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JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
ANNUAL MARKET REPORT
2013
JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
2013
was again a fascinating shipping year: world economic growth is recovering, and the shipping industry is working hard to counter the fleet oversupply that was created during the previous shipping cycle. Like in 2012, demolition activity in the tramp markets remained high while the pace of newbuilding deliveries decelerated. Reduced net fleet additions in the next years combined with global synchronized growth should boost freight market conditions so that market participants can hope for shipping fortunes to return. The fundamental global shift from oil to gas caused by the US shale oil / gas boom has led to positive multiplier effects for niche shipping markets like LPG, product and chemical tankers. These segments have to a certain extent moved counter-cyclical: few newbuildings to be digested and strong demand growth have spurred both private and public equity markets that were happy to finance shipping newbuilding projects in 2013, especially given the prevailing low asset values. The cyclical shift in shipping came to the fore during 2013 whereby renewed contracting interest in the tramp segments in conjunction with high specialized ordering, caused asset values to trend upwards. Allied to this, an increased green awareness, chiefly embodied by the upcoming 2015 MARPOL requirements, demands a proactive approach from yards to offer innovative solutions (ECO ships, dual fuel machinery, etc). This trend may enforce swelling asset price sooner than many expect – as presaged by the collective Q4 freight rate spike observed in dry and tank.
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CONTENTS
SHIPPING MARKETS IN PERSPECTIVE: ongoing correction time
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DRY CARGO: on the right track
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SHALE GALE: redrawing shipping markets
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TANK: ailing dirty markets, product recovering
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CHEMICAL: preparing for the upside cycle
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GAS – Fully Ref: markets in uncharted territory
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GAS – Small: diverging trends
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SHIP FINANCE: the equity game
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SHIPBUILDING: survival of the fittest
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DEMOLITION and LAY-UP: further adjustments required
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NEW MARKET DRIVERS
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JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
SHIPPING MARKETS IN PERSPECTIVE: ongoing correction time After a long expansionary stretch, further fleet supply adjustments are necessary. Following a period of massive supply growth caused by the 2003-2008 super cycle, tonnage growth has now actually declined below 4% for the first time since 2003. The prevailing low earnings in the tramp markets (dry, tank and container) indeed demand further fleet corrections through record
scrapping activity (in absolute levels). In relative terms, we are in known territory with exit rates of abt 2.53%, little higher than the 1980-YTD average. At the same time, shipyard newbuilding deliveries a rato 5-6% are tapering off as the contracting bonanza of the previous super boom
has for the most part been delivered. To a certain extent, one could argue that fleets have grown far too rapidly during the last lustrum, so that we are forced back to 1990-2003 equilibrium fundamentals with 3.5% fleet growth (4.7% delivery and 2% scrapping rates). The comparison with the 1980s would be too much
Global fleet dynamics (relative cgt %)
– namely exit rates surpassing delivery rates for a number of years – and only required in case world economic growth would collapse again, something at least consensus growth figures do not suggest.
Synchronized economic growth (%) back in 2015-2016
Scrapping at 3% and deliveries declining below 6% are reducing fleet growth below 4% for the first time since 2003 2010
2011
2012
2013
2014
2015
2016
2.5
1.8
2.8
1.6
2.8
3.2
3.3
Latin America
5.8
4.4
2.9
2.7
3.3
4.1
4.3
West Europe
2.0
1.7
-0.2
0.0
1.3
1.7
2.1
Africa
4.7
0.8
5.7
4.3
4.5
4.9
5.5
Middle East
6.7
6.3
2.5
3.1
3.7
4.7
5.4
S. Asia
8.8
7.0
5.1
4.5
5.6
6.2
7.3
China
10.2
9.1
7.4
7.5
7.6
7.4
7.3
Japan
4.7
-0.6
2.0
1.9
1.3
1.7
1.9
S. Korea
6.3
3.7
2.0
2.2
3.2
3.9
5.0
WORLD GDP
4.0
2.6
2.3
2.0
2.9
3.3
3.6
SEABORNE TRADE
7.9
5.8
3.4
USA Depression economics
Competitive markets at play
Boom and bust
3.9 3.9 2.0 3.8 Source: MSI / Oxford Economics
JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
DRY CARGO: on the right track Cyclical shift: from surplus building up to tightening markets.
2013 marks a clear cyclical shift for dry cargo: freight rates were languid for most of the first half, with high scrapping and low contracting. From Q2 onwards, a Capesize freight rate spike, instigated by more (Brazil) iron ore exports, fuelled renewed optimism across the board: scrapping tapered off gradually while contracting shot up. It must be said that freight rates and contracting did not move in concert during 2013. Reason is that quite a few orders in 2013 were of the speculative nature with investors anticipating a market recovery by end 2014 / early 2015.
4 A decline of 37% in deliveries and orderbook at 9-year low are paving the way for improving freight markets. 2013 is the first year since 2010 that saw demand growth surpassing net fleet addition. Compared to 2012, deliveries were drastically reduced from 99 to 62mio ton. Accompanied by a positive contracting / scrapping balance, the orderbook dived to a meager 20% of the fleet. Such low figure will set the stage for a strong cyclical freight market recovery assuming demand dynamics a rato 8.5% next year.
Baltic average earnings (1000$/day) Depressed freight earnings abruptly soared‌ the precursor of tightening markets.
JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
Strong seasonal factors, driven principally by more iron ore reaching the market and a bumper harvest season in South America, will make 2014 another strong but volatile year,particularly with lower fleet growth of about 6 %. China represents 40 % of dry cargo shipping and notched up 2013 dry bulk imports by a staggering 23%. China dominates the global trade in just about every dry bulk commodity, including iron ore (representing 65 % of seaborne trade), copper (42%), coal (20%), nickel (36%), lead (44%) and zinc (41%).
