While tonnage supply is easily understood and fairly quantifiable (after all, it typically represents existing vessels on the water and legally contracted vessels to be built, with a few exceptions such as ‘slippage’, ‘substitutions’, ‘cancellations’, etc.), forecasting shipping demand is the shallow reef where economists’ models casually shipwreck, and correct estimates thereof have been the source of great a many fortunes in shipping!
Large vessels like VLCCs, VLOC/capesize bulkers and post-containership vessels are susceptible to high volatility in their trading earnings, as they are disproportionally exposed to macro-economic and geopolitical events. For example, it is a well-established fact that wars and armed conflicts, as repulsive and condemnable as they are, usually prove to be good for shipping. Furthermore, since whole countries and economies depend on big vessels to feed industrial production with raw materials, their existence is noticed by governments and regulators, business conglomerates, etc The Chinese, for example, have passed a directive over the last few years that most of the crude oil imported to China has to be carried on Chinese ‘controlled’ vessels by 2015. Since the third quarter of 2011, already the majority of oil imported to China has been on Chinese ‘controlled’ vessels, a full three years ahead of schedule. In a well oversupplied market such as the VLCC sector at present, the execution of such a directive exacerbates an already difficult market inequilibrium. It’s a similar picture for the capesize market where the Chinese, as the driving force for iron ore and coal imports, have made it clear that they will not tolerate commodities exporters and independent owners to ‘dictate’ the market (the ‘China-max’ VLOCs spat with Vale comes to mind.)
At the other end of the spectrum, smaller sized vessels such as panamax crude tankers, MR product tankers, handysize dry bulk vessels and handy containerships see their trading earnings range within a ‘reasonable’ range, usually no much below cash break-even in a bad market and a quintuple multiple of the vessel daily operating expense in a good market, almost most of the time. Even during the bleakest days of 2008, handysize dry bulk vessels were busy and operating at cash break-even levels. Usually smaller sized vessels have many trading routes to seek employment, many cargoes to move, many ports (even shallow or under-developed ports) to call, many charterers to attract to, many more localized pockets of economic activity to exploit …
Given that the consensus estimate for world economic growth is subdued over the next two years, ranging from 1.5% to 5% depending on the optimism of the model, smaller sized vessels seem to have the best prospects. It does not seem that there will be any imminent outbursts of industrial production and productivity that will drive through the roof rates for macro-economically driven big vessels. And, given that small vessels already trade on a cash flow positive basis in today’s depressed freight market (it has not been the case for VLCC and capesize vessels for almost a year now), with a favorable fleet profile, both in terms of newbuilding deliveries and demolitions due to aging, one is tempted to say that small is beautiful, whether tankers, dry bulk or containership vessels!
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