Full story on page 3. on page 4. Full story on page 6

Transcription

1 The end is nigh! Well the end of the year is nigh and, as is traditional, the Korean shipyards set their sights on selling a few more ships by year end to hit sales targets and start fretting about next year s and whether they have any chance of achieving it. After all of them failed miserably to get anywhere near last year s sales or turnover targets, this year has been more mixed with HHI exceeding theirs but DSME and Samsung both missing. DSME s performance is understandable having effectively been out of the market for half the year with financial issues as well as struggling with the same market related issues as everyone else. Having said that, they ve also had some very valuable, and some might say rather unfair, support from their shareholders in terms of directing captive business their way in the form of the 5 option 5 ship HMM VLCC order. Like all the yards, Samsung has had a challenging year but has found it more difficult than HHI because of their traditional focus at the higher value end of the business. HHI, while they like LNG and offshore almost as much as the others, have always maintained a traditional, commercial ship heritage which the others have, to a certain extent at least, diluted in pursuit of high value business. In a year like 2017, which has been about demand for cheap, standard ship types, that focus on conventional tonnage has served HHI well as they ve been more competitive for the big ship demand we ve seen this year. To be fair to Samsung, they ve managed to take their fair share of VLCC business with orders for both BW and Capital. But, you get the impression that this was almost a matter of necessity rather than choice. Full story on page 3 on page 4 Full story on page 6 So, this year has been difficult for the yards but what does next year promise? Mostly, the yards are scratching their heads worrying about where the demand will come from and how they can move prices to something more sustainable. The first question is easier than the second. Continued on page 2 Source: Affinity (Shipping) LLP

2 Our feeling is that the yards SHOULD see a gradual, market-wide improvement with all the main sectors continuing a cyclical recovery. Dry won t bother them much but, if cape prices get to $50mill, we may see the Koreans back in that market. But, they are very focused on the outlook for containers. The last quarter has seen a massive increase in activity from the rest of the year with in the region of container vessels over 10,000TEU having been contracted in China and Korea. Not only does that suggest a cyclical recovery is under way after a few horrible years but, our feeling is that the lines which have yet to move will be forced to by competitive advantage the likes of MSC are stealing with scrubbers and CMA with LNG dual fuel. Can they really afford to sit on the side lines while their competitors build some of the cheapest if not THE cheapest - per TEU containers ships ever built with the double advantage of cutting their fuel bills in half? Our feeling is they can t. And, if they can t, the Korean shipyards will be the eager and grateful beneficiaries. The yards are also looking hopefully at the LNG market in the expectation that much better spot trading will convert into a few more contracts in Whilst we re confident that there WILL be more LNG ordering next year than this, Korean LNG capacity is so massive that it probably won t be enough really to move the needle much. But, it s the tanker market that worries them the most. This year has seen a steady trickle of contracting since the beginning of year in spite of weak trading. But, that demand has been extremely price sensitive which brings us conveniently onto the second question. Can they move prices out of the current range? That s the real challenge and it s hard to see them succeeding unless it s in conjunction with a freight and / or 2nd hand market recovery. Whilst we can see that the yards input costs are under significant upwards pressure (steel and currency in particular), buyers are unlikely to be sympathetic as their concern is price rather than cost or margin. So, the yards may find themselves in an easier, more active, market where returns are even worse than they are today. Having said that, historically, we are still very much in the bottom decile in terms of pricing so, even at 10%, or even 20%, higher prices, most newbuildings will still look historically cheap. So, on that basis, if prices start to move, supported by earnings, they could move quickly - particularly as capacity in certain sectors is much less than has historically been the case. The graphs on page one show where we are in this newbuilding cycle, The bars show the current orderbook in each sector as a % of the existing fleet against the average orderbook since The figures on top of the bars are the current price and the average price in 2017 US$. In all cases, the orderbooks are substantially less than historical averages (particularly in dry) as are the prices both of which suggest that it s a pretty good entry point - particularly with new technology available and regulatory obsolescence stalking older tonnage.