The world’s second-biggest economy has also been the main driver behind 2013 global growth in these and other commodities. Although iron ore dominated the headlines with a 25% increase, the improvement was broad-based. Imports of coal rose by 29% yoy to over 67mio ton, grain/soybean imports were up 17% while minor bulk intakes, led by nickel and bauxite, increased as much as 40% in Q3. The big miners increased iron ore production by a full 18% in Q3: attractive market fundamentals will see record-additions in 2014.
Net fleet growth 2013 (mio dwt)
Although China is well-positioned to absorb more cargo, it is equally important that additional product becomes available. A bet on a dry cargo rally should thus be coupled with belief in a noticeable expansion in iron ore supply. In short, the tons shipped by BHP, Rio Tinto and Fortescue in 2H 2013 forms only the first output burst from a wave of more iron ore projects that are to bring more product to the marketplace in the coming years. Capturing greater economies of scale to drive down costs and thus be more price-competitive to expel less efficient (Chinese) producers is high on the miners’ agenda.
5 The formidable Chinese economic growth of over 7% will continue, in part because of the government’s commitments to expand domestic infrastructure (urban properties, transport networks, etc) so as to facilitate rising consumer consumption
Iron ore exports (mio ton) Demolition levels declined due to positive freight shocks
The big miners increased iron ore production by a full 18% in Q3. By 2017, about 450mio ton or 35% more iron ore could become available
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JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
King coal has returned but for how long? A decline in global coal prices was the main driver for the evinced stepup in coal imports in Europe (11% yoy), Japan (4%) and China (12%). Predicting future coal scenarios is difficult as forecast demand and trade outlooks depend largely on effectively enforced ‘green measures’ to reduce hydrocarbon emissions globally that in turn could curb coal use overnight. This political risk is best embodied in China where air pollution problems frequently make the headlines, and reducing coal
use is a prioritized issue. 2013 saw already about 300mio ton of annual coal production closed in China, corresponding to ca. 6% decrease yoy. Around 2000 mines could be expected closed by 2015. An eventual slowdown in Chinese coal demand from 2015 could neatly come at the time when Southeast Asian coal requirements would take off so as to satisfy a doubling energy consumption there.
South America’s soyabean revolution A ramp-up in US ethanol production implies that corn acreage will strongly increase next lustrum. Substitutes for these converted soybean acres are found mainly through increasing South American soyabean production. Brazil alone brought more than 44mio (+ 18 %) ton to the market last year. The step-up is largely driven by flourishing Chinese imports, up 16 % yoy. The question is whether South America manages to secure stable supply and shipping services. Regardless of risk, few see the soya boom decelerating, either globally or in South America. If it is not Asian markets hungry for tofu and soya sauce, it’s livestock owners looking to boost their yield.
Global coal imports (mio ton) Gradual step-up in coal imports with South Asia expected to be the principal coal growth driver from 2015 onwards
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JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
SHALE GALE: redrawing shipping markets The US ‘shale gale’ is indeed a revolution that surfaced overnight. Lower 48 states shale plays Montana Thrust Belt
Niobrara*
Bakken***
Heath**
Cody
Williston Basin Big Horn Powder River Gammon Basin Basin HilliardMowry BaxterMancos Greater Green Niobrara* River Park Basin Basin
n
ontereyemblor
Uinta Basin Manning Canyon Mancos
Piceance Basin
Denver Basin
Hermosa Paradox Basin Lewis
Pierre
San Juan Basin
Forest City Basin
Woodford
Permian Basin
Marfa Basin
Barnett Ft. Worth Basin
Eagle Ford Pearsall Western Gulf
Information Administration based on data from various published studies. , 2011
Appalachian Basin
Antrim
Devonian (Ohio)
Marcellus
Illinois Basin
ExcelloMulky Cherokee Platform
Anadarko ArdBasin m Palo Duro Bend ore Ba sin Basin
AvalonBone Spring BarnettWoodford
Raton Basin
Michigan Basin
Fayetteville Arkoma Basin
Utica
New Albany
Chattanooga
Black Warrior Basin
HaynesvilleBossier Current plays Prospective plays Stacked plays Shallowest/ youngest Intermediate depth/ age Deepest/ oldest
ranging from new shale plays, more pipelines, crackers, petrochemical plants to expanding terminal capacity. US gas production will increase by 2.61trio cubic feet (tcf) or 11% during 2013-2020. The EIA has systematically been underestimating gas production figures in recent years. The chart demonstrates that shale gas extraction is not just filling up declining legacy gas production but also adding more volumes. As the US used to be for 95% self-sufficient
Conasauga
FloydValley & Ridge Neal Province TX-LA-MS Salt Basin Tuscaloosa
Shale plays
It is improvements in hydraulic fracturing and horizontal drilling that have rendered energy production in the US economically viable at low cost. Production techniques are constantly being improved as affirmed by the latest use of propane as drilling feed. It is indeed a revolution as several midstream companies in the US Gulf were still considering to build gas import terminals back in 2008; most of them have now been embarking on gas export projects, be it LNG or LPG. Fact remains that there has already been a huge wave of infrastructure investments in the US,
Basins Basins * Mixed shale & chalk play ** Mixed shale & limestone play ***Mixed shale & tight dolostonesiltstone-sandstone
Miles 0
100
200
300 400
±
Only the US? The US has the unique set of ingredients available that facilitated the shale boom: • Excellent open-access pipeline network in proximity of consumption markets • Regional energy policy in place and market-based pricing • High % of liquid rich gas/oil fields • Flexible private initiative and ownership rights • Vast array of drilling / servicing companies with knowledge at hand China and Australia could be next in line if the costs of logistics can be controlled.
