Are shipping investors becoming too bullish?

Shipping investment is returning to favour. The amount of money invested in new tankers, bulk carriers and container ships last year was dramatically higher than seen in the previous twelve months. Shipping investors perceived a period of better markets approaching (if still some way off), while the drastic reduction in shipbuilders’ prices for new buildings seen over the past few years greatly increased the attractions of ordering new tonnage, especially more economical tonnage. But will these huge investments prove well-timed? Accurately predicting the cycle has always been a hazardous exercise.

The statistics for new building orders placed at world shipyards in 2013 are impressive. Bulk carriers led the pack: 937 vessels with a capacity of 80 million deadweight tonnes were ordered, one-sixth more than the total for the previous two years together. Tanker contracts, 376 ships of 34m dwt, exceeded by two-fifths the previous two years’ volume. Container ship orders, by contrast, at 223 ships totalling 21m dwt, were one-fifth lower based on the same comparison, but this amount was still far higher than seen in the immediately preceding year. These calculations, based on provisional figures compiled by Clarksons Research, demonstrate the massive scale of renewed enthusiasm for capital investment spending within the industry.

Despite persistent worries about where investment funds would be obtained, substantial new money became available. Stories about the traditional providers of finance, the shipping banks, withdrawing from the market remained at the forefront, but other investors stepped in. As the incentives appeared to improve, amid signs of a bottoming-out of the long shipping recession, private equity funds, hedge funds and various alternative sources gained prominence.

Combined with shipowners’ internally generated funds, the external sources were sufficient to enable an estimated $104 billion to be invested in new buildings of all types in 2013, a 16 percent increase from the previous year. Investment in tankers, bulk carriers and container ships last year was more than double the value seen in the preceding twelve months. By contrast, investment in the now very large offshore sector saw a huge reduction, limiting growth in the grand total.

Trade growth incentives

Looking at how trade has been growing in the past few years, shipping investors can be forgiven for thinking positively. Global seaborne trade in all cargo types, during the period of four years from 2010 to 2013 (including an estimate for last year), averaged remarkably strong 5.5 percent growth annually. This performance is somewhat exaggerated by including the ‘bounceback’ year of 2010, when a recovery took place from the effects of the world financial crisis and ensuing severe global recession. Nevertheless, it is still a very creditable achievement amid lacklustre growth in the world economy.

A glance at seaborne trade growth rates over the past three decades reveals how unusual it is to find a phase of similar length and strength. There was only one: 2003 to 2006, within the ‘boom’ period, when annual increases over four years averaged 5.4 percent. Given that both ‘super growth’ periods happened within the new millennium, and that prospects for more trade expansion in the future are clearly visible, it is not altogether surprising that eagerness to invest in new shipping capacity is evident.

In previous cycles, a significant period of more robust trade expansion and vessel demand was often reflected in high freight markets, until vessel supply caught up and overtook the demand trend when additional newbuildings became available. This pattern has not occurred in the past few years, at least not on a sustainable basis.

The explanation is fairly straightforward. After the freight market boom ended in 2008, surplus transport capacity was created by enormous fleet expansion, caused by what proved to be excessive ordering of new ships while the boom was still in progress. This over-capacity has overwhelmed even a sustained robust upwards trend in seaborne trade movements in the past few years. Mainly subdued freight markets resulted, although there have been temporarily stronger episodes. But the excess capacity is being reduced, and demand-supply gaps are closing or likely to begin closing soon, hence improving the prospects for freight market returns and, in turn, improving the investment outlook.

Two charts in the latest monthly report of shipbroking company Platou clearly demonstrate how much surplus capacity has occurred in the global tanker and bulk carrier fleets during recent years. These charts provide a general view, because circumstances vary among different sizes and types of tonnage within the sectors. For tankers, fleet utilisation is shown as declining from around 90 percent at the 2008 peak, to nearer 80 percent last year, although towards year end there were signs of an improvement emerging. For bulk carriers, the decline was more dramatic, from close to full 100 percent fleet utilisation in 2007-08, to around 85 percent in 2013, followed similarly by signs of a distinct upturn getting underway later in the year.

