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serious crisis SMM Hamburg, 6th September 2010 Final
“A Year of Decisions For Shipping – How Will The Markets Develop?”
Dr Martin Stopford, MD Clarkson Research Services Ltd
Figure 1: Jingnan shipyard: a long established Chinese shipbuilder that opened a major new facility
1. The Decision Makers
Good morning ladies and gentlemen. The title refers to "a year of decisions", so let’s start by looking at who the decision makers are. In shipping there are four primary groups of decision-makers, and today each faces a very different situation. Shipowners are at the heart of the equation and they face a wide range of different problems over finance and investment. Bankers are still struggling with the credit crisis generally but shipping portfolios have their own problems. The shipbuilders who are expanding fast are juggling the problems of cashflow; funding new facilities and managing accounts which cannot meet their commitments. Finally where things are not going smoothly governments are being drawn into the frame, generally reluctantly. In the wake of the great boom these decision makers have plenty to worry about and my focus this morning will be on getting the facts we know into perspective. But this is what they are paid to do – worry about the future and in the end its just a job like any other. Some do it better than others. I will start by looking at the market trends in recent decades, both as earnings and return on investment. I will then take a look at those key drivers of the future markets – the market fundamentals; the world economy, ship building and demolition. Finally I will pull all this together into some sort of perspective on the dilemmas facing decision makers in the various parts of the industry today.
Martin Stopford, Clarkson Research
The shipbuilding shortage which was predicted to result from heavy demolition of tankers built during the 1970s bubble. The Difficult 1990s The 1990s was expected to be much better. The Miserable 1980s The 1980s was a much worse disaster than anyone expected at the beginning.000/day Dress rehearsal Super-Slump Super-Boom Owners. Freight rates 1980 to 2010 A quick run through the last three decades gives illustrate how previous generations of decision makers have handled the same sort of decisions we are struggling with today ( Figure 1). With a large surplus of ships which.800/day $12. produced earnings which were barely sufficient to cover operating expenses. So by 1999 even diehard optimists were wondering why they soldiered on in the bulk shipping business. It turned out badly and prolonged the recession. Clarkson Research 1 98 0 1 98 1 1 98 2 1 98 3 1 98 4 1 98 5 1 98 6 1 98 7 1 98 8 1 98 9 1 99 0 1 99 1 1 99 2 1 99 3 1 99 4 1 99 5 1 99 6 1 99 7 1 99 8 1 99 9 2 00 0 2 00 1 2 00 2 2 00 3 2 00 4 2 00 5 2 00 6 2 00 7 2 00 8 2 00 9 2 01 0 2 01 1 2 01 2 2 01 3 2 01 4 2 9/10/2010 . This was Martin Stopford.000/ day 2008 $50.000/day "China's present to “super cycle bulk shipping". with rather high blood pressure” (Clarksea Index is a weighted average of earnings by tankers.) 1999 “What a miserable six months” 1995 2000 “A $24. for four years in a row. After a short dip in 2001. made significant counter cyclical investment at the start. containerships & gas. By 1986 most shipping banks were facing problems with most of their portfolios. The Tight 2000s The 2000 provided the answer. bulkers.000/day significant “Wow” upturn in 2001 the dry bulk “Back to market” normal” The great shipping boom left a legasy $22. The strategy of foreclosure just made matters worse because the sale of ships at distress prices undermined the collateral supporting bank portfolios. Figure 1: Earnings of the average ship 1980-2010 50 45 40 35 C la rkse a In d e x $ 0 0 0 /d a y 30 25 20 15 10 5 0 1979‐81 "Rates 1982‐6 boomed" "Worst ever" $8. never happened. There was a round of speculative ordering of tankers which turned out to be badly timed.000/day 2004 $39. but the result was disappointing. the market took off and for five years from 2003 to 2008 earnings were massively above trend.500/day 1989 “Far Better! ” 1993 “A year owners would rather forget” 1991 $16. But eventually the surplus was cleared and the market got back to some sort of normal by 1990.A Year of Decisions in Shipping 2. Governments handled the second oil crisis badly and trade collapsed. In fact each decade has a different character and none turned out to be quite what the market expected at the outset. encouraged by builders who were struggling to fill surplus capacity.