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JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
on gas, large parts of incremental gas volumes will have to find new consumption markets, either domestically or internationally as export product. Proposed US LNG project volumes are 276mio ton, surpassing the total 242mio ton LNG trade in 2012. A small 50mio ton has already received approval for export to non-FTA countries. As most shale gas is lean (read methane), the US gas boom especially entails LNG additions as domestic use is generally
saturated. Oversupply naturally leads to permanent low prices, which contributes to the US to be well-placed to dump LNG across the globe going forward. In order to export LNG to countries where the US has no free trade agreements (FTA) with, however, most LNG projects are required to obtain export approval from the Department of Energy (DOE) and the Federal Energy Regulatory Commission (FERC). A small 50mio ton (Sabine Pass, Freeport LNG, Lake Charles and Cove Point) has already received non-FTA approval. Exports will start flowing from 2015 onwards, and in
turn redraw LNG trading patterns and product pricing.
The US oil system is changing big time: Soaring domestic production of tight oil will increasingly replace heavy oil imports. The graph depicts well how radically the trade-off between domestic and imported oil has developed. The challenge for refineries is that shale or tight oil predominantly consists of light oil and condensates which
demand different treatment and have markedly different product yields. Apart from the obvious challenges to the refinery industry, oil price structures are rethought with new hubs and pipelines being reversed; oil qualities are fine-tuned to properly meet demand requirements, both as for crude and products markets. To a certain extent, this renders US oil/product markets more complex, as the notable premise of future oil production growth is all to come from tight oil. On future production levels, however, large variations in forecasts exist.
US dry natural gas production (tcf)
LNG trade vs US projects (mio ton)
US oil production and imports (mio b/d)
Current shale gas share is 35-40% and mounting
Projected US LNG volumes outgrow global 2012 LNG trade
The EIA-high resource scenario forecasts US crude production to increase to 10mio b/d by 2020, entirely driven by tight oil additions
Source: EIA, Annual Energy Outlook 2013 Early Release. Note: 25 tcf = 68.5 bcf/d = abt. 495mio ton LNG equivalents
JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
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TANK: ailing dirty markets, product recovering CRUDE – An ongoing regime of abysmal earnings was halted by a sudden Q4 freight rate uprising.
2013 turned out to be another ‘Annum horribilis’ for large tanker owners who are still looking for ways to digest the structural fleet oversupply. The tightening MEG/ WAFR tanker balance in Q4 was a very welcomed market boost for operators, although it could be argued that this may slow down the much needed scrapping in the segment. Product earnings remained dull during the year as well, while the observed freight rate increases would appear more fundamental.
Growing Far Eastern crude requirements offset the reduced US imports. Following the shale oil revolution discussed in the ‘Shale Gale’-section, US crude production has increased by close to 40% since 2011. With increasing levels of self-sufficiency, import requirements are obviously falling. US October production exceeded imports for the first time since 1995. Reduced US imports have thus far mostly affected exports
Tanker earnings (1000 $/day) Negative VLCC earnings reversed in Q4
JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
out of West Africa. Fortunately, the growth in long-haul imports to China, India and South East Asia has compensated for the US imports decline. Much of the volumes that were traditionally sold West are rerouted East, creating longer distances and rendering overall 2013 tanker demand marginally positive. New trades that have developed, for instance, are Canada and Brazil to China, or West Africa / Venezuela to Far East.
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PRODUCT – Refinery capacity is shifting East as modern sophisticated plants are outcompeting inefficient refineries in the OECD. A key trend in oil refining is the capacity build-up of sophisticated plants in Asia and the Middle East. While much of the Chinese growth is to satisfy domestic demand, the growth in Indian refinery capacity has primarily been export-oriented. Also the Middle East is seeing substantial investments in crude distillation plants: Saudi Arabia alone will increase refinery output by 60% to 3.3mio b/d during 2012-2016. Close to a third of the world’s refining capacity is now located in the Asia-Pacific region Another country with a transforming refining industry is Russia. Although a key refiner for years, most of the existing basic capacity was developed during the Soviet era. Today, the resulting high fuel oil output share is generating negative spreads to crude. With a substantial upgrading of their capacity, Russia will become a key supplier of
distillates in the years to come, of which much will be routed to China as well as to Europe through Baltic. The European predicament will lead to more refinery closures and altering trading patterns. Less efficient trading and more arbitrage volumes will soak up more fleet capacity As with Russia, much of the existing OECD refinery capacity was designed to meet a different distillate
output mix than what the current demand calls for. The notable difference to Russia is that this capacity is not undergoing the same upgrading, but rather a downscaling. This trend will induce more products imports from Russia, the Middle East and even the US. The same story applies to Australia, where the already substantial oil products deficit and a further forecast decrease in refinery capacity (by 17% in 2014) will necessitate more products imports, chiefly diesel.
US oil products trade balance (mio b/d) Basically all regions with a deficit in oil products could be seen importing more from the US
JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
A boom in US oil products exports as local (CPP) demand is decreasing. As it is (still) prohibited by US law to ship out domestic crude, the excess of bulging domestic crude avails has to be processed and in part be exported on product tankers. The ensuing reduced domestic CPP demand in turn adds to the availability of volumes for exports. Both effects combined, the US has become a forceful net products exporter since 2011. Takers of these product volumes are South-America (delay in refinery expansions), the Far East (diversifying away from the
Middle East and the expansion of the Panama Canal), Europe, West Africa and Australia. A more bifurcated trading pattern, based on arbitrage volumes, is in itself triggering more ship demand. Despite the recent MR and LR2 ordering bonanza, the freight market outlook is still positive. A flurry of activity was noticed on the fleet side: on the one hand, there is the ordering spree of MRs and LR2s, largely backed by public equity money (cfr.
Scorpio ordering more than 30 MRs in 2013) to capitalize on demand growth a rato 3.5-4% henceforth. On the other hand, to counter the seemingly large fleet growing, the average scrap age of product tankers fell to about 26 years, bringing down net fleet growth markedly. If the high scrapping rate of product tankers continues, the market may be looking at a required replacement of up to 10mio dwt by 2017 With the introduction of modern fuel efficient vessels, the potential earnings differential between mature and modern tonnage will become more pronounced. The earnings disparity will put further pressure on older tonnage and may ceteris paribus bring about an even lower scrap age.