3 Volatile best describes the market since then but these new and very welcome highs seem to represent a dry market in recovery. Sentiment remains strong and whilst some are happy to put their feet up and enjoy the festivities that Christmas time provides, others continue their hunt for acquisitions and seek opportunities where a recent stabilisation in asset values provides value. In comparison to recent weeks, the tanker S&P market has seen a flurry of activity, possibly as owners rush to conclude transactions prior to the Christmas break. In particular we have seen a number of crude vessels being committed and are aware of a number of other transactions being discussed. An undisclosed US fund is thought to be in close discussions on two VLCC newbuilding options from Singaporean owners Sentek. The vessels are 300,000 dwt and slated for delivery in 2019 from Hyundai Samho, and though the pricing remains unconfirmed we believe it to be in the high $83s. Though this price would be above our valuation, it is difficult to compare accurately as specifications can vary significantly i.e. for example being scrubber ready or fitted bearing a significant cost. Following their recent purchase of the MT ARTOIS (298,330 dwt, built 2001 Hitachi) at $22.5m, Ridgbury Tankers are thought to have committed the MT DHT UTIK and MT DHT UTAH (both 299,498 dwt, built 2001 DSME) and MT DHT EAGLE (299,983 dwt, built 2002 Samsung) at $66.5m enbloc. Though the exact breakdown is not clear at this stage, it is broadly in line with the previously mentioned sale. In a similar sale, clients of Sun Enterprises are understood to have sold their MT MEANDROS (309,498 dwt, built 2000 HHI) at $20m to Greek buyers. Again, this pricing is in line with the above transactions and in line with our expectations. CEPSA have sold their MT TEIDE SPIRIT (149,990 dwt, built 2004 DSME) at $18.8m to clients of Eurotankers. There have been few comparable sales of this age (the last being in January) with which to compare but is in line with expectations. Whilst it is not clear whether a deal has been concluded rumours surround the possible sale of the MT DONG-A SPICA and DONG-A CAPELLA (157,500 dwt, built 2017 NTS) some sources suggest one has been sold and one fixed on TC while others suggest both are sold to either New Shipping or TMS Tankers. No doubt more information will come to light in the following days. Clients of JP Morgan have made headlines once again reportedly buying their fifth Capesize of 2017, namely the SwissMarine/Glencore controlled Capesize MV CHANCY (182,571 dwt, built 2015 JMU) at US$ 43.5 million. Pricing falls in line with the US$ 44.8 million achieved on the same Owner s year younger vessel MV CHOULLY (182,618 dwt, built 2016 JMU) which sold at the end of October. Also making waves in the Capesize segment are clients of Zodiac who have acquired two modern Chinese-built units, namely MV RHODES IV (178,031 dwt, built 2009 SWS) & MV ALEXANDRIA VII (178,005 dwt, built 2010 Shanghai Jiangnan) at US$ 46 million enbloc. Whilst other similar aged Chinese units have been sold of late, these have formed part of larger fleet transactions to the likes of Goodbulk and Economou and hence these latest transactions set somewhat of a benchmark. Elsewhere, the ten year old Japanese Panamax MV GOLDEN HEIWA (76,596 dwt, built 2007 Imabari) is reported sold to undisclosed Buyers at US$ 13.3 million. When one looks back to the US$ 12.5 million achieved on the two year older MV DARYA UMA (76,520 dwt, built 2005 Tsuneishi) at the end of October pricing appears to have softened. In the Ultramax segment, the widely marketed MV EQUINOX MELIDA (61,299 dwt, built 2016 DACKS) has this week been sold to clients of Vrotandos, Greece for US$ 25 million. At first glance values appear slightly firm when compared to the rgn US$ 24 million paid by clients of Scorpio for the 2016-built Chengxi units from Golden Ocean in September, however we understand the vessel is fitted with a considerable amount of extras as well as having a BWTS system installed. Arguments can also be made for a difference in quality of the Yard. Two circa ten year old Supramaxes have changed hands this week with MV CAROLINE VICTORY (58,713 dwt, built 2008 Tsuneishi Cebu) fetching USS$ 14 million and MV GLOBAL VANGUARD (52,223 dwt, buit 2008 Oshima) reported sold in the high US$ 10 millions. Firstly the difference in pricing can be attributed to the significant premium that a larger Supramax vessel commands and secondly there had been rumours that the latter had recently touched bottom. In comparison, MV SPRING EAGLE (58,096 dwt, built 2010 Tsuneishi Cebu) was sold to clients of Thoresen Thai at US$ 15.4 million, highlighting both resiliency in values in the segment, but also a cheap deal for the Buyers of the MV GLOBAL VANGUARD. We have witnessed a resurgence in average Capesize rates this week with the indices now topping US$ 25,000 per day, thus representing not only a new yearly high but also the highest average Capesize rates since November 2014 when the index topped out at US$ 27,866 per day.