These B ill $ $MM O rd e rs C o nta ine r ships now look very expensive and 120 LPG 240 61 with prices well down from the peak. As result today's capacity has drawn well ahead of the requirement indicated by long-term trading trends. The world economic outlook is patchy because the OECD countries which still account for half of sea trade. 3. Clarkson Research 3 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 9/10/2010 . So sluggish trade growth is an issue. L NG 220 100 their collateral value is insufficient to 2 0 0 B ulk support the required loans. are struggling with unresolved structural problems. The Unbalanced 2010s From my perspective the scenario that lies ahead of us is characterized by a return of the structural imbalances which characterized the 1980s and 1990s. Firstly some prudent shipowners who remembered the 1970s built up very substantial cash balances which they are now tempted to re-invest. One consequence of the boom was very heavy investment in new ships. Some seem to have interpreted the 5 year financials in 2008 as “normal” and invested in structures devised on that assumption. Secondly other investors are committed to substantial new orders. During the five years the market committed over $800 billion in orders for new ships. Half of this investment took place in 2007 and 2008 when new building prices were at record levels (see Figure 2 which shows the new price of a Capesize bulk carrier on the right axis). on which finance was not Figure 2: Investment in new ships & newbuilding prices Ne w C ap e O the rs always arranged in advance.A Year of Decisions in Shipping without doubt the best boom in living memory. Fourthly. as 1 8 0 Ta nke rs 47 80 Ne w C a pe $ M M the industry built up a track record of 1 6 0 5 42 40 excellent financial performance. Meanwhile the supply side of the shipping market is drawing ahead of demand and with shipyard output growing fast the surplus is likely to get bigger over the next couple of years. The formula is familiar enough. Thirdly. and possibly one of the best ever. This outlook leaves the decision makers mentioned above struggling with several problems. the investment boom went on so long that shipbuilders were able to drive up prices and had time to plan and build new capacity. 1 2 0 28 1 100 33 105 particularly in Germany where the 9 21 40 80 68 25 volume of business done through KG 13 28 21 60 22 companies grew very rapidly and in 16 12 9 20 4 0 12 14 2 7 9 11 13 14 55 15 17 14 11 3 7 the United States where public listings 4 2 3 39 35 9 0 2 0 1 6 5 6 5 4 3 21 21 23 3 7 1 12 5 0 3 7 13 13 11 10 7 6 5 became much more common than 0 8 0 previously. Fourthly second-hand prices increased very rapidly and seductive arguments about "new paradigms" persuaded bankers to build portfolios which were often based on collateral valued at levels well above long-term trends. But they are not sure if the market has really bottomed out and are anyway are having problems finding well priced assets. new 1 4 0 60 17 investors were drawn into the market. Return on investment 1982 2010 Martin Stopford.
3% in the 2000s. In A during the 1990s bulk carriers did slightly better than tankers. and there 35 3 was a dip in 2006. which I took as a percentage of the current new building price. It seems likely that this will continue until a robust economy has been achieved. Martin Stopford.e. both of which were highly volatile. but remember that until 2003 Containership earnings Shows 12 Month Average (in arrears) of containership earnings 40 returns were very low. (Figure 4) leaving a 3.A Year of Decisions in Shipping The returns on shipping Figure 3. but so too interest rates (which I calculated using LIBOR) and new building prices. However the same analysis showed a return of 9. and the average over the whole decayed was 2. This has reduced the "cost of capital" in the shipping industry to a nominal level.4% in the 1990s and 9. depreciation and interest on the vessel value. though this market is much less established and the data correspondingly less reliable.000/day is average for September 2007 to August 2008)) decades. based on the sum of $0 operating expenses. During the first half of the decade earnings were insufficient to cover depreciation and interest. bulk carriers and container ships over the last two Chart shows 12 month moving average of tanker earnings (i. In recent months the crucial issue has been the fall in interest rates due to financial easing.8%. Clarkson Research J a n -9 0 J a n -9 1 J a n -9 2 J a n -9 3 J a n -9 4 J a n -9 5 J a n -9 6 J a n -9 7 J a n -9 8 J a n -9 9 J a n -0 0 J a n -0 1 J a n -0 2 J a n -0 3 J a n '0 4 J a n '0 5 J a n '0 6 J a n '0 7 J a n '0 8 J a n '0 9 J a n '1 0 4 9/10/2010 J a n '1 0 J a n -9 0 J a n -9 1 J a n -9 2 J a n -9 3 J a n -9 4 J a n -9 5 J a n -9 6 J a n -9 7 J a n -9 8 J a n -9 9 J a n -0 0 J a n -0 1 J a n -0 2 J a n -0 3 . $20 $71. Rough estimate of 3300TEU Container costs and revenues 1994-2010 50 whole