Introduction to shipping

As the loan portfolio of Danish Ship Finance covers a large variety of ship types, the company's customers are exposed to a correspondingly large number of national, regional and international events.

The company monitors and assesses the risks and anticipated earnings for each of the vessel segments to which Danish Ship Finance is exposed.

As each vessel type and vessel segment involves a unique structure in terms of market participants, key drivers and technical terminology, we extensively source our information from external suppliers, each of which is a specialist in a specific area of the shipping industry.

Shipping overview

Around 90% of world trade is carried by the international shipping industry.  

Ship transports between regions are designated deep-sea shipping, which, financially, is the most effective means of transport. Traffic is particularly heavy on shipping routes between the large industrial regions of Asia, Europe and the USA. This part of the shipping industry is in direct competition with air transport in respect of specific high-value product groups. Air traffic therefore only accounts for a small proportion of the volumes transported.   

Short-sea shipping covers transportation within the regions and handles the redistribution of cargoes shipped to regional centres by the deep-sea vessels. Short-sea often competes directly with land-based transports. Short-sea vessels are smaller than deep-sea vessels.

Vessel types

Each vessel type is to a large extent built to carry specific products on specific trading routes or to perform specific service functions.

The major product groups are liquid bulk, dry bulk, containers, vehicles and passengers.

The principal types of merchant vessels belong to the groups of tanker vessels, dry bulk vessels, container ships and Ro-Ro vessels.

In addition to the above-mentioned main groups of commercial vessels and passenger, cruise and offshore vessels, there is an endless number of less-known vessel types. These include heavy lift vessels, floating cranes, livestock carriers, itemised cargo vessels, fishing vessels, icebreakers, dredgers, tugs and pilot/rescue vessels.

Dry Bulk vessels

Dry bulk vessels are designed to transport large volumes in few, large holds. The most common dry bulk products include raw materials such as iron ore, coal, coking coal, grain, bauxite, scrap metal and paper rolls, soy beans, metal plates, aluminium and stone.

Dry bulk vessels are generally designed for simplicity. Design focus is on cubic capacity, access to holds and loading equipment. Some of the small dry bulk carriers may be designed to higher technical standards to be able to handle specific products such as cement, stone, paper rolls and wood products.

Container vessels

Container vessels are used for carrying loads in containers. Container trade ensures fast, frequent and secure transportation of thousands of goods to more or less all global destinations.

The size of a container vessel is measured by the number of twenty-foot containers (teu) the ship is able to haul. Container transport is characterised by a few large container ports around the world. The large vessels usually navigate according to specific schedules, transporting goods from the ports by a specific route (liner service). The smaller vessels primarily navigate out of smaller ports to the large container ports (so-called feeder ships).

Furthermore, the smaller vessels are equipped with cranes that make them independent of the port's unloading facilities, whereas on-shore cranes are required for the large vessels.

Tankers

The best known tanker vessels are crude tankers and product tankers, which carry crude oil and refined oil products, respectively. Other types include chemical tankers, gas tankers (LPG and LNG) along with numerous other lesser known tanker types.

Common for all tankers is that they carry liquid substances in large bulk quantities.

Depending on the type of tanker involved, it may be capable of transporting other products than those it was originally built for. In the group of tankers, a much higher degree of substitution occurs than between the group of tankers and the group of dry bulk carriers for example. One effect of this is often particularly highly correlated earnings and tonnage values for the various types and segments of tankers.

For example, a product tanker is capable of transporting crude oil, but a crude oil tanker, on the other hand, cannot transport refined products, as these products require coated tanks – a feature which a crude oil tanker does not provide.

Chemical tankers have coated tanks as well as stainless steel tanks. This enables them to carry refined products that would otherwise be carried by a product tanker. Conversely, a product tanker cannot carry certain chemicals and oil products, as these require special safety procedures and special coated tanks or stainless steel tanks. In other words, the substitution is one-way only in this example.

Another example is some of the LPG tankers which are capable of carrying Clean Petroleum Products (CPP), whereas the product tankers cannot transport liquid gases.

In addition to technical restrictions, the tankers’ ability to substitute each other is restricted by the oil companies’ safety procedures and the costs of cleaning the tanks if the tanker needs to change products. Therefore, tankers sometimes change employment, but only when the difference in earnings is large enough to justify expenses for the change.

Ro-Ro vessels

Ro-Ro is the common description of vessels that transport rolling cargo, where the cargo can most often be rolled-on and rolled-off using ramps (Roll-On Roll-Off). Ro-Ro vessels have multiple decks and carry forest products (on trailers), cars, trucks and pallets. Many people regarded the Ro-Ro vessels as the natural successor to the cargo liners, but the vessels were pushed into the sideline by the more efficient container ships in cargo types to suitable for rolling transportation.

