SHIPPING MARKET RESEARCH

By

Umenwa, Olisaemeka EmmanuelB.Tech

A term paper submitted in partial fulfillment of the requirements forthe degree of Master of Science

at The Federal University of Technology Owerri, Imo State Nigeria

August, 2012

Introduction

Market research studies play an important role to decision-makers in every

business. The case is no different for the shipping industry. Given the international

nature of the industry and the high complexity of its operations and economic

structure, the maritime researcher is usually faced with the task of preparing

forecasts and market research reports in order to extract better information that can

help to reduce the risk of making a bad investment.

Shipping market research is concerned with a specific commercial decision. This

means studying the prospects for a specific type of ship, trade flow or business unit

(Stopford, 2008). In studying the prospects of a particular decision, the market

researcher’s bias is more towards technical and behavioural variables, which are

less easily represented in statistical terms – models can be used to establish the

framework, but the central issues are questions like: How will competitors or

charterers react? Which are best dealt with by research into the current views and

behaviour patterns of the relevant business decision.

A technical variable is such that estimates the rate at which innovation could be

introduced in response to a major price change in the world economy or a variation

in volume of raw materials previously used as input caused by changing trade

pattern. For instance, will automobile industry be able to manufacture engines that

will run on LNG pursuant to the “green energy and zero emission initiatives”

making waves in the global economies?

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The changes in technical variables are usually followed by behavioural

relationships as people would tend to seek alternatives where conditions are stiffer

than their expectations. The aim of the prediction so made is to be able to form a

reasoned view because determining particular rates of change and corresponding

consequences are difficult in themselves.

In this paper, we shall try to expound the methodology of conducting shipping

market research. To achieve this, illustrations shall be drawn from typical decision

making scenarios as posed to the shipping market researcher or decision maker and

built into a suggested procedure for market research studies which is enumerated in

the sections that follow.

Markets: Shipping Markets

Economists understand by the term market, not any particular market place in

which things are bought and sold, but the whole of any region in which buyers and

sellers are in such free intercourse with one another that the prices of the same

goods tend to equality easily and quickly (Cournot, 1838). The central point of a

market is the central exchange, mart or auction rooms where traders agree to meet

and transact business but the distinction of locality is not necessary. The traders

may spread over a whole town or region of country and yet make a market if they

are in close communication with each other (Jevons, 1871).

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In shipping, there are four markets trading in different commodities. The freight

market trades sea transport, the sale and purchase market trades second-hand ships,

the new building market trades new ships and the demolition market deals in scrap

ships. These markets shall be discussed further but it is worthy of note that due to

the decision facing the market researcher, judgments must be based on an

understanding of market dynamics, not economic principles taken out of context.

Market research does not in any way centre on the four shipping markets however,

waves of cash flowing between these four markets drive the shipping market cycle

and greatly affects the outcome of the investment being considered such as

described in the next section. In essence, the ship owners are part of a process

which controls the price of the ships they trade and the revenue they earn.

Markets Research Methodology

As stated earlier, market research studies focus on particular part of the market,

usually in connection with some specific commercial project involving investment

in fixed assets or in the development of new products or services. For instance, a

banker deciding whether to finance a fleet of crude oil tanker; a bulk operator

deciding whether to order a 60,000 dwt Panamax bulk carrier or 45,000 dwt ultra

modern bulk carrier with the ability of switching cargoes; a shipyard interested in

entering the product tanker market; a port management team deciding how much to

invest in upgrading container handling facilities; a new investor in the form of

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banking institution considering provision of transport to cater to continental shelf

oil and gas operations which include but not limited to rig operations and supply

services using offshore support vessels.

For each of these decision-makers, better information can help to reduce the risk of

making a bad investment. The banker will be interested in the commercial future

for crude oil tankers of specific size, age and design so that he does not end up

financing a fleet of ships which turn out to be very difficult to charter. Similarly,

the bulk operator needs to evaluate details such as size trends, fuel economy, the

options for automation, cargo handling gear, prices on offer, charterability of the

vessel, resale value and what his competitors are doing. The port authority needs to

know what aspects of a container terminal are most important to operators, the new

investor needs to know factors which offshore rig operators consider necessary

before they embark on hiring a vessel or entering into a contract.

