Last week we covered dry bulk carriers and used the Baltic Index to illustrate a dispassionate look at shipping rates.  We also shared anecdotal evidence that rates were near break-even for some sizes of ships (Capesize) and that the conditions had been partially caused/exacerbated by the lack of letters of credit, due to tight credit markets.  This was covered in the context of the metals supply chain, but we will step outside of that paradigm this week and explore the world of modern shipping.

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When we examine modern shipping, we note that transport ships are built in standard sizes, depending on their intended purpose.  The standard size hulls are generally referred to by DWT.  The unit of measure is DWT, which stands for DeadWeight Tonnes.

In 1720, the Builders Old Measurement Rule was adopted to establish the method to calculate this value.  The calculation involves the length and breadth of the vessel and not necessarily the actual volume of cargo that can be transported.  That system was superseded by the Moorsom System in 1854, which actually calculates the internal cargo space.  This value is important, as ships were assessed duties and paid harbor fees based on tonnage.

In practice, cargo capacity is defined by Deadweight Tons, which is the difference between the hull’s displacement while empty and its displacement while fully loaded.  Think of when you see a ship with the hull riding well above the painted water line versus a fully loaded ship which appears relatively low in the water and the painted water line is at/below the surface.

The following sizes are common categories:

Name DWT Notes
Small size 10,000 – 20,000 Refers to dry bulk, cargo, and clean tankers
Handy size 20,000 – 30,000 Refers to dry bulk, cargo, and clean tankers
Handymax 30,000 – 50,000 Refers to dry bulk, cargo, and clean tankers
Seawaymax 40,000 – 50,000 The largest size that can traverse the St. Lawrence Seaway
Panamax 50,000 – 80,000 The largest size that can traverse the Panama Canal.  Refers to dry and wet cargo vessels
Aframax 80,000 – 120,000 Tankers and the largest size defined by the Average Freight Rate Assessment (AFRA)
Suezmax 120,000 – 150,000 The largest size that can traverse the Suez Canal.  Most often refers to crude carriers
Malaccamax 300,000 The largest size that can traverse the Straights of Malacca
Capesize 150,000 – 400,000 Dry vessels large enough to traverse Cape Horn and the Cape of Good Hope
VLCC 150,000 – 320,000 VLCC Very Large Crude Carrier
ULCC 320,000 – 550,000 Ultra Large Crude Carrier

Ships are not only built in standard sizes, they are also built for a general purpose.  There are many special purpose vessels as well that we don’t have time to cover in this week’s letter, providing ample areas to explore at a later date.  General purpose vessels fit into a number of categories:

  • Container Ships – Standard size containers may be loaded anywhere and brought to the dockside loading area to be loaded onto a container ship.  Large cranes and forklifts simplify the loading/unloading of cargo, significantly reducing the amount of time spent in port to take-on or offload cargo.
  • Dry Bulk Carriers – These are the vessels referred to last week in the Baltic Index.  They primarily haul grains, ore, coal, etc.  They may also haul metal stock that is too heavy for containers, and where there aren’t readily available general-cargo ships to carry them.
  • Clean Tankers – These ships carry refined petroleum products, such as gasoline, distillates, diesel, and heating oil.
  • Crude Tankers – These ships carry unrefined crude oil to refining centers.
  • General-Cargo Ships – These ships aren’t common now in any size.  They are the vessels seen with cranes above hatches and were the default haulers of non-bulk cargoes before the advent of container ships.  Due to container ship load/unload times being significantly faster than cargo ships, the number of general purpose ships continues to drop.  These vessels may still be in use to haul dense loads such as steel or other metals that may not be shipped in containers, but that are insufficient to fill the hold of a dry bulk carrier.
  • LNG Tankers – These ships carry Liquefied Natural Gas from areas that have a surplus to LNG terminals (not a lot of these at this time).
  • Mixed Class – These ships are designed to carry either bulk cargoes or liquid cargoes.  They are not common, but allow vessel owners to choose to use their ships to carry the cargo type that provides the highest return.
  • Passenger Vessels – Passengers are a special type of cargo which requires accommodations and services not required by other cargoes.  There are passenger vessels that focus entirely on the “cruise” experience rather than transportation itself, as most travel is now accomplished by aircraft if it requires travel over water.
  • Reefers – These ships are special purpose vessels designed to carry frozen cargo.  They are being replaced by container ships that allow for refrigeration units on the containers to be plugged in while onboard ship.
  • Ro-Ro (Ride-on, Ride-off) – These are specialized cargo ships that transport autos, trucks and other motor vehicles.  Loading and unloading is simplified and quicker than other methods, utilizing a stern ramp.

Before we explore the intricacies of ship types and the opportunities they present to investors, we will examine the history of shipping to learn what we can of the cyclical nature of the shipping industry.