decayed.5% over the Figure 5. Rough estimate of Capesize costs and revenues 1990-2010 4 If we compare to the daily cost with earnings and calculated return. That's in the 2000 is the return shot up to 14.2% margin.6% (note that this is after paying interest costs on the full capital value of the ship at LIBOR). $ 00 0 P er d ay 30 25 20 15 10 5 0 J a n -9 0 J a n -9 1 J a n -9 2 J a n -9 3 J a n -9 4 J a n -9 5 J a n -9 6 J a n -9 7 J a n -9 8 J a n -9 9 J a n -0 0 J a n -0 1 J a n -0 2 J a n -0 3 J a n '0 4 J a n '0 5 J a n '0 6 J a n '0 7 J a n '0 8 J a n '0 9 J a n '1 0 1 I also included containerships in the analysis (Figure 5). making it one of the principal beneficiaries of the financial easing policy of governments. Then in the 2000 is things improved and the return over the whole decayed was 9. Rough estimate of VLCC costs and revenues 1990-2010 4 $120 investment vary a good deal from Co s t $ /d a y fo r Ne w VL CC VL CC Ea rn in g s (1 2 m o n th a v e ra g e ) one decade to another and this is a 3 $100 hood starting point for weighing $80 up what the next decade might 2 bring. In this analysis earnings play an important part. 120 110 100 90 80 70 60 50 40 30 20 10 0 Shows 12 Month Average (in arrears) of bulk carrier earnings & costs Area 2 Cost New Capesize $000/day Capesize Earnings 12 Month Av 3 $ 0 00 P e r d a y 1 2 The tankers the 1990s was a very poor decade (Figure 3). I made a rough analysis of $60 1 the return on investment for $40 tankers. This may sound Cost $000/day 45 2 low. $ /d a y e a rn in g s J a n '0 4 J a n '0 5 J a n '0 6 J a n '0 7 J a n '0 8 J a n '0 9 Figure 4. with earnings just sufficient to cover costs.
6% and 14. provides a useful benchmark for weighing up the coming decade.80% It also demonstrates that Capesize Bulker 3. Finally we have the credit crisis which started in 2007. The oil crisis in 1973 and another in 1979. The US financial crisis in 1990 to 93.5%.50% 3.20% between 2. The ROI is calculated as follow general bulkers did ROIt = ((depreciationtt + interestt + OPEXt) x 350)/newbuilding pric somewhat better than tankers. Martin Stopford. the principal pattern today is that the non-OECD countries are generally performing well. The world economy The world economy had a record run between 2003 and 2008. who controlled all investment until 1990 and had it on their balance sheets. The Return on shipping investment (ROI) 1990-99 & 2000. However the demand side of the shipping market is much more difficult to analyse than supply. In contrast to the OECD economies are now mature. Looking below the surface. From this perspective the recent crash looks less frightening.20% 14. followed by the most severe recession since the early 1970s (Figure 6). India. LIBOR 6 month VLCC 2.remarkably close to the famous 8% offered by KG companies.June 201 1990-1999 2000-2010 spread of returns in % per annum increase individual segments and is 5.50% there are significant Container (3. to independents who are buying ships to charter and now account for half the market. though structurally the volatility which has been building up could be due to a structural change as the size of the container charter market expands and investment control moves away from the service operators. with demographic problems and problems in the banking system which are still unresolved. It's is not difficult to be positive about the performance of China. This analysis the results of which are summarized in Table 1. One of the most striking messages from the history of the last 30 years in the shipping market is that demand leads the way and fluctuations in demand for more important in triggering the major developments in the shipping market than supply. In price each month and OPEX added. South America and other non-OECD areas during the coming decayed.A Year of Decisions in Shipping when the higher return in the first part of the decade was pulled down by the very poor performance between 2007 and 2010. Over the last 50 years there have been regular "crises" in the world economy .500 TEU) 9. then the dot-com crisis in 2001.60% 9. Clarkson Research 5 9/10/2010 . but overall containerships produced the best return -. All of these crises are shown in the figure below which also shows a close correlation between cycles in the world economy and cycles in seaborne trade.the stories crisis in 1956 and another in 1967. 4. first the cycles and crises in the world economy and secondly the specific developments in seaborne trade.30% differences in the Note: the ROI calculations based on a new ship depreciated over performance of different 20 years.40% 9. It is also noticeable that the volatility of this market segment increased significantly over the period. with interest charged at LIBOR on the full newbuilding segments of the market. Our task is to weigh up where things will sit in future. These economies have growing markets and are no longer so dependent on the north Atlantic. because it involves two lares of complexity.