A combination of commercial and economic knowledge is required in order to

conduct this sort of market research. The emphasis is on identifying the factors that

will significantly influence the success or failure of the commercial decision,

gathering information and assessing how these may develop. A major part of the

task in carrying out the market research study is therefore deciding what the scope

of study should be (Stopford, 1997). For example, a shipowner thinking of buying

a bulk carrier for agricultural trades apparently needs to consider the future growth

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and development of commodities, but he must also look at a wide range of factors

such as the commercial strength and plans of existing operators in that trade.

In order to carry on with the major aim of the paper, some of the following

procedures for conducting a market research study as suggested by Stopford is

adopted as summarized below;

1. Establish terms of reference – this covers a discussion of the decision to be

made which the study is to facilitate and the identification of the information

type required for the study.

2. Analysis of past trends – here, we define the applicable market

structure/segmentation, identify competition, estimate trends and analyze

their causes based on compiled database.

3. Survey of competitors’ plans and experts’ opinions - having identified main

competitors in step two above; proceed to survey plans of companies

operating in the market as well as opinions of experts on future

developments.

4. Identification of key variables that will influence future market development

and prioritize variables in terms of their potential future impact on the

market.

5. Results presentation.

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As stated in previous sections, various cases and illustrations shall be used to

examine how each step in the procedure will be developed for a shipping market

research study. So far we have tried to cite cases involving the bulk market

operator, the banker with interest in oil product tankers, an investor with the

prospects of purchasing an offshore support vessel and a pending port management

team’s decision for investment in container handling facilities.

Terms of reference

Under the terms of reference, we define what decision is to be made in concrete

terms which is executed based on the outcome of the study or is terminated for an

alternative. The extent of contribution which the study will make is dependent on

the stage of thinking that has been reached. At this point, we also identify the type

of information required to carry out the study. In order to achieve the above aims,

we consider the following for the chosen market;

a. Accessible market size and the possible share that can be won;

b. Freight rate development;

c. Most cost effective ship type in providing the chosen service,

d. Probable competitors’ reaction to a new entrant to the trade.

If we consider the case of a banker with interest in financing oil product tankers,

the accessible market size is such that can be evaluated by considering the global

tanker fleet whose capacity-building still continues due to the delivery of

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newbuildings and only minor scrapping of old tonnage. According to Clarkson

(2011), the number of tankers worldwide greater than 10,000 dwt was increased by

1888 to 5,629 units with a total carrying capacity of 470 million dwt during last

twelve months. The fleet’s average carrying capacity therefore is 83,700 dwt.

In terms of deadweight tonnage (dwt) the tanker fleet breaks down into the major

types as follows:

Source: Clarkson Shipping Intelligence Network, November 2011

The chart shows that crude oil tankers account for 65% of the total tanker fleet

tonnage while oil products and oil/chemical tankers are about the same at 17%.

For the purposes of this study, we define the oil products tanker fleet being our

focus as all non-specialized tankers below 60,000 dwt, as well as coated tankers

above this size. These ships carry a spectrum of cargoes, ranging from relatively

unsophisticated dirty products such as fuel oil through to clean products such

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as naphtha. Vessels that trade at one end of this spectrum are unlikely to be able to

switch easily to the other end, and “last cargo” regulations ensure that dedicated

fleets become established for some cargo types. At the most sophisticated end of

the fleet there is an overlap with the chemical sector, with a significant volume of

“swing tonnage” that can operate in either “CPP or easychems” depending on

market conditions (CRS, 2004).

The ownership structure in the market is relatively diverse and capital costs are

relatively low compared with larger crude oil sectors. Several major pooling

arrangements are in operation. Shipping pools operate in every sector of the tramp

shipping business. A "pool" is a collection of similar vessels, under different

ownerships, operating under a single administration. The pool managers market the

vessels as a single, cohesive fleet unit, collect their earnings and distribute them

under a pre-arranged "weighting" system. Pools are generally developed for two

reasons. Firstly to allow participants to provide the service levels required by their

major customers.

