the level of activity in the crude oil tanker market has not been exactly high since the beginning of 2005. 

Naturally all eyes are once again on China as we come to the end of the Year of the Monkey next week. Will the new year be the year of the Rooster - or the Year of the Headache?

Since the end of the 1990s, FSU oil production as well as exports have shown a remarkable recovery and to a great degree, changed the tanker markets. Not least as a result of new terminals being opened in areas that are ice-bound during winter and spring. In addition to the current situation and expected developments in the Baltic, there are great expectations for new projects in Arctic Russia. As a result, shipowners have flocked to shipyards and ordered ice-strengthened tankers, and especially product tankers, as if there were no tomorrow! Well, disappointment looms.

After strong downward corrections in dry bulk freight rates earlier this year, we have witnessed a fantastic recovery and a very strong upward momentum for all vessel sizes, resulting in a new all time high for the Baltic Dry Index.

Now that I have relocated to the United States, I spend more time trying to find something to watch on TV than actually watching. However, I was pleasantly surprised the other day to see that now and then they air political discussions in the UK´s House of Commons......as entertainment. Especially during the course of the Q&A sessions, it is not uncommon to hear the "speaker" demand "order, order!" as the discussions top off. In a way, this reminds me of recent developments in the LNG shipping market.

The tanker market reached new highs in September on a wave of transient factors topping a very strong global oil demand development. The latest global oil demand forecasts from IEA shows a very strong increase from 81.5 million barrels per day in 3Q to 83.8 mbd in 4Q this year and 84.2 mbd in 1Q 2005. At present there is already a very tight tonnage balance in the tanker market. Therefore, in the short term it is hard to see any substantial downside risks, albeit unforeseen events could always change the market scenarios.

Against all odds, coal has definitely been the star performer among the main energy commodities in the last few years. Despite pollution concerns and the Kyoto Protocol on carbon dioxide emissions, the global use of coal is now out-pacing  oil and gas. In addition to the phenomenal growth in China´s steel industry with higher iron ore import volumes, the coal trade is the main contributor to the strong dry bulk market.

July was an exciting month in the dry bulk market, especially for the largest sizes. After the strong downward corrections from the fantastic rate levels seen earlier this year, a strong recovery took place from late June through mid July, before easing somewhat and then showing a strong finish to the month. From 22 June to end July the Baltic Capesize index rose 59% and the Panamax index was up 68% over about the same period, whereas the Handymax index was up 32%. Indeed quite a lot in just six weeks´ time.

It remains to be seen how stable conditions within Iraq can become after the surprising ahead-of schedule handover of political power to the transitional Iraqi government. In the short term, hopes in that direction are limited with almost daily reports of violence throughout the country. However, foreign forces with the support of the UN and Nato seek to protect the long road to democracy in this country, which is supposed to have the second largest oil reserves in the world after Saudi Arabia.

The high point of the 2004 China commodity boom may well have been marked on April 22 by the appearance of a banner advertisement in the South China Morning Post for 14 million metric tonnes of iron ore pellets "available promptly in South Africa". On April 28, Wen Jiabao made his famous speech about the need to take "very forceful measures" to curb the economy.  At the same time the State Council issued new guidelines requiring companies to cut back on the use of debt to fund projects in the areas of steel, aluminium, cement and property.

In recent months, the LNG shipping market has been strongly focused on super large LNG carriers with cargo capacities well above the current "standard" size of 145,000 cbm. With demand for LNG and LNG vessels expected to grow significantly over the next decades, shipowners have ordered more vessels on speculation.

Last November, Turkish authorities introduced a new set of regulations concerning vessel transits through the Bosphorus and Dardanelles Straits. Amongst others, the new rules introduced daylight sailing restrictions on all vessels with an LoA of more than 199.9 m. This caused enormous delays in transitting the straits during the darkest period of the year, but the queues vanished in March as a result of - longer days!

The strong steel market is at present sending sweet vibrations through the dry bulk market with an almost uniform resonance in all size groups of dry bulk carriers. When volumes of steel making raw materials, such as iron ore coking coal, coke, steel scrap, limestone, manganese, various ferroalloys, and some other input materials together with finished steel products are added, it appears that the steel industry now accounts for close to 50% of the total volume of seaborne dry bulk trade.

The phenomenal freight rates now experienced in the dry bulk market are reflected in very strong price increases for existing vessels and rather modest increases for newbuildings. The value of being present in order to scim the cream from the unprecedented market conditions has never been greater, with Panamax resales ready to sail valued over 60% higher than current newbuilding prices.

The shipping year 2003 ended in a very upbeat mood. The dry bulk market ended with record-high rates and also the very volatile tanker market ended at peak levels, following three deep dives for large tanker rates since May. VLCC rates rose to WS 160 in December, after hovering in the high WS 40s in mid October. Some other vessel types also saw very good market conditions, but gas and offshore did not participate much in the party.