Surfing The Cycle: Watching The Waves Shipping Style

Clarksons

In an industry as volatile as shipping, having the right ship at the right time can bring significant rewards, but the other end of the cycle can be deeply painful. As any surfer knows, to ride the waves good timing is vital, but notoriously tricky. For shipowners, tracking movements is also key; assessing the markets is paramount but carefully watching how the cost base is changing is clearly important too…

On A Firm Footing

In shipping history, managing costs during challenging times has led to a number of successes. In the 1880s, towards the tail end of the revolutionary shift from sail to steam power, profits at the New Zealand Shipping Company were dented by the high cost of spot chartering steam ships. The company, chaired by John Coster, ordered two new steam ships and with five vessels started the first steam liner service from New Zealand to London. The trips were profitable; high freight for refrigerated cargoes (then an emerging market) supplemented income from passenger fares, and one of the new ships traded until 1899 when she was deemed too costly to run compared to more modern ships and was sold.

Tides Keep Turning

Owners today have faced challenging times too after a number of years with market conditions in the doldrums. With vessel income clearly very volatile over time (see graph), cost pressures are still prominent, and there are many moving parts for owners to keep an eye on. For example, trading a VLCC on the spot market in 2010 could theoretically have generated earnings of $12m, but earned net income of just $3m after accounting for OPEX, interest and depreciation.

While costs are generally less volatile than earnings, they still vary over time. VLCC operating costs doubled between 1992 and 2007 with crew costs rising, but operating costs in many sectors have recently fallen, in part reflecting cutbacks in the downturn, with typical OPEX for a VLCC 8% lower in 2016 than in 2008. Meanwhile, theoretical depreciation costs on ships built today have halved since the boom as newbuild prices have dropped, although ships built in the mid-2000s face higher breakeven levels.

Calmer Waters?

Interest payments have also dropped substantially. Lower newbuild prices, combined with a fall in interest rates (with LIBOR for example dropping from c.5% in 2006-07 to below 1% in 2009-15) have helped to reduce costs. Since start 2010, VLCC spot earnings have spent about 60% of the time above $20,000/day, but only around 30% of the time above $40,000/day, theoretically the level needed to cover costs at 2007 interest rates.

Surf’s Up

So vessel costs are liable to change over time, and owners have many factors to monitor. In 1884, John Coster declared that as his company had survived the bad times, he now had “no fear whatever of the future”; this sentiment may feel out of place in today’s still tricky markets with much uncertainty, including over future costs. Yet shipping has never been for the faint-hearted; owners willing to take the risks and keep track of all the costs may just manage to catch a good wave.

grph

[clarksons]

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