MR fleet development
Substantial ordering of MR tonnage
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JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
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CHEMICAL: preparing for the upside cycle Another bleak year in chemical but with a proliferated belief in recovering freight markets.
The same ‘tanker’ comments can be advanced for chemical: overcapacity is keeping a lid on freight market conditions to improve in structural fashion. Earnings remained languid in general while rates ex US saw notable increases throughout the year. Soaring exports of ethylene dichloride to China and Japan, as well as more MTBE to Japan and styrene to Korea were relevant drivers for the comforting freight balance US Gulf – Far East.
China strengthened its position as the biggest importer of organic chemicals by an extraordinary 11% growth, hence, sharing over 30% of global organic chemical imports. US organic chemicals imports rose by 17% thanks to the shale revolution. A less straightforward effect of the US shale revolution is increasing import requirements for certain
5k Easychem spot rates ($/ton) Strong spot rates ex US during Q3-4
JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
organic chemicals. Following abundant cheap gas, ethylene producers are increasingly replacing naphtha feedstock with ethane and propane. The switch to lighter feedstock, however, inducts a fall in production of by-product credits that are generated during the cracking process. As a result, the US has to fill some gaps by importing more organic chemicals, for instance benzene. The US now shares about 9% of total seaborne organic chemical trades.
Stainless steel contracting activity is picking up as investors want to take part in the promising market outlook.
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into the industry. In Japan, stainless steel chemical tanker yard capacity is already filling up for 2015 and 2016, and the earliest delivery dates currently quoted are 2017.
After years of limited stainless steel contracting activity, the segment has, during the last few months, been getting considerable attention from private equity and other financially driven investors. The low confirmed orderbook at 8% of the existing fleet combined with good demand prospects, are attracting new capital
China methanol imports (1000 ton)
N-America benzene imports (1000 ton) Chinese methanol imports remain high
Buoyant benzene imports from especially South Korea
JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
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GAS – Fully Ref: markets in uncharted territory Burgeoning VLGC earnings have propelled an ongoing record ordering spree and a transforming LPG landscape.
As substantiated in our ‘Gas Compass of November 2013’, the 2005-2006 ordering boom triggered by high earnings is being revisited, although for slightly different reasons. About 50 VLGCs have been contracted in recent years allegedly to reap the benefits from the US shale gas boom by capitalizing on low asset values and private/public equity firms keen to participate. BW Gas, Dorian / Scorpio and Frontline / Avance Gas, together responsible for over 60% of the VLGC orderbook, are cases in point. IPO and
Fully ref earnings (1000 $/month)
attempted consolidation moves are the order of the day, redrawing the LPG ownership landscape. The ‘Saudi Contract Price’ as the LPG benchmark is also increasingly coming under pressure with more LPG derived from (US shale) gas. US LPG exports swelling by 83% are responsible; MEG / WAFR / Algeria are sputtering. The US shale gas revolution has quickly rooted LPG exports from the US Gulf, with Asian customers
JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
lining up to enjoy competitive pricing against Middle Eastern exports. Not only propane volumes have risen; also butane output is expanding fast, as well is there ethane as the new shipping commodity that demands creative transport solutions. So it is probably not without reason that LPG exports out of MEG (-18%), Algeria (-8%) and WAFR (-20%) have declined in spite of their commitment of exporting more LPG. Has product cannibalization already struck?
Will Chinese PDH as well as more LPG feedstock use in Europe and Far East come to the rescue? Formulating stories of record LPG export additions has become a ‘fait divers’; finding future outlets to haul the volumes to is a little more tedious. Apart from the risky strategy of China to build a plethora of PDH (Propane DeHydrogenation plants that convert propane to propylene) to counter their 5mio ton propylene shortage, it is an uncompetitive
US LPG trade (mio ton) Record 2013 VLGC earnings, orderbooks and LPG exports are obviously (shaping) a new bubble
Europe or a reorienting Asia that could substitute more naphtha by LPG as cracker feed henceforth… only if LPG becomes relatively cheaper. There are likewise limits to South American LPG consumption growth to absorb US LPG increments as well. LGC-MGCs are benefiting from the LPG buoyancy, less from ammonia strengths. It is especially LGC-MGCs that are enjoying more Atlantic trade on the back of VLGC activity. The typical MEG-India LPG leg has, just as in 2012, been thriving as well. Mediocre ammonia product prices support the relatively stagnating market with, as a positive straw, long-haul ammonia US imports reinvigorated. The Algerian Sorfert plant coming on stream in Q3 could not provide a boost to the market. Most of the talk in ammonia is on a return of US domestic production as an outgrowth of the shale gale. This could at the earliest happen in a few
15 years with new plants building, while these events will probably trigger more ammonia volumes (from the Black Sea and Med) finding a home East of Suez instead of going to the US. The MGC orderbook chiefly comprises replacement candidates; LGCs are no market-makers. The MGC market did not evince the same contracting spree as the VLGC market. Less transparent and smaller markets, barriers of entry and the lack of a spot market are probably relevant factors. As for LGCs, it is quite interesting to note the shortterm focus shipping embodies: Q1-Q2 for example suddenly saw some ordering interest surfacing at the time LGCs were working hard to deliver volumes Eastbound or long-haul to the US. Two fresh orders from Solvang followed suit, tantamount to the orderbook today.
JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
GAS – Small: diverging trends
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Strong LPG market effects for the larger units, while the smallest ones saw languid freight rates the entire year. Ethylene carriers have suffered from MEG decline in exported volumes. As articulated in the chart, the larger Semi-refrigerated (Sr) gas carriers, have churned out decent TC rates on the back of more LPG employment, following the US shale gas boom. There is not much to tell on the smallest Pressurized (Pr) and Sr segments, which continue to suffer from high OPEX and earnings that have not moved correspondingly over time. In the
MEG, there have been far less ethylene shipments during 2013 with Qatar consuming product downstream, Saudi exporting less and Iran still out of play. Ethylene carrier ordering spiked thanks to the US shale gale, ethane as ‘joker’ cargo and relatively low NB prices.
Small Gas TC rates (1000 $/month) Dull freight rates for small while large Sr ship rates inched up
JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
Despite lower volumes, the interest for ethylene was obvious: a relatively small premium over Sr tonnage pushed owners to contract ethylene tonnage, providing them with the flexibility to haul ethylene as well as ethane. With the US adding a flurry of ethylene crackers over time and the MEG recovering, market consensus also points to mounting petchem seaborne volumes. Moreover, the public equity community rightly anticipates the observed trend of higher resale values for complex tonnage like ethylene over Sr or Pr tonnage.
The ageing Sr fleet should be evaluated against the growing European petrochemical predicament. The leap in ethylene contracting should also be seen in light of the ageing Sr fleet (17% over 25 years; 12% is 30+), notably the smaller ones below 8k Cbm. The European petchem predicament with declining cracker and refinery output owing to a lack of competitiveness, has precluded owners ordering more Sr tonnage as less long-term charter commitments are obtainable. On top of this, the process of further
ship up-scaling is still ongoing, so that 6.5k Sr business may in part be shifted to larger ethylene ships of 8-12k Cbm. This explains for instance why 6.5k Sr rates have not changed through 2013, or even more, why some ship-broking shops have stopped quoting these ship rates. A Pressurized ordering spree was initiated thanks to a Japanese come back and new US Coast Guard regulations. With the Yen/USD devaluating during 2013, Japanese shipyards returned to their traditional habit
Pr fleet profile Pressurized newbuilding investments will bring fleet growth over 4% as scrapping will remain languid
17 of focusing on Pr building. Fierce yard competition caused low Pr NB prices to be important factors behind the contracting bonanza instigated basically by a few parties (Stealth, Epic or Petredec), enough to crank up the Pr orderbook. Changed valve pressure settings for Pr ships calling at US ports together with willing funds to expand in gas are other elements supporting Pr investments.
JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
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SHIP FINANCE: the equity game Ship finance in 2013 has been all about equity. At this point in the cycle, transaction activity is dominated by newbuilding orders rather than second-hand purchases. Private equity and institutional investors (pension-, mutual- and hedge funds) are being drawn to invest in shipping by historically low vessel values as well as tight credit markets and low yields prevailing in other Fixed Income markets. Predelivery instalments for newbuildings are in this context by and large financed by equity. The aim is easily understandable: generate abovemarket returns – e.g. higher than what other markets like real estate In 2013, the number of equity-related transactions has doubled. Public equity from institutional investors in the capital markets was the most important source of capital, igniting (Pre-)IPO activity
can offer – if and when the shipping market rebounds. The deal database of Marine Money International (a financial consultancy) learns that the number of equity-related transactions doubled from 2012 to 2013 (64 vs 128 transactions). The number of shipping IPOs (Initial Public Offering) is a clear reflection of activity and attractiveness of public equity. 2012 saw only one real shipping IPO (GasLog Ltd), while 2013 witnessed 9 successful IPOs, with BW LPG as the largest raising ca $500mio. The already listed shipping companies have actively capitalized on the positive market sentiment and raised ca. $ 3.5bio in 37 transactions, a significant increase from 13 transactions in 2012. Allied to this is the volume of Private Placements, or Pre-IPO-transactions. Private Placements to Qualified Institutional Buyers can be executed quickly without too much ‘red tape’ and serve as an efficient way of
JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
raising capital when market windows are open for specific investment themes. Private placements go hand in hand with specific investment stories like ECO newbuildings in dry, shale dynamics for gas or consolidation for product tankers. The Norwegian OTC market has been used as a ‘waiting ground’ for young / start-up companies preparing for a stock-listing and as such provides a (theoretical) market place for the shares. The Private Placements have largely been
placed with a limited number of experienced institutional shipping investors. These companies are all initiated by well-known shipowners with a strong capital markets track record, and/or expectations of high M&A and S&P activity. Relevant examples are Frontline 2012, Scorpio Bulkers, Navig8 (product and crude), Hafnia Tankers and Avance Gas. . In addition to the successful deals, a number of shipowners have evaluated the Private Placement/ OTC track during the year, but found little support among Qualified Institutional Buyers. Private equity might be a more realistic alternative
Cash return in % (EBITDA/MV) - 5y old Cash return from shipping investments will improve, and valuation of shipping shares can be expected to continue upwards in 2014
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Private equity provides a good alternative, especially when longer-term fundamentals are envisaged, and expertise of shipowners and financiers are combined
for these owners, with their longterm, more fundamental approach. Private equity by predominantly US-based funds with a 3 to 5 year investment profile has become an influential force in shipping. While shipping cyclicality used to keep private equity firms away, it is the search for alternative investments coming out of a cyclical trough that has just attracted private equity firms to shipping. Their approach usually consists of teaming up with industry- and segment-specialists and co-investing, either in the entire operation or in separate vesselowning companies. By combining fundamental macro- and segment analysis with recognized shipowners, the expectation is to obtain above market returns with a qualified
moderate risk profile over the medium to long-term. 2013 has produced a number of private equity-backed investments in shipping newbuildings: Oceanbulk (Oaktree), TRF (W.Ross/Fearnley Advisors), Interlink (Carlyle), Eletson Gas (Blackstone), Ridgebury Tankers (Riverstone) are relevant cases in point. These entities might not be many in numbers, but they add to an existing number of strongly capitalized private equity-backed shipowners that are all vigorously expanding their activity. We have also seen private equity companies taking profits by listing their investment vehicles - Navigator (W.Ross) and Ardmore (Greenbriar) after 2 and 3 years, respectively. Both investors
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JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
remain as significant shareholders after the IPO process. The average cash return for the major shipping segments is 8.3% by end 2013 (measured as annualized implied 1-year bareboat rate relative to the market value for 5-year old vessels (EBITDA/MV). The 10-year average for all six segments in the graph is 15%. There is hence significant valuation upside across most segments, in particular for the major dry bulk and tanker segments. During 2013, we have observed a significant increase in the valuation of listed shipping shares; EBITDAmultiples have expanded and the discount to NAV (Net Asset Value) has come down. By the end of the year, most analysts consider that the shipping sector is, on average, close to fully valued. But, as the general consensus is that we are in an early stage in a new shipping cycle, estimates will be raised and asset prices can be expected to appreciate. The result will likely be a continued re-pricing of shipping shares.