Secondly to improve transport efficiency by special investment and increased ship

utilization e.g. by arranging backhaul cargoes more effectively than a small group

of ships could do. The oil products tanker fleet sector has received a massive

amount of investment in the past few years and the order book for delivery over the

next couple of years as of 2011 stands at 37% of the fleet. In the wake of the Erika

and Prestige there has been a growing focus on modern, quality ships. Demand is

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typically short-haul, matching refinery production with intra-regional demand.

However, some longer-haul routes serve major refining regions such as the Middle

East and the Caribbean. A wide range of cargoes (fuel oil, gas oil, gasoline, jet,

naphtha, mtbe) are available and long-term contracts, period charters and spot

chartering are all widely used. The biggest charterers are the major oil companies

and oil traders. From the ongoing overview, an opinion of what size of market is

obtainable for an individual or institution with interest in entering the oil product

tanker market could be generated. The issue of market share that might be won is

insignificant because of the presence of pooling. In essence, the market is highly

competitive, and satisfies many of the characteristics of the perfect competition

model. The commodity is homogeneous; entry costs are very low; many

companies are competing for business (arguably each ship is a separate

competitive unit); and information flows make the markets very transparent.

The next question is concerned with freight rate development in the market. As

explained earlier, product tankers are specialized cargo-carrying vessels which can

carry – for example – naphtha, clean condensate, jet fuel, kerosene, gasoline, gas

oil, diesel, cycle oil and fuel oil. Unlike the other tanker markets which primarily

transport cargo from its origin to the point of refinery, this sector handles the

processed cargo that leaves the refinery destined for its point of consumption. For

the market under review, freight rates on all routes declined by between 22 and 40

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per cent in 2009, with the Caribbean to the East Coast of North America/ Gulf of

Mexico route declining the most. The lowest point in the year occurred in April for

both tanker sizes on the Persian Gulf to Japan route. Thereafter, on the Persian

Gulf to Japan route, freight rates increased exponentially from May 2009 until

January 2010. In 2009, average earnings for product tankers continued their

downward slide. Whereas average time charter equivalent earnings on the

Caribbean– East Coast of North America/Gulf of Mexico route had been $17,567

per day in 2008, in 2009 the rate was $9,467 per day. The low point was reached in

October 2009, when the rate on this route declined to a mere $5,800 per day.

However, by February 2010, rates had recovered to $11,000, which offered some

respite to concerned ship-owners (RMT, 2010).

Similarly, in the first months of 2011, the charter market was characterized by

strong fluctuations. From January to May, it was initially possible to achieve

charter rates of USD 15,000 per day in comparison to the low results in February

of USD 10,000 per day. The higher winter demand for mineral oil products led to

an increase of charter rates in April to USD 17,500 per day as well as to rates of

approximately USD 14,000 per day in May.

As a result of the crisis in Libya the oil export in this country collapsed from

March and came to a complete standstill from July to September. The former

integrated tonnage led to additional transport capacities on the tanker markets. The

mineral oil export from Libya has been starting since October and could already be

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increased from former 0.54 million bpd to 0.75 million bpd until November. This

development nearly led to normalization and increased demand for tanker tonnage

in this trade. From June until October it should be noted that in the Panamax tanker

segment only charter rates between USD 6,900 and USD 8,800 per day could be

earned and in November earning of approximately USD 10,000 per day could be

reached (Hanseatic Lloyds Report, 2011).

The most cost effective ship in providing the service under consideration should be

based mostly on the decision maker’s financial strength. Assets cost depend on the

size of vessel and are relatively low compared with large crude oil sectors. More

sophisticated ship types carry clean products while most products tankers can

switch between clean and dirty products when the tanks are carefully cleaned.

Older products tankers gravitate to carriage of dirty products. The ability to switch

between products presents the ship with more efficient backhaul cargo

opportunities which means better profits. These among other considerations

account for effectiveness measures in the product tanker market.

Oil product tanker market has relatively few barriers to entry. Information systems

in bulk shipping business are very open, giving buyers and sellers of ships,

operators and charterers a timely flow of commercial data. Information about

revenues and asset prices are published daily and widely circulated in the industry

to both ship-owners and charterers by the shipbroking business and information

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publishers. These information services ensure a high degree of transparency. In

addition the costs of operating different types of ships are well known (several

companies publish reports documenting them) making it easy for potential

investors to estimate prevailing profit levels.

