Confessions of a Shipping Cyclist Wheeee Wrong againsuckers! Martin Stopford, President Clarkson Research Marine Money, 26 th February 215
Surviving the Shipping Cycle 1. Secrets of our rich cycle forecasting heritage 2. Why shipping cycles are sexy 3. Predicting the shipbuilding super-cycle 4. How to predict the oil price 5. Predicting the shipping super-cycle OK, I confess. Everything I told you last year was completely wrong Forecasting Expert
1. Secrets of our Ancient Cycle Forecasting Methods The old ways are still the best
Was it it good? It No, was fantastic!! Useless 6 3 Mirror Lights Should I buy a Panamax? Honey cakes 1 4 Absolutely & we have some very nice ones for sale 2 Smoke 5 Antonius Van dale 17
Method 2: Aristotle The Rational Approach Aristotle's logic revolves around deduction (sullogismos). A deduction leads to our notion of logical consequence: If X and Y are true, then Z must be true For example If you buy our shares AND you re a sucker, we ll buy them back for 3% at the bottom of the cycle Aristotle Onassis Early Greek Shipowner
Method 2: The Computer Model The computer model is the direct descendent of the Aristotelian approach of deduction It uses data to summarise the relationships in the world economy We type things into a plastic box and it tells us the market s about to recover All I did was scrap 3 more ships and now we have a boom DATA
Method 4: Blame the Banks. "The rates today are lower than ever before. This was brought about by the over-production of ships fostered by reckless credit given by banks and builders, and over-speculation by irresponsible and inexperienced owners. J.C.Gould, Angier & Co, 31 December 1894 Shipping s success over a century Wales to Singapore 1871 $11.4/ton (coal) Tubarao to Japan 22 $8.7/ton (ore)
2. Why Shipping Cycles are Sexy
Three types of shipping market cycles 2.Short Cycle (5-1 years) 1. Shipping cycles fall into three categories 1. Seasonal Cycles 2. Short Cycles 3. Long Cycles 3. Long cycle 5 years? 1. Seasonal cycle (12 months) 6 Years 6 Years 6 Years Figure 3.1 Compiled by Martin Stopford from various sources
Seasonal shipping cycles 5% 4% 3% 2% 1% % -1% -2% -3% -4% -5% Deviation of VLCC monthly earnings from trend -1% June -23% July -38% Aug -16% -25% Sept Oct 37% 37% Nov Dec 17% Jan 8% Feb 13% March -16% April -8% May
Index 1741=1 7 6 23 Dry Cargo Cycles 1741-214 Stopford Era 5 Sailing Ship Era Steam Ship Era Bulk Era 4 3 2 1 Source: Maritime Economics 3 rd Edition 29 1741 1761 1781 183 1821 1841 1861 1881 191 1921 1941 1961 1981 21
Cycle length in years The length of 24 short shipping cycles 25 2 15 1 5 1 2 16 11 15 15 17 7 7 For example this cycle lasted 14 years peak to peak 11 13 11 6 5 4 14 6 7 3 11 1 17 175 18 185 19 195 2 25 4 4 13
3. Predicting the Shipbuilding Super-Cycle One free with every ship
The shipbuilding super-cycle Million Dwt 3 Shipyards expand in the 197s boom & again in the 2s 25 Orders Placed Deliveries 2 15 1 5 Step i: take orders for a lot of ships Step 2: predict the market will get worse next year, then recover 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 23 27 211
Figure 22 How Shipbuilders Saw the Market 1978-1984 Million CGT 24 21 18 15 12 1 2 3 How will output develop? 4 1 June 1978 forecast 3 June 198 forecast 2 April 1982 forecast June 1984 forecast 4 9 6 Actual world shipbuilding completions 3 Note: This graph tracks how between 1978 and 1984 a group of international shipbuilding experts revised their forecast of future shipbuilding completions as the 198s recession developed 1975 198 1985 199 1995 Fig 17.1 Comparison of forecasts of world shipbuilding completions
4. How to predict oil prices If he d paid more attention to the IEA he d be up here with me
$ per barrel at market prices 13 12 11 1 9 8 7 6 5 4 3 2 1 The Oil Price Hard to Predict Winner of the Shipping cycle yellow jersey $ money of the day 1861 1867 1873 1879 1885 1891 1897 193 199 1915 1921 1927 1933 1939 1945 1951 1957 1963 1969 1975 1981 1987 1993 1999 25 211
IEA s Price Forecast Leads the Way Oil Price $/barrel 16 14 12 1 8 6 4 2 When it comes to forecasting oil prices the IEA has all the information just follow them In 1993 the oil price was $17 a barrel. What was the forecast for 21? 196 1965 197 1975 198 1985 199 1995 2 25 21 215 22 225 23 Source: BP energy review Marttin Stopford 7 Junel 211
World Oil Price - The 1993 Forecast Oil Price $/barrel 16 15 14 13 12 11 1 9 8 7 6 5 4 3 2 1 196 1965 Oil Price 197 1975 198 1985 1993 forecast 199 1995 2 25 21 215 22 225 23 Source: BP energy review Marttin Stopford 7 Junel 211