It is difficult to characterise the fleet of Ro-Ro vessels because it consists of a large number of highly different vessel types. A broad sub-division of the fleet shows the following segments:

  • Classic Ro-Ro vessels
  • Roll-on Lift-off (Ro-Lo)
  • Ro-Con
  • Ro-Pax
  • Car carriers – Pure Car Carriers (PCC) and Pure Car Truck Carriers (PCTC)

Substitution

Some vessel types (such as containers and Ro-Con vessels) are, to a varying degree, mutually substitutable, thereby evening out the supply and demand differences in the various vessel markets.   

The high substitution activity, however, does not apply for the main groups of commercial vessels. One of the reasons is that the technical, financial and safety requirements concerning the handling and storage of the different types of products make it impossible for one of the main groups of commercial vessels to replace a vessel from one of the other main groups.  

Nevertheless, some vessel types have an ability to transport several types of products, allowing them, to some extent, to act as a connecting link between the main groups of commercial vessels.   

For instance, the crude oil tankers and the dry bulk vessels are connected via the vessel type called OBO (Oil/Bulk/Ore), which is capable of carrying both crude oil and dry bulk products. For example, when the tanker segments show high freight rates and the dry bulk vessels show low rates, the OBO ships may shift to carrying crude oil, thereby reducing the size of the dry bulk fleet and increasing the size of the tanker fleet. This move may theoretically cause higher freight rates for the dry bulk vessels but a decrease in freight rates for tankers. However, the rather limited number of OBO vessels reduces this effect to a minimum.   

Similarly the group of container ships and dry bulk vessels are linked through the “multi-purpose” vessel type – or itemised cargo vessel – which is capable of carrying both containers and dry bulk products.   

The capability of the Ro-Ro vessels of carrying containers alongside vehicles and passengers categorises them as both container ships and passenger ships.  

On the demand side, the connection between the various vessel groups are nowhere near as evident. Here, developments are affected principally by macro-economic factors such as GDP growth, growing trade and changing travel patterns (iron ore, for example, is increasingly being transported to China from Brazil instead of from South Africa, triggering an increase in demand for dry bulk vessels).

Ship segments

Most of the vessel groups are sub-divided into segments in which the difference lies in the size of the vessel and the type of product it carries.  

Furthermore, vessel types are categorised into segments according to their size due to the physical restrictions in the form of water depth, port size and canal dimensions that apply on the routes they navigate. In addition, considerations of financial optimisation ensure that the vessels are classified into relatively standardised sizes according to the parameters set by factors such as freight volumes and transport distance.  

For example, it would not be financially viable to spend time loading 2 million barrels of crude oil onto a VLCC and then transport this cargo 50 nautical miles up the coast only to spend the same amount of time unloading the tanker. On short haul voyages, with low demand at the destination port, it is far more efficient to transport small-volume cargoes, thus avoiding long periods of time along the quay at the departure and the destination and avoiding investing in large storage facilities. Thus in general, the larger the ship the longer it is meant to travel on each voyage.   

This means that two vessels of widely differing sizes may experience widely different demand and supply patterns, even though they carry the same type of products.  

Small vessels are mainly affected by changes in regional trade patterns, while large vessels are affected by changes in the international trade structure.  

Freight rates, supply and demand

Put simply, freight rates are determined on the basis of negotiations between shipping companies and forwarding agents/cargo owners, reflecting the balance between ships and cargoes available in the market.   If the supply of vessels is too great, freight rates are most often low, whilst they are high when there is a shortage of vessels in the market.  

The five most important factors generally affecting demand in the shipping market are:

  1. The global economy: generates the bulk of demand, either through imports of raw materials or trade in finished products.  
  2. Raw materials available: some raw materials, especially agricultural products, are subject to seasonal fluctuations. In addition, raw materials trading is affected by overall demand and availability.  
  3. Average haul: expresses the distance travelled by a ship before it reaches its final destination. For example, periodic closures of the Suez Canal have increased the average sea travel distance between the Arabian Gulf and Europe from 6,000 miles to 11,000 miles.  
  4. Random shocks: shocks that affect the stability of the economic system such as natural disasters, wars, economic crises and the like.  
  5. Transport costs: raw materials will only be transported from remote places of origin if transport costs have been reduced to an acceptable level.  

The five principal factors on the supply side are:

  1. The world fleet: The size and composition of the world fleet clearly reflects the current supply of vessels.   
  2. Fleet productivity: even though the size of the fleet is fixed, ship productivity provides an element of flexibility.  
  3. Shipyard production: shipbuilding plays an active role in the adjustment of the fleet. However, it usually takes between one and three years from the ship is ordered until delivery takes place.  
  4. Scrapping: scrapping also plays a key role in fleet growth.    
  5. Freight earnings: Freight rates motivate shipowners to adjust their capacity in the short term and to identify savings and improvement in the longer term.
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