New investors require equity, but commercial shipping banks will provide loans to

acceptable credits against a first mortgage on the ship. There is a comprehensive

network of support services to which new investors can subcontract most business

functions (subject to sound management controls). Ship management companies

will manage the ships for a fee; chartering brokers arrange employment, collecting

the revenues and dealing with claims; sale and purchase brokers will buy and sell

ships; maritime lawyers and accountants undertake legal and administrative

functions; classification societies and technical consultants provide technical

support (CRS, 2004).

Setting out the terms of reference in this way makes it clear that the decision-

maker is seeking more than a simple forecast of the trade on a particular route and

in fact needs advice on how the competitive position is likely to develop and how

the commercial environment in which he will be operating will change (Stopford,

1997).

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Analysis of past trends

Here, we define the trends and applicable market structure/segmentation, identify

competition, estimate trends and analyze their causes based on compiled database,

extract any cyclical effects. This is best done by assembling information that is

readily available on the current position and analyzing past trends. We turn to the

container ship fleet for an understanding of how to proceed with past trends

analysis in the charter market and probable competition in the chosen service.

As a result of the global financial crisis, hardly any notable newbuilding orders for

container ships were placed since the second half of 2008 for the following two

years. In 2010 this changed with the recovery of the global economy and the

resulting positive developments in the container shipping. In 2011 nearly 200

container vessels with a total capacity of round about 1.27 million TEU will be

delivered – 47 vessels of them have a capacity of more than 10,000 TEU and cover

47% of the whole capacities being delivered in 2011 (ISL, 2011).

According to the order book, orders exist for a total of 115 newbuildings for the

segment of 4,000 TEU class with a total capacity of 525,329 TEU. Out of these

orders, eleven vessels meet today’s Panamax-criteria, 70 ships are the so-called

wide-beam-containerships and for 34 orders, the beam is not yet known. In

comparison to existing ships with a comparable size, the wide-beam-containerships

have a bigger beam and can carry more containers.

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Their main advantage is that due to their modified design they have a shallower

draught and therefore consume less bunker at a comparable speed and the number

of ports that they can call at increases since a lot of ports have restrictions

regarding the draught of vessels. At the moment these wide-beam-containerships

of the panama-class cannot yet pass through the Panama Canal. In 2014 this will

change due to expansion. (Alphaliner, 2011).

The following graph gives an overview of the orders placed and deliveries per

quarter in million TEU.

Source: Clarkson, October 2011

Despite the current developments and threatening overcapacities there still is a

small rise of scrapping for container vessel currently even with a declining trend.

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In 2010, ships with a capacity of only 131,000 TEU in total were scrapped. The

figure stood at 46,500 TEU for 2011 and only 38,600 TEU in 2012 (Clarkson,

2011).

In the first quarter of 2011, the charter and freight rates developed in different

directions. Whereas the liner shipping companies had to struggle with falling

freight rates and increasing bunkering prices, the charter rates initially continued

their upward trend because of the good demand. The tramp shipping companies

were able to profit from this new transaction in all size segments, especially in the

case of larger ships as from 3,500 TEU. The short peak was reached in mid-April.

After that the demand declined considerably. Nevertheless the charter rates

maintained at this level till the beginning of June and then decreased severely

within a short period of time (HLL, 2011).

The world’s largest container shipping line, Maersk Line initiated a destructive

competition “Daily Maersk” (daily cut-offs and guaranteed transit times in six

Europe-Asia services with 70 vessels). Because of the “Daily Maersk” service new

vessel could interlope to the charter market since other container lines might not be

able to stand the price competition and might have to deactivate their services.

The ruinous price competition between the three largest liner shipping companies

in the Asia-Europe trade led to the fact that liners like MISC, Malaysia’s biggest

liner shipping company will go out of business and that others like CSAV

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(Compania Sud Americana de Vapores) Chile, ZIM Israel, China Shipping or

NYK (Nippon Yusen Kaisha) Japan are thinking about a venture. In the beginning

of December, MSC (Mediterranean Shipping Company) Switzerland and

CMA/CGM France announced their cooperation which was to start March 2012

for at least two years and include the Asia-Northern Europe, Asia-Southern Africa

and South America trades. Together, the two liner shipping companies share a

capacity of more than 3.9 million TEU which makes them bigger than Maersk Line

who has a capacity of 2.6 million TEU.