trade only grew by 3% per annum.0 0 02 x + 0 .1% 4. The lowest is 1%. the consensus forecast was that world GNP would grow at 4.2% in 2008 and 4% in 2009.1% 2. During the decade 2000 to 2009. However as far as seaborne trade is concerned. 6% 5% 4% 3% 2% 1% -1% y = -0 . Over the last five decades the annual growth of sea trade has varied enormously from a peak of 7.9% per annum in the 1980s (see inset table in figure below). In Figure 7 below I have set out four different scenarios. despite the best efforts of China. The second 3% reflects the growth rate in the last decade.9% 4.6% in 2009. The truth is we face a very uncertain outlook. have credibility -.5% per annum in the 1950s to a trough of . They just need a sense of what is possible. Finally I have added a 7% scenario which is the growth Figure 7: Sea Trade scenarios based on different rates of growth 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Growth of sea trade 7% scenario s e a b o rn e im p o rts b illio n to n n e s Period 1950-60 1961-70 1971-80 1981-90 1991-00 2001-09 %pa 7.9% trend is dragged down by five 7% crises (roughly but not reliably every 10 years). but I doubt whether anyone in this room takes these projections seriously. and reflects the growth rate during the 1980s.9% 4% scenario 3% scenario 1% scenario C hina Impo rts W o rld le s s C hina 7% i 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Martin Stopford.5% 9. The sad reality is that we just do not know when these cycles will appear.2 years ago when I spoke at this event. In fact GDP fell by . and the third is 4% which was the growth rate in the 1990s.0 3 97 practice of the The regional balance is changing This looks like another but pretty severe. Today the forecasting agencies are predicting growth of about 4% per annum over the next two years. decision makers do not really need precise forecasts.8% 0.A Year of Decisions in Shipping In forecasts world economy little Figure 6: GDP recovering OK so far but OECD still weak % growth The 42 year 3. Clarkson Research 6 9/10/2010 .
when we get to discussing supply.3 billion deadweight. The severity of the crisis last year made it look as though this might be an exception to the rule. and the credit squeeze made financing very difficult. but. in terms of the world economy.A Year of Decisions in Shipping rate in the 1950s. albeit a little late. However the shipyards have got over the last 12 months successfully. 5. With a fleet of 1. Shipbuilding and the demolition One of the principal legacies from the boom was the expansion of world shipbuilding capacity. In terms of sea trade. Figure 8 Shipyard deliveries showing scheduled deliveries & latest estimate (line) latest 180 160 M illion Deadweight 140 120 100 80 60 40 20 0 29 33 O rig in a l s c h e d u le d o rd e rb o o k D e liv e rie s D e m o litio n Stage 2 39 192 157 Current estimate Stage 1 117 80 89 38 37 24 41 46 46 50 55 62 70 75 59 Today we have a relatively modern fleet and in 2009 demolition was 32. about 2. and we must expect more problems in future as the financial pressures build up. On this basis the 2010s are unlikely to be as good as the 2000s.9 million deadweight. are growing slowly. Clarkson Research 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 7 9/10/2010 . The yard is delivered 117 million deadweight of ships in 2009 and the trend so far this year suggests 150 million deadweight in 2010. with 140 million deadweight in 2011 (Figure 8). which still constitutes a very large proportion of seaborne trade. which Martin Stopford. the OECD countries.5% of the fleet. but a return to the 3% growth trend seems possible. perhaps we 3% per annum growth would make a reasonable planning assumption. we see that we really need the 7% scenario to keep the shipping market is buzzing in the way they have done over the last few years. Generally in the past order books which have been contracted end up being built. So far in 2010 the pace and demolition has slowed to less than 2% on an annualized basis. Some of their clients have had difficulties in raising finance. I suspect most readers would settle for 3% as a reasonable outcome. Many shipowners had not arranged adequate finance in advance. deliveries are running at around 11% of the fleet. and output has continued to grow. Unfortunately the 7% scenario is very unlikely because although the Pacific countries are growing very rapidly.
