WHEN IS THE NEXT SHIPPING BOOM?

Transcription

1 WHEN IS THE NEXT SHIPPING BOOM? By Ravi K Mehrotra CBE Executive Chairman Foresight Group, London Samunder Club April & May 2012 Houston and Florida, USA 1

2 WHEN IS THE NEXT SHIPPING BOOM? I am not a fortune teller as most of the Shipping fraternity think although my group has survived the last 28 years! In reality I am a professional turned entrepreneur hence fortune telling is the last thing on my mind. To succeed in Shipping one has to be a hard-headed person used to 24 x 7 working conditions as Shipping has no time zones and therefore there is no time to indulge in the fantasy of fortune telling. Another trait of a ship owner is that they keep themselves abreast of what is happening around the world also their mental filtering system keeps on working to see if any of the world events will have an effect on shipping for example the Arab Spring of last year. Ship owners love their ships but they develop a keen sense of when to sell and when to buy. Finally, ship owners are good lovers hence generally women find them attractive. This gives them the mental balance to focus on their second love ship owning. 2

3 WHEN IS THE NEXT SHIPPING BOOM? Also Boom is a very harsh and euphoric word, it does not happen by the clap of hands. Many factors are involved and have to work in tandem. Therefore what I can do is to work with you and see where we are now and what factors, if they develop, can have a positive effect on international shipping which can provide basic parameters for a possible shipping boom as we experienced between 2005 and mid Do we agree? So let us begin by seeing what the existing world economy and seaborne trade is and the future projections of growth. Please see slides IV & V:- 3

4 WORLD GDP GROWTH PROJECTIONS Growth Percentage Years ABS Outlook Spring 2011 IV

5 WORLD TRADE VOLUME GROWTH PROJECTIONS Trade Volume Growth Years ABS Outlook Spring 2011 V

6 WHAT DO THESE TWO SLIDES TELL US? We had a financial crisis in the second half of 2008 which stopped Banking Letter of credit facilities and World Trade came suddenly from annual growth of seaborne trade of 7% to -1% in With the relaxation of Banking facilities in 2010, the seaborne trade grew more than 7% albeit from a negative position at the end of 2008 which gave a balanced outlook on Shipping in However what is more significant is that the world shipbuilding activity was unaffected by this financial crisis as most of it is concentrated in Asia and where the banking crisis had least effect so the ship building continued. World ship borne trade came down in 2008 & 2009 but new ships kept on adding in the world fleet. This created an overhang of the world ship fleet and this brought down the ship utilisation rate as well as ship values thus effecting the earnings of ship owners the results of which can be seen around us. Please see slides VII to IX:- 6

7 EXISTING WORLD MERCHANT FLEET SUPPLY, DEMAND & UTILISATION Million Compensated Gross Tonnes Years R.S. Platou, Norway VII

8 EXISTING WORLD DRY BULK FLEET SUPPLY, DEMAND & UTILISATION Million DWT Tonnage Years R.S. Platou, Norway VIII

9 EXISTING WORLD TANKER FLEET SUPPLY, DEMAND & UTILISATION Million DWT Tonnage Years R.S. Platou, Norway IX

10 WHAT DO THE LAST THREE SLIDES TELL US? As we can see from the previous three graphs, the last shipping boom was between 2005 to mid Why? The ship utilisation rate was above 90%. You can never go above 95% as all ships are not available for trade, some ships are going through repairs, surveys etc. So what do these slides teach us? Either we have to increase the world trade to absorb all shipbuilding capacity or alternatively reduce shipbuilding capacity or increase old ship scrapping. Please see slides XI, XII & XIII:- 10

11 FOR THE FUTURE OF SHIPPING EXCESS SUPPLY IS THE CHALLENGE Black bars New deliveries in million GT Red bars Scrapping in million GT ABS Outlook Spring 2011 XI

12 FOR THE FUTURE OF SHIPPING EXCESS SUPPLY IS THE CHALLENGE Million Gross Tons Years ABS Outlook Spring 2011 XII

13 FOR THE FUTURE OF SHIPPING EXCESS SUPPLY IS THE CHALLENGE seaborne imports billion tonnes Several Trade Scenarios Growth of sea trade Period %pa % % % % % % China Imports World less China 7% i 7% scenario 4% scenario 3% scenario 1% scenario World & China s seaborne imports with scenarios Reference: Clarksons, UK XIII