The container ship fleet is segmented into Post Panamax, Panamax, Sub-Panamax,

Handysize and Feedermax vessels with each class having a certain range and

number of TEUs it can carry. The development of charter rates for Panamax class

with 3,900 to 5,100 TEUs capability for instance showed that from February 2011,

the demand for tonnage initially rose. Since supply was limited, there were clear

increases in rates starting at USD 24,000 gross per day in February to more than

USD 27,000 gross per day in March. The average periods rose from twelve months

to two-year, sometimes three-year periods. From the end of March the upward

trend stopped. The demand of the liner shipping companies was reduced due to

overcapacities in the Asia-Europe services and surplus tonnage was offered

additionally to the tramp vessels in the charter market. Primarily this led to only

slightly falling charter rates. At the beginning of June, occasionally rate of

approximately USD 25,000 gross per day with a period of twelve months could be

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achieved. In the second half of the year, more and more ships came into the

market. While (Compania Sud Americana de Vapores), Chile practiced an

aggressive charter-expansion-policy- and with that made a strong contribution of

the charter market in 2010 – they did not only reduce this expansion drastically in

2011, but also closed down several services. This affected the container vessels

disproportionately since CSAV took up several ships of this size segment and

offered their redundant panama vessels in the market. Due to the resulting

oversupply, the charter rates declined in the further course of the year. Despite the

tramp shipping companies’ strong resistance, the rates fell below the 20,000 USD

mark in the beginning of August. The waited stronger demand of the liners during

the “peak season” in July/August stayed away and the charter rates fell down

drastically. The market participants undersold each other for the little existing

business. After only a short time a charter level of USD 12,000 per day was

reached and fell to USD 8,000 per day in September. The temporarily lowest was

at USD 7,500 per day by the end of October. At the same time the charter periods

decreased by six to twelve months, ships were often even chartered in for round

tips for one or two months to cover the short term demand.

Currently 709 ships of the size class from 3,900 to 5,100 TEU are in operation

worldwide, of which 3 ships are not chartered out at present and another 32 vessels

are without employment. Of 115 ordered newbuildings which will be delivered by

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the year 2014, 32 are without a charter at the moment (HLL Database, 2011). The

trend differs for other segments of the container ship fleet.

The figure below shows the typical segments of crude oil tanker market.

The crude oil tanker fleet incorporates 1,314 vessels ranging from 60,000-450,000

dwt. It covers four major sectors: Panamax (uncoated, 60-80,000 dwt), Aframax

(uncoated, 80-120,000 dwt), Suezmax (120-200,000 dwt) and VL/ULCC (200,000

dwt+). The size of vessels used on a particular route is usually determined by cargo

size and port facilities, but since these vessels carry only one type of cargo (crude

oil), there can be significant competition between the size ranges, with, for

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example, VLCCs switched into Suezmax trades as long as port facilities can handle

bigger vessels (CRS, 2010) and the question of lateral cargo mobility is not

applicable in this case.

Such information as obtained above is collected and collated for any given market

to analyse major competition and segmentation background before a decision is

reached. Once market segment has been defined, the next step is to identify the

competition, since in the shipping market strongly growing demand does not

necessarily bring commercial success; the ship-owner may find himself squeezed

out of the market by cut-throat competition. In the case of a shipbuilding company,

this may involve identifying other shipyards with a known capability in the market

segment and assembling information about their commercial performance. In a

bulk shipping project, it may involve identifying the fleet of ships able to trade in

this market and analyzing the future order book and financial position of other

operators (Stopford, 1997).

Survey of competitors’ plans and experts’ opinions

While statistics provide an overview of the past, they only often give a little

indication of changes which are too recent to appear as a statistical trend. To avoid

this type of error it is important to survey the opinions of people involved in

business and plans of companies operating in the relevant market segment. This

involves; identifying the relevant experts to question; deciding on a list of the

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questions that need to be answered; selecting the most appropriate method of

surveying opinions.