SHIPBUILDING: survival of the fittest NB values bottomed out midyear, while a marked uptick in prices at yearend brings us to an important junction. NB prices ($ mio) Depression economics
Competitive markets at play
Boom and bust
Are we revisiting the 1970s when an excess of petrodollars were recycled into shipbuilding?
NB prices increased throughout 2013, while steel plate prices fell down by about 30-40 $/ton
JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
As explained in the ‘Shipping markets in perspective’-section, it is not only shipowners that need to process the tonnage overcapacity: it is also shipyards that are forced to correct capacity and adjust to fundamental demand for new ships. The overhang of building capacity culminated in 2013 and NB values probably bottomed out. As charted, the end of 2013 marks an interesting junction where values since long have increased again. Are shipfinanciers perpetuating the folly? The dry bulk market revival and performing gas markets are some elements behind more ordering
but it is eminently the surplus of investment funds looking for a home in one or another shipping segment that have already pushed activity up. The role of the US shale revolution and corresponding public equity is to a large extent driving speculation in shipping these days. The implicit safety net that low purchase prices of ships offer against higher resale values down the road is an important mechanism that makes many ship investments work. The revival in contracting towards the end of the year made prices climb even when steel plate prices have been ebbing downwards during the last years following from a global steel overcapacity.
Ship investments ($ bio) 2013 investment levels were close to 2012 but much less offshore; more investments in container and dry
Consolidation, contraction and financial engineering are the order of the day. Large variations in forecasts! Despite some rebounding on the contracting side, it is well-known that shipyards have been curbing building capacity. Many different opinions exist, but operational capacities of yards have already substantially been adjusted downwards; as for the effective hardware, a comparison with the 1970s or the mid-1980s elucidates that yards today have actually been slower in curtailing capacity. A come-back of government support, China committing to shipbuilding through attractive financing and yards
21 merging are factors responsible. Nevertheless, it could be surmised that additional yard capacity adjustments may induce market tightness sooner than many expect. The shipbuilding capacity chart (next page) affirms this view for 2014 for ‘fundamental’ estimated contracting demand of about 70mio dwt or 24mio cgt. More contracting will obviously result in less or delayed capacity reductions, especially when the average yard cgt output has increased over time – read: the marginal yard is becoming more productive.
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JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
The rise of China: look at history! Although comparing contracting demand with capacity changes is a useful exercise to frame things in perspective, one should look at specific developments as well. In China for instance, it is fair to state that some overcapacity is there to stay. The strategy of China with respect to shipping and shipbuilding seems cut-and-clear: • Become the largest freight buyer, preferably on own built keels • Become the largest shipbuilder • A certain oversupply of tonnage is no drama as it destroys rates and renders transport cheaper
• State support for large reputed yards in their quest to break into quality segments like container. • Ambition to build high-spec ships over time and reach a market share of 25% in this segment
already expanded markedly in highend building like LPG, as the orders of VLGCs corroborate.
We should also remind ourselves of the rise of S. Korea in the darkest days of the 1980s when their socalled mega-yards surfaced through policy-based government support. Exactly the same evolution could take place in China, when a myriad of smaller yards would disappear, convert to scrap / repair services, or else be consolidated into larger yards. China is mainly exposed in dry bulk, but 2013 has shown that it has
In contrast to Japan and China, S. Korean shipbuilders are more diversified as they are active in basically all segments. Unlike 2012, 2013 has seen less offshore (Drill ships, FPSO, semisubs, Jack-ups though less in OSV) contracting in $ terms. Still, offshore activity should not be underestimated as it is largely underestimated by cgt measures. It does, for instance, not sufficiently take into account the
Orders by country ($bio)
S. Korea: diversified portfolio with reliance on offshore
complexity of different offshore types like e.g. mobile offshore drilling units which occupy capacity in yards for a lot longer than conventional ships. A sizable orderbook in dwt terms combined with the activity from offshore explain the minor adjustments in capacity of only about 1-1.5mio cgt during 2012-2013. Japanese yards still have workable orderbooks, but too low a forward cover requires action Japan: a devalued Yen is not enough to rescue shipbuilding practice. More consolidation is underway.
Shipbuilding capacity (mio ton) Apart from the usual players, China is almost doubling investment in shipping tonnage
Fundamental contracting demand
Market tightness may return sooner than expected, providing yards with pricing power again
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JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
Even considering the devaluation of the Yen, it is clear that Japanese shipbuilding is suffering with over 1mio cgt capacity lost during 2012-2013. Although in absolute terms about the same, the relative reduction in Japan (-11%) is more pronounced than in S. Korea (-8%). Apart from putting all odds on ‘excelling by innovation’, further capacity contraction and consolidation are unavoidable. The shipbuilders Mitsui and Kawasaki, or Mitsubishi teaming up with Imabari are cases in point.
