Dry Bulk Shipping - 2011 got off to a rough start – a portent of what could be in sight for the remainder of the year


Since the latest peak in Baltic Dry Index (BDI) on 10 September at 2,995 – dry bulk earnings have known only one way – and that is down. At the end of January.


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Since the latest peak in Baltic Dry Index (BDI) on 10 September at 2,995 – dry bulk earnings have known only one way – and that is down. At the end of January the BDI stood at 1,107 with the largest segment, Capesize, feeling most of the pain; a 63% drop in index value. The depressed rate environment in general and in particular in the Capesize segment is not likely to go away any time soon. During most of 2010, Capesize rates have defied gravity on the back of strong demand for particularly coal and also for iron ore. Average time charter rates of USD 33,298 per day in 2010 were a positive surprise to what was expected to be a hardship year. The strong demand positively affected the market and significantly reduced the downside effects stemming from the heavy inflow of new tonnage into the market. In 2010 the Capesize fleet grew by 202 vessels of 38 million DWT (+22.4%) and the forecast for 2011 is an equally challenging supply side growth.

Dry bulk demand in 2010 was strong across the board, with demand for major and minor bulks growing by 10% according to Clarksons. Demand was particularly strong for iron ore where the advanced economies returned to the market to supplement the stand-still growth from China. Moreover, 2010 was a strong year for coal demand and 2011 is also set to provide very solid demand growth figures. Iron ore and coal are basically the only two commodities that are shipped on Capesize vessels. A large amount of vessels continue to be chartered to haul iron ore to China, but the firm volumes are not enough to fully stem the ongoing decline in Capesize rates.

Right now the bad news is outweighing the good news by a landslide margin, affecting freight rates negatively. The Australian flood has attracted much attention as it has impacted coal exports (particularly coking coal) out of Queensland as well as grain trades. Lower volumes of both commodities are being shipped. This has shifted the tight balance in the market into oversupply of tonnage.

As an extreme example of too many ships and trades being increasingly front-haul biased from the Atlantic into the Pacific came as the C11 back-haul route slipped into negative territory. On 13 January, the Baltic Exchange Capesize Route C11 from China/Japan to Europe was estimated at minus USD 229 per day. Since then the rates have worsened even further. At those rates, far below break-even OPEX-levels, owners are literally paying charterers to carry their goods in order to reposition the vessel at the lowest possible expense.

Meanwhile, the smaller segments are kept afloat on the back of the multiple commodities transported in those vessels alongside strong demand for grain shipments from the US Gulf. This is helping to ease some of the negative sentiment in the market deriving from the weather-related problems in Australia, Colombia, South Africa, and Indonesia.

One way for the industry to ease the way to a recovery in freight rates is by demolition of large amounts of old tonnage. So far in 2011, as much as 1.5 million DWT of an average age of 32 years has been reported ready for breaking. In the course of 2010 just 5.7 million DWT was demolished, as the freight rate level did not encourage demolition of tonnage. Despite low freight rates and high scrap prices, BIMCO expect that 2011 will only see 12 million DWT sold for scrap. Currently, 24 million DWT is 30 years of age or older.

As the World’s number one demolition location, Bangladesh, remains closed for business, India, China and Pakistan offer prices close to USD 500 per ldt. These price levels have not been around since the tight demolition markets in mid-2008 before the financial crisis.

The active fleet has grown by 1.1% so far in 2011, caused by deliveries of 7.6 million DWT in the form of 85 new built vessels offset by considerable 1.5 million DWT being demolished.

BIMCO forecasts inflow of new dry bulk tonnage in 2011 to reach 83 million DWT, offset by demolition of 12 million DWT. This will make the fleet grow by 13.3% in 2011.

Already in January deliveries in the Capesize segment amounted to 22 ships comprising 4.1 million new DWT.

Last year Vale converted 9 single-hulled VLCC’s into very large ore carriers. In total, 13 million DWT of converted tankers has entered the dry bulk fleet during the past two years. Only a significant amount of converted DWT is expected to enter the fleet in 2011.

The last time freight rates were as low as the present levels the dry bulk sector was still struggling in the early shadows of the financial crisis, but the sector was then on a firm course away from the abyss. A vanishing of demand was then the “root cause”, leaving no firm ground for freight rates to rely upon. This time around, demand is strong as indicated by rising commodity prices, so you should not expect rates to dig equally deep; supply is the “root cause”, making the recovery longer and the current doldrums trickier to escape. The global stimulus packages indirectly helped the steel industry. But many Western countries are still below pre-recession levels. This may support demand for iron ore shipments.

Low hanging fruit like laying up of vessels, large scale demolition of tonnage and continued postponements of newbuild deliveries is amongst the first cures to be prescribed for the decease know as massive oversupply. The container segment experienced severe overcapacity as a result of the crisis – and dealt with it by laying up tonnage and extensive slow steaming. Since dry bulk vessels are “slow boats” as compared to the container “speed boats”, slow steaming is not expected to be applied.

BIMCO assesses that freight rates for Capesize vessels are likely to remain depressed in the coming months, with supply-side pressure being the dominant factor in the fundamental supply-demand equation.

For the smaller ships, modest increases in earnings might be seen in the second and third quarters, boosted by demand for Australian, US and South American grains.

At the end of the day such low freight rates spell out disaster for ship owners – in particular the ones trading in the spot markets or on long-term charters on a floating rate linked to the BDI. And when rates are low, even more vessels play the spot markets as they don’t want to enter into long-term deals on such low levels. Brokers are reporting that some owners are refusing charters at current rates in a move to improve the situation.

With regard to asset prices coming down substantially with the BDI, banks may consider their portfolios as they face a bigger and unwanted exposure. Until recently firm asset prices made banks comfortable – but current developments could re-ignite financial issues as a major concern to the shipping industry. Judged by banks’ behaviour throughout the current crisis, it appears that they have learned a lesson from previous market downturns i.e. that the shipping industry is a cash-flow business and not an equity market. We can only hope the banks continue to be sensible and make debt servicing arrangements with their customers that are realistic and manageable.

As always, should freight rates remain depressed for a prolonged period of time at a level below operating cost, some will fight for survival and only the fittest will make it.
But this is not the first nor the last time that supply and demand is unbalanced. The shipping industry is cyclical, and continued growth in trade and restraint in the ordering of new tonnage will be important elements on the road back to a balanced market.

in Copenhagen, DK


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