There are many established techniques for surveying opinions, ranging from the

personal interview to the general questionnaire. For example, an opinion survey of

the ferry market revealed that the commercial trend was strongly towards treating

the ship as a ‘floating hotel’ in order to maximize on-board expenditure by

passengers or that the world business cycle is the single most important factor

which influences trade growth. This will provide the basis for a new line of

investigation about how this trend would develop over the next decade (Stopford,

1997).

Future market outlook and key variables

At this stage of the market research study, we tend to decide what the future

market environment is likely to be and how sensitive the market sector is to these

trends. This according to (Stopford, 1997) involves asking questions like: how

sensitive is this market to commercial conditions in other sectors of the shipping

market? Is there any impact of decisions made in sectors of other markets within

the market of our interest? For example, the great uncertainty which currently

predominates on the financial markets again underlines how unstable the global

economy still is. In the first half of 2011 the surge in oil prices, the political

turmoil in the Arabian region, the earthquake in Japan and the escalation of the

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debt crisis in the Euro-zone firstly influenced the positive development of the

world’s economic situation. The container segment by extension is burdened by a

disproportionate expansion of the capacities in the upper size classes as well as the

ongoing predatory competition between the liner shipping companies in the freight

and charter market (HLL, 2010). The wide beam containerships with the ability of

calling at many ports due to their shallow draughts and less bunker consumption

pose a great challenge to the usual Panamax class.

In view of the discussions above, the next phase of the task is to single out the

factors that are likely to be most important in determining the future outcome for

the project and to examine how these will develop. For example, a study

concerning the purchase of an oil product tanker as earlier discussed in the paper

might identify as a key factor the development of export refineries in oil-producing

countries and look into this.

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Result presentation

Following a thorough analysis of the collated records on the chosen market, the

result is then presented in a format that will make it possible for the decision maker

to understand why a commercial project should be undertaken and why another

option should be considered. A useful presentation technique is to draw up several

alternative scenarios of how the project may develop under different

circumstances. The aim of this approach is to enable the decision-maker to think

through the implications of his decision under a variety of different circumstances.

Given that some of the key influences develop unfavourably, what would be the

level of the company’s preparedness in terms of reaction? Is there an action that

can be taken to guard against such an event? In as much as this may not be easy to

carry out in practice as it sounds, it is more preferable to the ‘spot prediction’

technique (Beck, 1983).

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Summary and Conclusion

In this paper, we have tried to expound the methodology for conducting a shipping

market research. To achieve this, illustrations were drawn from typical decision

making scenarios as posed to the shipping market researcher or decision maker and

built into a suggested procedure for market research studies. The paper proceeded

by defining what a market is and highlighting the various shipping markets in

existence followed by research methodologies in general. The adopted procedure

for market research comprises of the terms of reference, trend analysis, survey of

competitors’ plans and experts’ opinions, identification of key variables and results

presentation. Market data and reports from bulk and liner fleet operations were

reviewed in order to meaning to the paper.

In essence, the complexity of shipping business necessitates the conduct of

shipping market research. At every point in time, be it for a new investor, a

banking institution negotiating a loan deal, parties of interest in shipping and

shipowners as well, better information always tends to reduce the risk of making a

bad investment.

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References

Alphaliner Weekly Newsletter – Liner Shipping Review Volume 2011 Issue.

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Cournot, A. A. (1838) Researches into the Mathematical Principles of the Theory of Wealth. (Trans. N. T. Bacon. New York: The Macmillan Company, 1897)

Hanseatic Lloyds Report (2011) - The shipping and charter market for container and tanker ships.

Institute of shipping Economics and Logistics (2011) – Shipping Statistics and Market Review. Vol. 55 No. 1/2 - 2011.

Jevons, W.S. (1871) The Theory of Political Economy. 8vo. London. xvi.

Shipping Intelligence Network. (November 2011) – The Global Tanker Fleet published by Clarkson Research Studies.

Shipping Intelligence Network. (November 2011) – Oil Tanker Trade Outlook published by Clarkson Research Studies.

Stopford, R.M. (1997) Maritime Economics 2nd Edition (London: Routledge).

Stopford, R.M. (2008) Maritime Economics 3rd Edition (London: Routledge).

UNCTAD, Review of Maritime Transport (annual), Annual Review of Shipping Industry 2010. (United Nations).

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