finance
Time to just ‘order, trade or scrap’ in shipping? Analysis by Basil M Karatzas, CEO of Karatzas Marine Advisors & Co. Since late Autumn this year, the shipping markets have shown small, but much-needed signs of market recovery, with the Baltic Dry Index (BDI), the presumed proxy for the overall market, surpassing the “psychological” mark of 1,000 points. There has been rate betterment in a few market sectors based on seasonality, particular trade or geography, but the head wave behind the improvement has been China’s increased steel production and partial restocking of iron ore inventories, which resulted in a rally in the commodities market (iron ore pricing climbed by about 15% from late May till the middle of August) and an associated rally for capesize rates, the market bearing the direct impact of China’s trading patterns. Based on such trade, the Baltic Capesize Index climbed by an equitable percentage level in the same period, which lifted the whole BDI with it, as per graph 1. In terms of freight rates, however, the extent of improvement has been rather small ‘to move the needle’ in a meaningful way as average capesize earnings increased from approximately $12,000 per diem (pd) to just below $15,000 pd, rates that are well below levels required to cover vessel operating expenses and also service debt. In a market accustomed to bad news and negative cash flows for some years now, any improvement in rates was well received and there have been a ripple effect in many market segments in terms of momentum, in terms of vessel asset pricing, in terms of elevated future expectations – and why not – a full market recovery. However, one has to wonder though whether any improvements, their goodwill notwithstanding, are transient or worse just wishful thinking. From data compiled by Karatzas Marine Advisors approximately 2,000 vessels in major, mainstream shipping asset classes were transacted in the first eight months of 2013 in the form of newbuilding orders, second-hand assets or demolition candidates. A quick glance at graph 2 clearly indicates that newbuilding activity has been riding high and dominating all market segments with the exception of containerships and crude tankers. While the total volume of business is more or less comparable to that from the same period of the year before, newbuilding orders are approximately 50% higher year on year while demolition activity has decreased by 50% in the same interval. In the first eight months of 2012, about an equal number of demolitions and newbuilding contracts took place for a net zero impact on
the world fleet, as per graph 3; however, for the whole calendar year 2012, on a net basis 300 vessels were removed from the world fleet (1,100 vessels were removed from the world fleet through scrapping with fewer than 800 additions through newbuilding orders.) However, in an ever-rebounding market recovery and optimism, so far this year about more 200 vessels have been contractually added to the world fleet than removed. To a certain extent, there have been smaller micro-themes within the larger market trend that partially explain the activities in transacting vessels in 2013. First, there has been structural changes in the tanker market trade due to shale oil production in the US that has made product,
chemical and gas carriers tankers a growth business with potential tonnage “undersupply”, and a great deal of the newbuilding orders have been concentrated in these markets. Second so-called “eco design” vessels with flexible yard payments – potentially including export credit, made newbuildings economically and commercially more attractive than secondhand tonnage. Third, a sizeable amount of tonnage available for sale in the second-hand market has been “vintage” or “below expectations” in terms of specs or maintenance. Fourth, institutional investors, the newcomers to the market, assign lower risk and higher investment prospects to newbuildings through established publicly-traded
Graph 1
Graph 2
Autumn 2013
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