More enjoyable times ahead?

Bulk carriers have re-emerged as a favourite for shipping investors. The rehabilitation of this sector’s attractions last year has raised some eyebrows. It has suggested the possibility that renewed enthusiasm, and resulting new capacity ordered for delivery in the next couple of years, could delay a sustainable freight market recovery.

A clear example of how such a setback can be triggered is provided by events in 2010. At the beginning of that year, there was still a colossal volume of orders for bulk carrier newbuildings at shipyards around the world, totalling 298m dwt. This quantity, mostly scheduled for delivery over the following two or three years, was equivalent to 65 percent of the existing global bulk carrier fleet, implying massive capacity expansion ahead. During 2010, shipping investors’ optimism about a freight market recovery resulted in a further huge 103m dwt of orders being placed, raising the total order book even higher despite its already vast size.

The consequences of this questionable eagerness are still being observed today. For individual investors, there are often compelling reasons justifying the purchase of new tonnage, but if too many have the same idea at the same time the results can be unpleasant.

So what are the main factors which will determine whether the large investments seen over the past twelve months and previously, in tankers, bulk carriers and container ships, will prove worthwhile in the years ahead? At the beginning of 2014, according to Clarksons figures, new tankers on order at shipyards were equivalent to 13 percent of the existing world tanker fleet. Much higher percentages were evident elsewhere. In the container ship sector, the equivalent of 20 percent of existing tonnage was on order, and in the bulk carrier sector the figure was similar at 21 percent. Most of the new tonnage is scheduled for delivery this year and next year. These percentages imply considerable fleet expansion.

On the ship demand side of the picture, trade growth could absorb the new capacity. Currently, there are clear signs pointing to global seaborne trade growing solidly over the next few years, although prospects for crude oil trade to increase are limited. Much depends on the world economy’s performance: there is some anxiety about whether China, the main driver of growth in many market segments, will continue to perform as strongly as seen in recent years. Changes in geographical trade patterns, affecting voyage distances and tonne-miles (a more accurate measure of shipping demand), also will be influential.

On the ship supply side of the picture, newbuildings entering the fleet will be partly offset by scrapping (recycling) old or uneconomic vessels. The extent of this offset is always difficult to estimate. Many new ships are specifically designed to cut bunker fuel consumption: these could accelerate replacement of older tonnage. Then there is the productivity factor. Large proportions of the existing fleets are ‘slow steaming’ to reduce fuel costs, amid subdued markets and vessel earnings. The annual transport capacity provided by these ships could expand if, as a result of improving markets, slow steaming is reduced, enabling ships to perform more voyages in the same time period.

It is a conundrum, a large one! In the global shipping business, great uncertainties are not abnormal, and are what experienced shipowners are quite familiar with. Whether all the newer players are as familiar with the imponderables remains to be seen. Recent investments in new ships certainly have the potential for proving highly lucrative, if changes in market conditions greatly reduce over-capacity. If that does not happen the results may be much less palatable. It is not an industry for the risk-averse, and this characteristic explains why the shipping business is so exciting for investors.


Richard Scott

Visiting lecturer, Greenwich Maritime Institute and MD, Bulk Shipping Analysis


Too Many Ships in the World Merchant Fleet

For ship spotters and maritime historians, it was an event of great significance. Back in 2005 the world fleet of cargo-carrying ships reached the symbolic 50,000 number. Today there are many more, and their capacity has risen enormously. For shipowners and market analysts, this enlargement is also significant, but has worrying overtones: expansion in many categories has greatly exceeded the growth of seaborne trade and demand for these vessels. The result has been varying degrees of depressed shipping markets over much of the past few years.