4 Further signs of the market recovering in 2017 Q3, with average carrier operating margins up significantly. Based on container lines that have already published their results for the period between July and September 2017, the performance of the market looks much better than a year ago. On average, margins stand at 5 per cent for the third quarter, compared to 2.8 per cent in 2017 Q2 and -7.8 per cent in 2016 Q3. This has been the best quarter since early With the exclusion of HMM which reported a margin of -0.6 per cent, all other carriers managed to publish positive results. CMA CGM has been leading the market, having reached a remarkable 10 per cent operating margin. The cyber-attack against Maersk at the end of June must have had an impact to the market s average, without any doubt. This proved enough to push down the carrier s earnings during 2017 Q3 by more than USD 200 Mn. The Danish liner company has been the only one of the main ocean carriers to have suffered a dynamic deterioration in its performance. Between July and September, Maersk experienced a decline in its operating margin, which fell to 4.1 per cent (with operating income at USD 254 Mn) from 6 per cent in Q2 (and income of USD 364 Mn). Focusing on the entire market, conditions have been improving for ocean carriers, mainly driven by improving demand. On average, liftings increased by marginally more than a tenth (10.2 per cent) in July- September 2017 against 2016 same period. Once again, it was only Maersk affected by the cyber-attack which suffered a decline in volumes both when compared against the previous quarter of this year and 2016 Q3. In terms of total liftings, it was COSCO which dominated the market, as its volumes increased almost by a quarter (23 per cent) having reached 5.5 Mn Teu in Q3, surpassing Maersk (5.26 Mn Teu) and becoming the largest ocean carrier in terms of box liftings. This happened for the first time ever. On average, the freight market has experienced a much slower recovery. CCFI rates only increased by 1.9 per cent in the third quarter versus the second quarter, but 21 per cent year-on-year. Rates improved only marginally for CMA CGM, OOCL, Zim and K Line. In the meantime, Maersk, Yang Ming and HMM suffered losses in their average revenue during the third quarter against 2017 Q2. The ocean carriers did not manage to push rates significantly higher during the seasonally stronger third quarter even if demand growth proved rather dynamic. In October and November, the average China Containerized Freight Index is down by 7.4 per cent against the third quarter, with limited optimism in the room for the next couple of weeks. Moving to recent SnP activity, Navios Group has acquired four sisterships of 4.25 k Teu (built in 2008); the APL ATLANTA, the APL LOS ANGELES, the APL DENVER and the APL OAKLAND. The vessels were built at the New Times shipyard in China. The price is reported to be in the region of $25mill per vessel including charter which must be at a very healthy level to justify the large premium over charter free values. French interests are understood to have been behind the acquisition of the ASTURIANO for USD 3.8 Mn, a 2003-built feeder of 1.1 k Teu. SS due in Oct-18. The vessels is geared, with two 45t cranes. The WIDUKIND, a Panamax of 3.1 k Teu and delivered in 2006 was sold for USD 9.3 Mn. The new owners are not yet disclosed. The vessel, geared with three 45t cranes, has her SS due in Oct-21.