14 WHAT DO THE LAST THREE SLIDES TELL US? As we can see from the previous three slides, world ship scrapping has increased but not significantly; as for an experienced ship owner it is economical to run old ships where cash flow requirements are low provided charterers are happy with your operations. Most of the ship building increases were in China and with China s economical success it will be difficult to close some of these yards. The best China can do is to put a ban on opening new ones. Therefore, it is expected that the growth in the world fleet will continue for some years without significant increase in world economic growth. In other words ship owner s return on ship operations have to come down drastically. Their margins have to come from some other activities. Only very cash flow rich shipping companies, national companies and very efficient shipping companies will survive the next 3-4 years. For this see slides XV & XVI:- 14

15 RETURN ON INVESTMENT: Assumptions used in the IRR model: Asset sold 5 years after delivery Return on investment by year of delivery and sector Handysize 25 years amortization costs Vessel delivered 24 months after ordering 8% financing costs 5% operational escalation rate Year of delivery Supramax Panamax Semiannual repayments Debt/Equity ratio 80/20 between Debt/Equity ratio 60/40 between Repayment done in 5 x 20% installments Earnings for the period based on both historical market performance and forward rate projections Return based on asset prices at the time of ordering (January) Scrap price assumed to average at $270 per Ldt for the period 2007 Cape Percent return Delivery year Cape Panamax Supramax Handysize XV

16 XVI

17 WHAT DO WE LEARN FROM THIS PRESENTATION UP TILL NOW? Ship owners got used to almost 50% returns on any kind of ships during 2005 to mid It gave them the best cash flows since the second world war. In other words it spoilt them and ship owners as usual became irresponsible and placed orders for new ships immediately which helped to increase shipbuilding capacity. The result of this over ordering will reduce returns on the capital employed to around 5% which is even below what nowadays banks are charging for lending money including Libor. This marginal return on capital will also disappear if the ship has a breakdown or waits idly between two charters. 17

18 SO THE QUESTION IS... Would you like to invest during 2012 in an industry where you know there are no or very little returns? Appreciation of ship values will also not be there as shipbuilding has excess capacity In my view, any person in their right mind would not undertake this investment in shipping, but we the ship owners are not right minded people We are egotistic and we are in love with our ships (after our women of course...) Each ship owner thinks he or she has the right formula for success 18

19 SO WHAT DO YOU DO WITH SUCH A BUNCH OF PEOPLE? The problem is we do not know any other business and we are intrigued by the romance of ships and the ocean, where both are unpredictable. We have learned to linger on with the hope of divine intervention which will change the economics of shipping. A recent sad example of divine intervention is the tsunami which hit Japan in March of last year. It changed the fortune of LNG ships. 19

20 So, let us examine the possibility of so called For this, I submit to you the next three slides to examine 20

21 XXI

22 OIL AND NATURAL GAS RESERVES XXII

23 XXIII

24 SUMMARY All three slides focus on the prospect of future growth of China and India. Any other country growing will have very little impact on the present day size of the world fleet due to the limited size of population in other countries. Slide XXI shows the per capita consumption of steel, electricity and oil in these two countries which are the primary indicators of growth of a country. This shows if they are to become middle level developed nations, how much they will have to grow. For this reason we have compared these two countries with South Korea. From the graph you can see that it looks like these two countries have not yet started growing, they have a long way to go. So the question is when? For this I would like to present slide XXV:- 24

25 NB: The Indian take-off could occur before the Chinese Phase II expansion has finished but not before when the Indian economy will develop critical mass of GDP above $ 3.5 Trillion per year XXV

26 CONCLUSION From this slide you can see at present that we are in an over supply position as far as shipping is concerned but come 2016 we are in for another shipping boom. This may be the grandfather of all previous booms as both China s phase II and India s phase I growth story will be unstoppable. The growth in shipbuilding will have a marginal effect when you compare 2.5 billion people trying to become consumers of the developed world s goodies. Every year China and India will be creating a new Europe of middle class income groups. Nothing will be able to slow down this boom. 26

27 So the question my Friends is not when is the next shipping boom? Given the change in consumption are we going to see a fundamental change in our ships and their trade routes? BUT Who, as a ship owner, will survive till 2016? 27

28 Do you have any suggestions? 28

29 WHEN IS THE NEXT SHIPPING BOOM? By Ravi K Mehrotra CBE Executive Chairman Foresight Group, London Samunder Club April & May 2012 Houston and Florida, USA 1