World Oil Price & 1994 Forecast Energy Use Mill Tonnes Oil Equiv 16 14 12 1 8 6 4 2 Oil Price 1993 forecast 1994 forecast 196 1965 197 1975 198 1985 199 1995 2 25 21 215 22 225 23 Source: BP energy review Marttin Stopford 7 Junel 211
World Oil Price & 1995 Forecast Energy Use Mill Tonnes Oil Equiv 16 14 12 1 8 6 4 2 Oil Price 1993 forecast 1994 forecast 1995 forecast 196 1965 197 1975 198 1985 199 1995 2 25 21 215 22 225 23 Source: BP energy review Marttin Stopford 7 Junel 211
World Oil Price & 1996 Forecast Oil price $/barrel 16 14 12 1 8 6 4 2 196 1965 197 Source: BP energy review Future price 1994 forecast 1995 forecast 1996 forecast 1998 forecast 1975 198 1985 199 1995 2 Marttin Stopford 7 Junel 211 25 21 215 22 225 23
World Oil Price & 2 Forecast Energy Use Mill Tonnes Oil Equiv 16 14 12 1 8 6 4 2 Oil Price 1993 1994 1995 1998 2 196 1965 197 1975 198 1985 199 1995 2 25 21 215 22 225 23 Source: BP energy review Marttin Stopford 7 Junel 211
World Oil Price & 24 Forecast Oil price $/barrel 16 14 12 1 8 6 4 2 Oil Price 1993 forecast 1994 forecast 1995 forecast 1998 forecast 2 forecast 24 forecast 196 1965 197 1975 198 1985 199 1995 2 25 21 215 22 225 23 Source: BP energy review Marttin Stopford 7 Junel 211
World Oil Price & 26 Forecast Oil price $/barrel 16 14 12 1 8 6 4 2 Oil Price 1993 forecast 1994 forecast 1995 forecast 1998 forecast 2 forecast 24 forecast 26 forecast 196 1965 197 1975 198 1985 199 1995 2 25 21 215 22 225 23 Source: BP energy review Marttin Stopford 7 Junel 211
World Oil Price & 27 Forecast Oil Price $/barrel 16 14 12 1 8 6 4 2 Oil Price 1993 forecast 1994 forecast 1995 forecast 1998 forecast 2 forecast 24 forecast 26 forecast 27 forecast 196 1965 197 1975 198 1985 199 1995 2 25 21 215 22 225 23 Source: BP energy review Marttin Stopford 7 Junel 211
World Oil Price & 28 Forecast Oil Price/barrel 16 14 12 1 8 6 4 2 Oil Price 1993 forecast 1994 forecast 1995 forecast 1998 forecast 2 forecast 24 forecast 26 forecast 27 forecast 28 forecast 196 1965 197 1975 198 1985 199 1995 2 25 21 215 22 225 23 Source: BP energy review Marttin Stopford 7 Junel 211 28 27 26
World Oil Price & 21 Scenarios Oil Price/barrel 16 14 12 1 8 6 4 Oil Price 1993 forecast Future actual 1994 forecast 1995 forecast 1998 forecast 2 forecast 24 forecast 26 forecast 28 forecast 27 forecast 21 "Current Policies" 21 Carbon 45 28 26 2 196 1965 197 1975 198 1985 199 1995 2 25 21 215 22 225 23 235 27 Scenarios Source: BP energy review Marttin Stopford 7 Junel 211
5. Predicting Today s Cycles
Seems like we re still under water, folks
Oil tanker market 1947-215 each decade different W/S Gulf Europe 15 13 11 9 7 5 1. Tight Supply shortage of ship yards 2. Shipper driven market Run by oil majors 13% trade growth pa with 2% standard deviation 3. Investment bubble 11% trade growth pa with 1.5% standard deviation 4. Distressed market & no demand growth % trade growth pa with 7% standard deviation 5. Long trough working surplus out of system 3.5% trade growth pa with 3.4 % standard deviation 6. Superboom 3.5% pa growth with 2% st. dev. 7. Kicking can down road.7% pa trade growth with 2.4% st. dev. 3 1-1 1947 195 1953 1956 1959 1962 1965 1968 1971 1974 1977 198 1983 1986 1989 1992 1995 1998 21 24 27 21 213
VLCC Net Earnings 197-213 VLCCS made good money in 16 out of 44 years (36%) Net earnings after OPEX interest & depreciation 2 15 1 5-5 -1 197 1972 1974 1976 Free cash flow in $ million Free cash $ m VLCC The average ship value was $75 m and the average return was $.6m, a 1% return 1978 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214
Dry bulk market cycles 1947-215 $ 1 year TC 8 75 7 65 6 55 5 45 4 35 3 25 2 15 1 5 197 Peak 19 1973-4 "An exciting market" 1971-2 Very poor" 1972 1974 1975-7 Unprofitable" 1976 1978 Peak 2 1979-81 "Rates boomed" 198 1982 1982-6 "Worst ever" 1984 1986 1988 199 1992 1994 Note: based on the US Gulf-Japan grain freight 1964-215. Peak 21 1995 "Firm" 1996 1998 2 Stronger" 1999 Sentiment rock bottom" 2 22 Peak 22 24 fortunes made Source: compiled by Martin Stopford from various sources 24 26 Peak 23 28 28 Peak 24 21 21 214 recovery next year 212 214
1. Play the players, not the cards. 2. Watch them from the minute you sit down. 3. Play fast in a slow game, slow in a fast game. 4. Never get out when you are winning. 5. Look for the sucker and, if you don t see one, get up and leave because the sucker is you Amarillo Slim s Advice (and mine too!)