Main shipyard profile comments China
South Korea
Japan
Leader in bulk carrier construction Top 20 yards control over 90% of output
Leader in container, tank, LNG / LPG, offshore. Top 10 yards control almost all contracts placed
Bulk carrier construction of over 90% of total. Top 10 yards control over 80% of ordering
Forward cover 60% has no forward cover. In dwt terms, still delivering 70-80% of peak Big yards Many small yards with no pricing power will disappear or convert Ship segments Foucs on more complex ship construction. To become the most relevant tank/gas/ container shipbuilder
Forward cover 2/3rd has no forward cover In dwt terms, still delivering 70-80% of peak Big yards Large yards sitting pretty (Samsung, Hyundai, DSME) Ship segments Important switch to offshore Having China to grow in other segments than dry is difficult to avoid
Orderbook Nov. 2013 (mio dwt) China is already the largest in bulk, and close to overtaking S. Korea as the largest tanker and container builder!
S. Korea’s largest yards are sitting pretty but more high-end competition from China is developing
Forward cover 2/3rd still with orderbook In dwt terms, only delivering 60% of peak Big yards Lack of fresh new orders will lead to more consolidation and capacity rationalization Ship segments Depreciating Yen has rendered specialized shipbuilding competitive again
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JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
DEMOLITION and LAY-UP: further adjustments required Demolition prices continue to oscillate around 350420 $/ldt, with a small premium for tankers of 10-15 $/ldt.
Dull steel prices and secular currency effects are to a large extent shaping scrap price dynamics. The Indian subcontinent still commands an average $50 premium over Far East (read China) prices. Only generally higher steel prices and a halt in ships offered for scrap can push prices up. High scrapping rates at 2-3% are necessary to combat fleet oversupply: dry bulk relaxes, container accelerates and tank stabilizes.
Demolition prices ($/ldt)
The ongoing regime of depressed tramp earnings underpins the high scrapping rates. Container demolition has increased forcefully, esp. considering the still young fleet, with earnings firmly back to bottom. Tankers have also seen strong scrapping activity in spite of the recent screening of the fleet following the 2010 phase-out scheme. Dry bulk is still responsible for the lion-share of scrapping which is required to counter the doubling of the fleet since the China boom some 5 years ago.
JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
Sizable differences between scrap figures in cgt or dwt For freight market balance and ship supply purposes, the dwt numbers are relevant providing a good proxy of tonnage leaving a market. If one, however, aims at comparing NB delivery with exit rates, the cgt proxy can be useful as well, especially the amount of replacement newbuildings shipyards could be engaged in henceforth. A larger share of container scrapping automatically translates in higher cgt scrap figures, as container comprises a higher dwt to cgt conversion ratio than dry bulk or tankers.
Unlike the 2010 tanker phase-out schedule, we do not expect the 2015 ECA MARPOL regulations to generate a flurry of scrapping A sample study from MAN, presented at the International Statistics Maritime Forum in 2013, revealed that not that many ships are actually passing through ECA zones. Only about 42% of MAN B&W ships do visit ECA harbors: 26% did this more than 10 times per year, while only a marginal 1-2% did visit more than 50 times. Given the young age of the global merchant fleet, it is unlikely that the MARPOL regulations will affect global shipping / recycling practice in the short-term.
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More lay-up like in the 70-80s?
• Higher in/reactivation costs • Increased legal / certificate / Lay-up has resurfaced in classification requirements predominantly the tanker segment • Lower operating costs (TC basis) since mid-2013, at large necessitated imply less cost savings from lay-up by a persisting regime of abysmal • Predicament of crewing shortage freight market conditions. However, • More freight rate volatility, esp. during in general, owners have been opting low freight rate periods, reduce the for quick scrapping instead because incentive to mothball capacity of several factors that were less relevant during the 70-80s:
Demolition by country (mio dwt %) 70% of scrapping is on the Indian subcontinent (India, Bangladesh and Pakistan). China’s 20% market share can increase with more yards converting
Demolition volumes Dry and tank lay-up (mio dwt) Researchers at NHH (Norges Handelshøyskøle, Bergen) are investigating the change in freight rate adjustments over time in relation to lay-up decisions
JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
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NEW MARKET DRIVERS The 2015 MARPOL regulations must be seen in the wider picture of gas replacing oil. Who is bearing the switching costs?
The eagerness to cut the carbon footprint globally has been one of the drivers behind the 2015 MARPOL emission regulations. Putting the regulatory framework in historical perspective, it is fair to assume that in the course of the next years, we could expect more initiatives aimed at reducing pollution from ships. Gas, in this respect, is cleaner than oil, and in shipping terms has shifted the issue towards new engine machinery and adequate bunker facilities that can properly process gas as fuel. This fundamental change could quickly render shipping practice more expensive, and give birth to chicken-egg discussions as to who is to incur the additional costs of new engine machinery and changes in fuel prices. By lack of workable alternatives, it seems that most owners will opt for marine gasoil to comply with the MARPOL sulphur emission regulations‌ especially so in the first years.
Tarntank ordered the first LNG-powered product tankers in 2013
2013 has shown that it is difficult to gauge how owners will deal with the ECA requirements of 0.1% maximum sulphur content in bunker fuel. Burning marine gasoil is of course a viable option, although the 300$/ton premium over fuel oil will continue to rankle with owners. Scrubbers are an alternative solution, but it is not really embraced by the shipping community for it does not provide a fundamental long-term solution. A scrubber also requires a lot of space and may reduce the cargo intake on especially smaller ships. Future changes in legislation could even turn scrubber into an obsolete alternative. A more drastic choice would be to go for dual fuel / LNG fuel machinery: the additional capex is high and one would need to be sure of access to LNG bunkers. Also, what will LNG bunker prices be 3 years from now? In addition come the technical issues which need to be surmounted for LNG to work effectively on especially long
JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
voyages. To render strategy decisions even more complex, there is quite a lot of uncertainty as to whether the global sulphur limits scheduled for 2020 will effectively take place. As stated last year, regulation certainty is crucial for the shipping community to make well-founded investment decisions
RO-PAX ferries with LNG fuelled engines.