My Figure 9 Shipping supply and demand scenarios own feeling is that Bill. paid to find ways of dealing with that volatility. When we look at the trend in freight rates I described in the early part of this paper. and a relatively modern fleet which will limit scrapping. the 1980s.5% per annum and even during long the boom 2003 to 2009 it grew by only just over 5%. It's the sort of business that is likely to appeal to people who in their spare time practise extreme sports. Tons M. These are the liquid investors. and still has close on 500 million deadweight of ships to deliver. shipowners. Clarkson Research 8 9/10/2010 .nobody wants to sell their ships cheap and the market has been benign enough to minimize mandatory sales.A Year of Decisions in Shipping seems inevitable despite low interest rates and the best efforts of banks to keep the wheels turning (which if the fundamental purpose of financial easing). it is clear that thanks to low interest rates and the continued growth of cargo into non-OECD countries. but in truth we are talking of very broad issues. In recent decades sea trade has grown at around 3. The problem so far has been lack of investment liquidity -. So the fundamentals trend is one of growing surplus. 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Martin Stopford. Dwt Fleet provided the nonCargo 1600 OECD countries 11 perform effectively W orld F leet (Dwt) 1400 10 and there is not a Sea Trade 9 1200 further collapse in sea 1% pa 8 trade. This is always a precarious business. The shipyards have survived the most difficult year. shipbuilders and government and pointed out that historically shipping has been a highly volatile business and that these for decisionmakers are. bankers. I 1 started with the four 0 0 key decision-makers. either shipping companies who held back from investment during the boom. Conclusions 3 400 So let me pull all 2 200 of this together. In short. the shipbuilding industry is rolling forward. and there seem to be enough potential customers to prevent major cancellations. But potential investors are "circling the wagons". the situation 1000 3%pa 7 has more in common 6 with the 1990s than 4%pa 800 . provided "the price is right". 5 7%91 600 4 7. or non-shipping investors looking for "kick the tyres" assets at bargain prices. maybe mountain climbing or skydiving. but it is useful to pull together the supply and demand trends (Figure 9). However we have deliveries running at well over 10% of the fleet. In my view it would require a better than average decade to soak up those ships without inflicting some pain on the industry. many companies have been able to survive. 6. essentially. The market fundamentals I do not have time to go into great detail.
Martin Stopford 3000 words September 4th. Meanwhile the shipyards have sufficient capacity to expand the fleets by 7% per annum. 3% per annum would be a good outcome. We might as well accept that.A Year of Decisions in Shipping One of the consequences of this volatility is that some decades are much better than others. Pulling these together. In the past it has been very difficult to damp down shipyard capacity once it has been put in place. So fairly rapid supply growth seems probable. the heavyweight OECD countries are struggling. so flexibility is essential. So we cannot expect high levels of global growth in the coming decade. though in the disastrous 1980s sea trade grew by only 1% per annum. India and other emerging countries are growing rapidly. They still have a financial crisis which is largely unresolved. 2010 Martin Stopford. but we must also be aware that we never quite know what is coming next. after allowing for scrapping. and although China. I think that we should be l viewing the coming decade as one in which returns will be in the lower end of the spectrum (which ranges from 1% ROI to 15%) my own feeling is that 5% to 7% ROIper annum would be a good outcome. Clarkson Research 9 9/10/2010 . Today the economic outlook is mixed.
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