Danaos Corporation (NYSE:DAC) filed for a NYSE IPO last week (see highlights from the filing). As part of the prospectus they included an exceptionally thorough analysis of the international shipping industry. We've included a taste from the prospectus here; the full text is a must read for investors in Seaspan (NYSE:SSW), General Maritime Carriers (NYSE:GMR) and Tsakos Energy Navigation (NYSE:TNP) among many others.
Shipping is a global industry and its prospects are closely tied to the level of economic activity in the world. The maritime shipping industry is fundamental to international trade because it is the only practicable and cost effective means of transporting large volumes of many essential commodities and finished goods. Shipping markets are highly competitive and ship charter hire rates are very sensitive to changes in demand for and supply of capacity, and are consequently volatile. There are four main segments in the shipping industry, namely tankers, which carry such cargo as crude oil, petroleum products, etc.; bulk carriers, which carry coal, grain, etc; containerships, which carry only containers; and gas tankers, which carry mostly LPG and LNG. According to the latest available figures, in 2005 total annual world seaborne trade was estimated at 7.2 billion metric tonnes, of which drybulk cargoes amounted to 2.6 billion tonnes and oil cargoes amounted to 2.6 billion tonnes. The following table illustrates the evolution of the various categories of cargoes that comprise world seaborne trade. Global container trade exhibited the highest annual growth rate during the period shown, at 9.9%, which was well above the annual growth rate of world seaborne trade of 3.8%.
The world deep sea cargo ship fleet comprises approximately 24,000 ships with a total capacity of approximately 940 million dwt. The following table shows that, measured by dwt, at the beginning of September 2006, the world deep sea orderbook was approximately equal to 29% of the existing world deep sea fleet. The orderbooks for containerships (approximately 48% of the existing fleet), and LNG carriers (approximately 84% of the existing fleet), each constituted more than 45% of the respective existing fleets for these sectors, measured by dwt.
The Container Shipping Market
Container shipping is responsible for the movement of a wide range of goods from one part of the world to another in a unitized form. Participants in the container shipping industry include "liner" companies, who operate container shipping services, containership owners, often known as charter owners, who own containerships and charter them out to the operators, and shippers who require the seaborne movement of containerized goods. Container shipping represents an important and increasingly significant part of the global seaborne movement of goods. In 2005, global container trade stood at an estimated 105 million TEU.1 As of September 1, 2006, the global containership fleet contained 3,848 fully cellular2 containerships, with a total standing slot capacity3 of almost 9.0 million TEU, while the total container capable fleet capacity stood at almost 11.0 million TEU.
The range of containership owners is diverse, including liner companies, which are often significant corporate entities, and charter owners, who are often part of wider groups involved in other shipping activities. Shipowning generally requires a relatively high level of capital investment. Ownership of the Panamax and above sized sector is less fragmented than the ownership of smaller vessels. There are a large number of charter owners who own a small number of containerships, with over 200 owning just one or two containerships, and the average age of the worldwide containership fleet as of September 1, 2006 was 11.3 years. The six containerships scrapped in 2004 with an average age of 30.4 years indicates that some ships are able to operate for more than 30 years. No containerships were scrapped in 2005.
Growth in the liner shipping market has been relatively rapid in comparison with other major shipping sectors such as tankers and bulk carriers. In terms of loaded containers moved from origin to destination, estimated global container trade increased from 50.8 million TEU in 1997 to 105.2 million TEU in 2005, a compound average annual growth rate4 of 9.5%. In the last three years demand for container shipping has accelerated strongly, with estimated growth in world container trade reaching 11.6% in 2003, 13.4% in 2004 and 10.1% in 2005.
Global container trade is spread over a range of long-haul, regional, and intra-regional routes. The "mainlane" container trades on the major East-West routes are the world's largest in terms of volume, with the Transpacific forming the world's largest container trade, with 17% of the total volume in 2005, followed by the Far East-Europe trade and the Transatlantic. In addition to these trades, there are "intermediate" trades on the mainlane East-West corridor serving the Middle East and the Indian Sub-Continent. North-South trades form the second layer of the global liner network, connecting the Northern hemisphere with South America, Africa and Australasia. Additionally, there are also important intra-regional container trades, for example, intra-Asia or intra-Europe.
The Drybulk Shipping Market
Drybulk cargoes are used in many basic industries and in construction, and can be divided into major bulk commodities and minor bulk commodities. Major bulks consist of iron ore, coal and grains.14 Minor bulks cover a wide variety of commodities, such as forest products, iron and steel products, fertilizers, agricultural products, non-ferrous ores, minerals and petcoke, cement, other construction materials and salt.
Grains include wheat, coarse grains and soybeans. Clarkson Research includes bauxite, alumina, and phosphate rock as major bulk commodities in published reports but for the purposes of this document it includes only iron ore, coal and grain.
The chartering of vessels for a specified period of time or to carry a specific cargo is an integral part of the market for seaborne transportation of drybulk cargoes. The charter market is highly competitive. Competition is based primarily on the offered charter rate, the location, technical specification and quality of the vessel and the reputation of the vessel's manager. Typically, the charterparty agreements are based on standard industry terms, which are used to streamline the negotiation and documentation processes. The most common types of employment structures for a drybulk carrier are shown in the table below.
Spot Market In the spot market the vessel earns income for each individual voyage. Earnings are dependent on prevailing market conditions at the time the vessel is fixed, which can be highly volatile. Idle time between voyages is possible depending on the availability of cargo and position of the vessel. Vessels operating on the spot market generate revenues that are often more volatile than those from other types of shipping.
Contract of Affreightment Contracts of affreightment (CoA) are agreements by vessel owners to carry quantities of a specific cargo on a particular route or routes over a given period of time using vessels of the owners' choice within specified restrictions. In a CoA the owner is not required to use a specific vessel to transport the cargo, but instead may use any qualified vessel in its fleet.
Time Charter A time charter is a contract for the hire of a vessel for a certain period of time, with the vessel owner being responsible for providing the crew and paying operating costs. The charterer is responsible for fuel and other voyage costs. A time charter is comparable to an operating lease.
Bareboat Charter Under bareboat charter, the vessel owner charters the vessel to another company (the charterer) for a pre-agreed period and daily rate. The charterer is responsible for operating the vessel and for payment of the charter rates. A bareboat charter is comparable to a finance lease.
Pool Employment In pool employment the vessel is part of a fleet of similar vessels, brought together by their owners in order to exploit efficiencies and benefit from a profit sharing mechanism. The operator of the pool sources different cargo shipment contracts and directs the vessels in an efficient way to service these contractual obligations. Pools can benefit from profit and loss sharing effects and the benefits of potentially less idle time through coordination of vessel movements, but vessels sailing in a pool will also be vulnerable to adverse market conditions.
Charter rates are strongly influenced by the demand for, and supply of, vessel capacity because of the highly competitive nature of the charter market. Bulk carrier charter hire rates are very sensitive to these changes in demand and supply and consequently are volatile.
This is just a fraction of DAC's overview-the full piece is a fascinating read.
Related on Seeking Alpha: A few months ago, Oliver Schwindler wrote that he is near term bullish on shipping stocks; a comprehensive list of shipping stocks appears in his article.