5

6 Good news for the President as his manifesto is implemented As we anticipated in Monday s Macro Topics report, US GDP growth for the third quarter has been estimated by the Commerce Department at 3.3. per cent compared to 3.1 per cent in Q2. This is an upwards revision from the department s first estimate of 3.0 per cent growth for Q3 and it represents the first time in three years that growth has exceeded three per cent in two consecutive quarters. It also slightly exceeds the consensus forecast of around 3.2 per cent. US GDP growth is averaging 2.5 per cent this year compared to 1.8 per cent in There was a caveat from the Commerce Department that the figure included increased government spending perhaps due to hurricane season as well a rise in inventories, though that may have been retailers stocking up for the holiday season peak. The Commerce Department also reported that corporate profits rose by 5.8 per cent in Q3 year on year after rising only 0.1 per cent in Q2. All in all it paints a positive picture of an accelerating economy which is probably going to receive another boost in the form of tax cuts which will make their mark in the 2018 and 2019 profit and loss accounts for US corporates. Any extra money available for dividends will drive the record-breaking US stock market indices even higher. The question will surely come, is this a bubble? Some analysts are already saying that there is a 70 per cent of a stock market crash. Nobody will want them to be right and it is hard to see how valuations can fall when profits, wages, employment, and investment are all increasing. The next data point to follow is US velocity of money, which indicates the turnover of transactions in an economy. The velocity of M2 compared to M1 (all cash and cash equivalents plus savings deposits, compared to all cash and cash equivalents) has been falling since Q According to Anna Maria Santacreu at the Federal Reserve Bank of St Louis, writing in April 2016, in general, the velocity of money starts to increase after a recession is over, when confidence is restored. However, since 2007, the velocity of money in the US has been decreasing, which means consumers and firms are still holding onto cash instead of spending it. This behavior, which also reflects a decrease in inflation, suggests that confidence in the recovery is still low. When confidence is restored, we should expect to see a rebound in the velocity of money. In Q3 this year the ratio increased from to 1.427, a tiny increase but perhaps a further green shoot of recovery. Between 1993 and 2007, the ratio rarely dropped below 2.0 so there is a long way to go even to get back to the levels of around 1.7 seen in the middle ofthe 2008crash. The US government is meanwhile pursuing its America First trade policy as Commerce Secretary Wilbur Ross has initiated antidumping and countervailing duty investigations on aluminium imports from China. He has used powers granted under the Tariff Act of 1930, their first invocation for 22 years when the target was Japanese semiconductors. Mr Ross says that there is evidence to indicate unfair Chinese government subsidies to aluminium sheet producers and exporters. The investigation will report back in January 2018, while the department will conclude its judgement by July If the investigation concludes that unfair subsidy and / or dumping has happened, the Commerce Department will instruct US Customs officials to take cash deposits from all US companies importing aluminium sheet from China. The US currently imports around USD 600 Mn of aluminium sheet from China each year.

7

8 The information contained in this report is the property of Affinity (Shipping) LLP, and may not be reproduced in any format by anyone without prior written approval from Affinity (Shipping) LLP. None of the information contained in this document constitutes or forms, and should not be construed as constituting or forming an invitation or inducement to engage in investment activity. This document should not be relied upon as being an impartial or objective assessment of the subject matter and is not deemed to be objective research for the purposes of the FSA rules. This document has been issued by Affinity (Shipping) LLP for information purposes only and should not be construed in any circumstances as an offer to sell or solicitation of any offer to buy any security or other financial instrument, nor shall it, or the fact of its distribution, form the basis of, or be relied upon in connection with, any contract relating to such action. The information, including projections, contained herein is based on publicly available materials and sources that have been obtained and compiled in good faith from sources Affinity (Shipping) LLP believes to be reliable. Any opinions expressed are Affinity (Shipping) LLP s current opinions as of the date appearing on this document only. Any opinions expressed are subject to change without notice and Affinity (Shipping) LLP is under no obligation to update the information contained herein. Affinity (Shipping) LLP makes no representation or warranty, either express or implied, in relation to the accuracy, adequacy, completeness, fairness or reliability of the information contained herein and expressly disclaims any liability for any errors or omissions. As such, any person acting upon or in reliance of this document does so entirely at his or her own risk. Any projections or other forward-looking statements regarding future events are not necessarily indicative of, and may differ from actual events. To the fullest extent allowed by law, Affinity (Shipping) LLP, its members, officers and employees shall not be liable, whether in tort (including negligence), breach of contract or otherwise, for any direct, indirect or consequential losses, damages, costs or expenses of whatever nature (including, without limitation, any consequential, indirect or unforeseeable loss or loss of opportunity or profit or damage of any kind, even if foreseeable) incurred or suffered by you or any third party arising out of or in connection with the information inthis document. The distribution of this document in certain jurisdictions may be restricted by law and therefore persons unto whose possession this document comes should before proceeding inform themselves about and observe any such restrictions. Any failure to comply with these restrictions may constitute a violation of the laws of any such other jurisdictions.

9