LNG as fuel is slowly but definitely being adapted by the shipping community, which is working hard to offer adequate propulsion systems. It is predominantly shuttle and coastal ship services that have witnessed investments in LNGpowered technology: • LPG: Anthony Veder operates the Coral Energy (end 2012) with a type C tank and dual fuel machinery • Bunker barge: AGA commissioned the Seagas (spring 2012), a barge to provide ship-toship bunker fuel operations for cruise ships • Ferry: two RO-PAX ferries (Stavanger Fjord and Bergen Fjord) have begun operations in 2013 for Viking Line and Fjord Line using Rolls-Royce LNGfuelled engines • Container: in December 2012 TOTE ordered 2x3.1k TEU ships propelled by MAN slow-speed
2-stroke dual-fuel machinery for feedering between Florida and Puerto Rico from 2015 • Tugboat: The Borgøy is the first LNG-powered tugboat, built by Sanmar shipyard on account of ‘Bukser og Berging’ for Statoil employment • Product tanker: Tarntank ordered the two first 15k product tankers to be powered by the new Wärtsilä dual-fuel, 2-stroke engine, to be built at AVIC Dingheng in China for delivery 2016 • MR: in December 2013, Waterfront/Marinvest/Mitsui contracted 6+3 50k dwt MRs, to be built by Hyundai Mipo / Minaminippon for 2016 delivery. The engine will be a MAN flex fuel system running on methanol, fuel oil or diesel / gas oil Generally, the 2013 trend was that owners ordered newbuildings that are made ‘ready’ for dual-fuel with sufficient space kept available
27 for LNG tanks for possible later installation. In the majority of cases, however, the owner cannot stretch the ‘keep all flexibility open’ decision endlessly as shipyards have to order equipment as well, hence, conventional fuel oil machinery was mostly selected in 2013. For all tramp markets, there exists ample vessel designs for dual-fuel machinery, but the truth is that only a handful of LNG set-ups have actually been ordered Arguably, LNG will not only be used as marine fuel but it will also more and more be forwarded as feed for power generation or industrial distribution. The latter would require more small-scale LNG transport solutions. Also, we are already witnessing LPG owners that employ so-called multigas ships that are able to haul LNG besides traditional LPG products.
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The LNG push will be strongest in the US because of the monumental cost difference between (L)NG and oil. Also, the US has already adopted dual-fuel technology through government support for basically all types of newbuildings - though limited to coastal trading that is subject to the Jones Act. Europe is of course an important region as well given the established ECAs and probably more product tightness when it comes to the availability and price of low-sulphur fuel post 2015. Besides LNG, other fuel combinations are considered as well. Often passed over, but it should be noted that different fuels are suited to meeting the stringent MARPOL emission regulations. Dependent on the product supply owners and charterers could source from, it may well be that e.g. a LPG dual-fuel set-up could be more interesting. As the chart evinces, gas fuels have low energy content volume-wise but a high one in ton-terms. There is thus a bigger need for more tank space while the weight factor generates relative bunker savings for the ship.
Alternative propulsion systems will not only change shipbuilding, but so too lead to more ship market differentiation, in turn altering the shipping landscape The Panama Canal extension will redraw trading patterns and impact on ship investments. Although the new Panama Canal will only open in 2015-2016, the event is already leaving its stamp on shipping markets. The obvious effect is changed trading patterns: for instance, the seaborne trade of vehicle carriers, presumably the sector most affected by the Panama Canal expansion, could be subject to a 4-5% CAGR for the next 10 years. More on that could be read in our ‘Gas Compass of August 2012’. Relevant for 2013 is that many owners are already striving to anticipate the widening of the Canal by contracting bigger ships. Given the tabulated new measures below, it is self-evident that the typical Panamax size is being expanded. The Baltic Exchange has indicated at several occasions that with the
development of new shipping routes and ship sizes / types, it would not take long before new Baltic Indexes will be adopted and published.
Energy content (gross calorific value) Different fuels have different energy contents in terms of weight and volume, which affect the construction of the ship
The expansion of the Panama Canal is already a game changer today with shipowners contracting larger ships Panama Canal dimensions
Average ship dimensions
Existing
New
Panamax
Aframax
Suezmax
Length (m)
294,3
366
228
243
273
Beam (m)
32,21
49
32
42,5
48
Draft (m)
12,03
15,24
12
14,9
17
65000
130000
Max cargo size (mt)
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JOACHIM GRIEG & CO - ANNUAL MARKET REPORT 2013
From Petro-dollar to Agri-dollar? It is quite obvious that the US dollar has for a long time been the reserve currency (dollars for gold), facilitating trade and shaping the face of modern and even developing economies. Rapid changes in modern technology causing the shale gale revolution, the scarcity of oil opposed to abundant gas resources as well as the focus on renewables may imply that the days of the petrodollar (dollars for oil) could come to an end. Apart from energy switches, it could well be that constantly rising food prices on the back of fragmented supply (few countries exporting) unable to serve increasing demand could create the socalled Agri-dollar. The soaring deficit of agricultural products and the lack of arable land in China vis-à-vis the US/Canada that have largescale agricultural production and free access to markets are the underlying drivers that will secure continued geopolitical, trading and currency power to the US.
Steve Engelen Finn Engelsen Nina Willumsen Grieg Ivar Sandvig Thorsen Erik Valen www.joachimgrieg.no jgresearch@grieg.no Bergen - C. Sundtsgate 17/19 PO Box 234 Sentrum NO-5804 Bergen Norway Oslo - Karenslyst Allé 2 PO Box 513 Skøyen N-0214 Oslo Norway London - Sussex Mansions 37 Maiden Lane WC2E 7LH London UK
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www.joachimgrieg.no jgresearch@grieg.no
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