Market monitor 2013: Overcapacity in the world fleet

The maritime sector has been hit hard in recent years. Increasing costs and decreasing earnings have squeezed cash flows, and continue to do so. Since 2008, the world fleet has grown by 37%, whilst world demand volumes increased only 9%. As a result, the already existing overcapacity in the shipping market has been growing, instead of declining. The combination of high supply and low demand leads to low charter rates and declining asset values. Bloem Doze Nienhuis views the challenges that face seagoing shipping in 2013.

The ClarkSea Index is a weighted average of tanker, bulk carrier, containership and gas carrier earnings. Figure 1 shows the development of this index. It notes a decrease of the average earnings from $ 46.000 per day in July 2008 to $ 9.600 a day in October 2012. After a small uprise in 2010, earnings remain on the low level of around $ 10,000.

The Baltic Dry Index shows the same pattern since 2008, and also remains rather volatile at a level around the 1,500 point range. It is good to remember that before the 2006-2008 bubble the average value of the BDI was around 1,800 points during more than two decades. In that period the 2,000 points limit was exceeded just during a short period in 1995. The 1,000 points limit was hit during 1985, 1986, being the end of previous recession period .

Low new building activities 

Figure 2 shows that during 2012, only 18,8 million CGT was contracted. It went down from about 100 million CGT in 2007, and returned to the levels of 2009. New building prices went down by 9% in 2012. At the end of 2012, order books were still considerably related to the sailing fleet, but at a lower level than a year ago. Especially all dry bulker sizes and the larger container ships show still dangerous orderbook/sailing fleet ratios of over 15%.

Demolition and deliveries

Figure 3 shows that demolition rises in 2012 to more than 50 million tons dwt, which exceeds 3.5% of the total fleet. The scrapping volume of ships under 20 years surpasses twelve million dwt tons. This is a quarter of the total demolished fleet.

The deliveries have doubled in the period 20062011. The peak in 2011 was mainly caused by the contracts concluded just before the crisis. The trend of more deliveries is interrupted, showing a slight decrease in 2012. Scrapping volumes on the other hand, show a remarkable growth.

Figure 3 not only shows a growth of the scrapping volume as such, but a change in the age composition of the demolished ships as well. A strong increase of scrapped vessels under 20 years illustrates that increasingly ships are scrapped before the 4th special survey. We expect for 2013 a further increase of scrapping of these relatively young vessels, because owners simply cannot afford the costs of the next survey.

Table 1 shows that during 2006-2008 vessels were on average scrapped between the sixth and seventh special survey. Since then the average age goes down five years, from 33 in 2008 to 28 in 2012.

Asset values

Many ship owners are now in breach with covenants of one or more of their loans, because the market value of the vessels seems to be lower than the agreed ratios. The big question is how real market value can be assessed in a market where hardly any voluntary transaction is concluded. In Germany and the Netherlands dedicated discounted cash flow models have been designed for shipping purposes, and used by ship owners and their bankers. These models allow for estimating future cash flows over the full remaining useful life of the vessel and provide more significant results than a simple quote based on recent transactions.

2013 expectations

According to the World Trade Organisation WTO, the world trade volume is set for an increase of 4.5% in 2013 (2.5% in 2012). The growth expectations for the advanced economies (US and EU) are 1.6% and for the emerging markets and developing economies (among others China, India) are on average 6.2%. The performance of shipping is strongly interdependent with the global economy. The outlook for the global economy remains fragile. The expected economic growth in 2013 will not be enough to absorb the still increasing fleet capacity.

The main problem nowadays is probably not the crisis as such, but the duration of it. We expect that 2013 will most likely be a transition year. There is however no indication of a rapid recovery in 2013. If the trend of rising demolitions and lower new builds is set to continue, 2013 will rather be a year of further rationalisations.

Rabia Geng and Johan Wagelaar

A further analysis of trends in short sea shipping will be made in the second Bloem Doze Nienhuis Short Sea report, to be published spring 2013. Bloem Doze Nienhuis has a DCF valuation model available for all vessel types.

About the authors: Rabia Genç MSc is a financial analyst and Johan Wagelaar RA is a financial adviser specialised in shipping. Both work for Bloem Doze Nienhuis, a network of senior maritime experts.