The world merchant ship fleet is very large, probably larger than most people would guess. But just how many vessels are there? What is their cargo carrying capacity? How did this fleet develop in recent years and why? And what is the outlook for the future? The answers to these questions are of interest not only to those participating in, or merely observing, this remarkable industry; they are scrutinised intensely within academic maritime studies at GMI.

Fleet statistics weave a fascinating pattern. By mid-2011 the world’s entire fleet of all types of commercial ships over one hundred tons had increased its gross tonnage to 1 billion. At the end of last year the total reached 1.09 billion GT, numbering 86,300 ships. This gigantic armada includes not only the vast fleets of bulk carriers, tankers and container ships, but also a wide range of other types. General cargo vessels, multi-purpose ships, car carriers, roll on-roll off vessels, gas carriers, reefer tonnage, cruise ships, offshore service vessels and others (such as tugs and dredgers) are represented. Many perform services which do not involve carrying cargo, of course.

According to figures compiled by shipping information providers Clarksons, another (nautical) milestone was attained recently. The world’s fleet of vessels actually carrying cargo – which had numbered 50,000 over seven years ago – reached 1 billion GT in September last year, and since then has grown to 1.01 billion, comprising 57,400 ships, today. It is especially significant that this achievement resulted from cumulative growth of an astounding 43 percent over the past five years, averaging 7.5 percent annually.

Looking at the fleet statistics in more detail reveals some impressive performances over the past few years. Expansion rates in the largest sectors have been rapid. Measured by deadweight volume, the tonnage measurement normally used in the bulk markets, the world fleet of bulk carriers has grown by 73 percent in the past five years. At the end of 2012 there were 9,500 bulk carriers totalling 679 million dwt. The tanker fleet’s growth was 29 percent during the same period, to a total of 515 million dwt (13,500 ships, including 7,700 small tankers below 10,000 dwt). In the container ship sector, where the standard measurement is TEUs (twenty-foot-equivalent units), the world fleet reached 5,100 ships totalling 16.2 million TEU at the end of 2012, after growing by 50 percent over a five-year period.

Why is all this a problem? Unfortunately (for shipowners and their bankers), expansion of transportation capacity in the main fleet sectors has outpaced the growth of global seaborne trade and demand for shipping services. The market’s two sides are often out of balance, to some extent, but in the present cycle the imbalance (oversupply) is particularly large and persistent and is having a brutal impact on freight earnings and profitability.

Contrary to many perceptions, international cargo movements have been growing quite vigorously in recent years. There has been a good recovery from the damaging setback experienced in late 2008 and 2009, when the global financial crisis caused the ‘Great Recession’, which severely but temporarily reduced world economic activity and trade volumes. The upwards trend in seaborne trade resumed and continues, with most forecasts suggesting further strengthening through 2013. A positive trade scene is therefore evolving; some other factors which affect shipping demand have been beneficial as well. On the other side of the balance sheet, enormous amounts of new shipping capacity coming in to the marketplace (partly offset by higher scrapping) has greatly swelled the fleet, as discussed. Much of this new tonnage, or ‘newbuildings’, was ordered at shipbuilding yards in better times when the shipping markets were booming. The result – more rapid fleet expansion than needed – is still unfolding and signs suggest it will continue.

Where do we go from here? Forecasters in this notoriously hard-to-predict industry are frequently wrong-footed by unanticipated events. If the world economy soon takes off again and stays there, boosting trade, surplus shipping capacity could be quickly eliminated, but few expect that to happen. Although China’s economic growth appears to be reviving, the USA is picking up, and Japan could start regaining momentum, Europe’s economy is still in the doldrums and probably will remain there for a while. Political events could disrupt trading patterns and potentially add to demand for ships, but these circumstances are essentially unpredictable. There are other factors, of course, but no indications at present of a quick solution to the fleet over-capacity problem. The scale of the problem, although diminishing, is still so large that adjustment towards a better balance may yet take some time to complete.

Richard Scott
GMI visiting lecturer and MD, Bulk Shipping Analysis