Winter 2016 Newsletter - 2016

Winter 2016 Newsletter.pdf

Winter 2016 Full Article.pdf

By: Bob Beegle

It is again time to take a look at the past and wonder about the future. Six and a half years have passed since June 2009, the official end of the latest Great Recession. The global recovery has been slow and erratic, and economies are still fragile. Many companies, Marcon included, have not fully recovered to the pre-crash days. Global growth for 2015 was projected by the IMF in October at 3.1%, 0.3 percentage points lower than 2014, while 2016 was projected to be an improvement at 3.6%. Regretfully after a good start to 2015, this expectation did not hold up after it encountered the chaos of real life. Even advanced economies are slowing. Third quarter 2015 real GDP is now estimated at 2.0% in the U.S. (last year 2.4%) and 0.5% (0.6% predicted) in the U.K. Many emerging and developing economies were hit even harder by falling commodity prices, a strong U.S. dollar and tight finances. Growth in China is expected to slow in 2016-17 and this is already having an effect felt around the world. The New Year may not be quite as happy as many wished for.

The further slowdown in 2015 projections and next year’s global economic growth will disappoint many in the maritime industry as global trade and project investments decline even further at a time of overcapacity of tonnage in most markets. The long-hoped for improvement in 2016 is now put off until 2017, or.... Unhappy news, but most of us in the maritime industry for the long-term have lived through this before and will again. All we can do is to play the cards we have been dealt to the best of our ability and just “keep on keepin’ on”.

Global prices, demand and trade in bulk commodities plummeted in 2015 due to lower demand, primarily from China. China is not only the world’s second largest economy, but the world’s biggest industrial importer. As cargoes declined, so did freight revenues and earnings. On Christmas Day, the Baltic Dry Index was 478, only 7 points above the low of 471 the week before, and is expected to set new lows in 2016. In 2015, many bulker, offshore supply and even some tug owners found themselves fighting for market share by trading at or below operating expenses. Some owners, even while enjoying a break in bunker & lube oil prices, are trimming costs further to the bone and deferring maintenance & repair – something that they can get away with for only for a limited time before it catches up with them. All I can say is you do what you have to do to survive.

Crude oil on 28th December traded at US$ 36.36/bbl (WTI) after hitting a low of US$ 34.55 the week before – numbers not seen since February 2009. The year before, Brent and U.S. crude traded at around US$ 60/bbl, and during early summer 2014, above US$ 100/bbl. This is the second straight year of double-digit declines in the price of oil. Although projections for 2016 crude oil prices range from US$ 20/bbl to US$ 100/bbl, it is likely prices will remain near their current lows. Whether crude oil prices are US$ 20, US$ 40 or US$ 50/bbl in the mid-term, they will not remain at that level in the long-term. According to the IEA, the global oil market is expected to rebalance at around US$ 80/bbl by 2020; however the current risk of further conflict in the Middle East could cause oil and gold prices to rise earlier.

Looking at the offshore markets – the oil patch is a year into this latest downturn after Saudi Arabia unilaterally decided to keep the oil spigot open while everyone else also kept drilling and pumping. Obviously this created a supply there was no demand for. International and U.S. upstream oil companies ended up writing down $38 billion in assets in the third quarter of 2015 alone, the largest for any quarter since at least 2008 for the 46 representative companies tracked by the U.S. Energy Information Administration. The low oil prices continue to have a significant effect on the value of companies' assets and future prospects as well as on current revenue – and this effect cascades, not trickles, downhill to the OSV market. Much OSV tonnage is idle and tied up by owners or creditors to the docks or at anchor. 2015 was a difficult year for owners & operators and hard times are expected to continue into 2018.

The first beneficiary of a rebound in oil prices will be land-based drilling and shale oil projects, adding to the supply and if an offsetting increase in demand is not there, there will be a downward push on prices (again). Because of this, it takes time for there to be enough money for offshore projects to resume. Then once the offshore drilling market improves, it will take more time for the oversupply of OSVs to be absorbed.

This is not the first “boom & bust” cycle we have gone through, but they now seem to take longer to hit the bottom and even longer to fully recover than in the past. It does not mean that there is not a light at the end of the tunnel, but just that the tunnel is a lot longer. Not all of today’s companies will be around to enjoy that light. As in previous cycles, there will be winners and losers. As in the 1980s, the first trick is to tighten belts and concentrate on core strengths in order to survive for however long it may take. The second trick is to not only ride out the storm, but get positioned for the market post-recovery. There will be opportunities and bargains to be had in the coming years.

Marcon ended 2015 with 26 sales and 4 charters / tows fixed over the last 364 days. Seven 5,000HP+ tugs and AHTSs continue on previously committed long-term charters in the U.S., Latin America and Southeast Asia. This is admittedly down from our average of over 40 sales & charters per year since we opened our doors in 1981, and below the boom-time years of 2005 - 2010, but revenues have been steadily increasing the last three years. Regardless of whatever forecasts are made for 2016, we are going to strive to continue this upward trend. Marcon’s fourth quarter 2015 was hectic as we concluded nine sales in the last 45 days of the year – with a 250’ x 72’ x 16’, 5,250dwt ocean deck barge closing Christmas Eve. Several additional sales are pending. Prospects for Q1 2016 look very positive, but after that, who knows what may be lurking around the next corner.

If my magic crystal ball were truly crystal clear and infallible I would not be sitting at my desk on New Year’s Eve. I guess I will just have to live like everyone else taking each day at a time, hoping for a slight peek into the future. The end of each year, thousands of headlines across the world are written with one or two word descriptions for whichever year is next on the calendar. The headline for this newsletter is just “2016” - I will let you come up with your own adjectives.

It will be interesting to see how adjectives selected today stand up to the reality of chaos this same time next year.