Dry Bulk Shipping - After all-time low Baltic Dry Index (BDI), stronger volumes in Q2 are likely to support the freight market

Overview

How bad can a market be? Extremely bad if you look at the dry bulk shipping market since early December 2014.
Demand:
How bad can a market be? Extremely bad if you look at the dry bulk shipping market since early December 2014. The fourth quarter of 2014 was hugely disappointing, ending in complete despair, with Capesize rates diving below USD 5,000 per day in mid-December. On 18 February, the BDI hit an all-time low of 509; Supramax freight rates were the only ones above USD 5,000 at USD 5,002 per day .

The development of the dry bulk market is closely tied with that of China’s appetite for commodities; this goes for the good times in the past as well as the current challenging times. Despite the fact that GDP growth is still running high in China at 7.4%, the need for imported commodities was somewhat weak last year. Iron ore imports were a strong support once again, growing by 112.6 million tons (13.7%) helped along by a large drop in price, but coal was a devastating story in spite of a drop in prices too. Thermal coal imports were down from 192 million tons in 2013 to 165.5 million in 2014, with the trend likely to continue if hydropower generation hits another strong year. Moreover, the new Chinese import regulations on coal quality (sulphur and ash content) contributed further to the decline in imports in January when total volumes (including coking coal and lignite) were at their lowest monthly level since May 2011 according to SSY.

Despite Chinese steel production surging to a new all-time high of 822.7 million tons in 2014 (+0.9%), coking coal imports were down by 14.6 million tons to 60.8 million tons in 2014 (-31.6%). With falling domestic demand for steel, tax rebates assisted a surge in exports to neighbouring Asian customers. 2015 could see these rebates changed or removed, which would in turn reduce the incentive for steel mills to keep up production.

US coal exports were also a sad story in 2014 as their biggest export market, Europe, lowered its demand throughout the year. The US is primarily a coking coal exporter, but export demand is driven by price on the global market. As the US is the most distant of all exporters, high prices and tight supply are needed to keep up volumes; neither was present in 2014. Thermal coal exports dropped by 34% to 28.9 million tons.

According to Tradeviews.net, cement trade was one of the best performers last year with a growth rate of 10%, reaching approximately 179 million tons. Imports into South Korea were likewise strong, growing by 7% to reach 275 million tons.

Supply:
Demolition of dry bulk tonnage was relatively modest for a long time when considering the fundamental conditions of the freight market. However, recent extremely poor freight markets have stirred it up. At the end of February, 68 ships with a combined capacity of 5 million DWT had been demolished since the turn of year, out of which half were of Capesize capacity with an average age of 21 years. This compares to the 27 years average age of the Handysizes going for recycling. The tough trades of the Capesizes cut their commercial life shorter than that of Handysizes. The extremely low earnings has pushed more ships out of the market.

The youngest ships being recycled overall were a pair of Panamaxes built in 1998, followed by five Capesizes built in 1996. At the other end of the scale, 20 Handysizes built between 1980 and 1985 were recycled. 

During the first two months of 2015, 11 million DWT of new dry bulk capacity were delivered into the active fleet. As BIMCO expected, we have seen the majority being newbuilt Supramaxes whereas the delivery pace of Panamax is now coming slightly down. 54 Handymaxes/Supramaxes have already been delivered by the end of February. This compares to 199 for the full year of 2014 [40,000-67,000 DWT]. 

In the Panamax segment, just 22 ships have been delivered by end-February, as compared to 160 ships (4.6% in annual fleet growth) for the full year of 2014 [67,000-100,000 DWT]. For 2015 as a whole, Panamax deliveries are estimated to go as high as 150 ships (3.3% in annual fleet growth).

The troubles in the freight markets have for once also been seen in the order book where interest for new contracts has been subdued. The overall order book dropped to 158.2 million DWT from 168.6 three months ago. 

It remains an imperative for a sustainable freight market recovery that new contracts remain scarce for an extended amount of time. Fortunately, the newbuilding prices offered by the shipyards are still 10-15% above the lowest of 2012-2013 and are not seen as very attractive.

Outlook:
India was the beam of sunlight in an otherwise dark coal market in 2014. Going forward more support could come from India.

In China, the question that has been unanswered for a long time is will the lower and lower international iron ore price (-47% in 2014 and still falling some 15% in 2015) favour imports and eventually lead to large-scale shutdown of inefficient low-quality Chinese iron ore mines? The jury is still out on that one. 

Facts are as follows: in 2014, the amount of domestically mined iron ore was up by 4.3% while the iron ore quality of the same went down from an estimated Fe-content of 21% in 2013 to 17% in 2014. Meanwhile iron ore imports with a Fe-content of 62% went up by 13.7% in 2014 from a year earlier.

Will it become reality or remain a dream – and to what effect will it matter to the Capesize market? Australian exporters won the battle in 2014, much to the regret of the freight market. BIMCO expects that they will not let go of the lead, at the expense of long-haul shipping demand from Brazil. All mining majors have expansion plans in place for 2015 and 2016, and yet another Aussie, the new Roy Hill iron ore mine, will join them towards the end of 2015. The site is set for 55 million tonnes a year once fully operational.

Q2 is the peak season for South American exports of soya. Volumes will go higher to the primary benefit of Panamax and Supramax; whether freight rates will follow suit remains to be seen, as too many ships being in position for the season will cap the upside, just as we saw last year. For the Capesizes to find support, the seasonality must kick in here too. Iron ore exports from both Australia and Brazil are expected to increase as we move further into the year. Overall, iron ore volumes are expected to be higher for the full year, though not as strong as in 2014 where several factors moved in a positive direction.

Russian wheat exports are on course to beat last season’s volume. However, exports from July to January have been strong enough to have already eclipsed last year’s total, so it seems that more troubles lie ahead for the already reeling Black Sea market as Russian export restrictions kick in. 

To sum up, our forecast for March/May: BIMCO assesses that the Capesize time charter (T/C) average rates will be in the range of USD 3,000-9,000 per day. Panamax T/C average rates will stay around USD 5,000-9,000 per day. For the Supramax segment, BIMCO forecasts freight rates in the range of USD 6,000-9,000 per day, whereas Handysize freight rates are expected around USD 5,000-7,500 per day.
in Copenhagen, DK
 

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