Solid demand picture in a stabilized market but a tsunami of ships are expected to be launched in 2010
2009 saw China being the one and only driver that mattered in relation to demand for dry bulk tonnage. Iron ore imports grew by an amazing 42% as they went up from 443 million tonnes to 628 million tonnes. The huge demand for energy and low coal prices caused Asian coal import to go up by 10%, driven by India and China. But this could not prevent overall volume of seaborne dry bulk trade from a contraction of 4% in 2009, according to Clarksons.
Looking forward towards 2010, the demand picture should broaden with world trade back on growth path. Nevertheless, freight rates have flatlined, with a downward tendency since December 2009 – but owners are still earning decent rates. It is a bit worrying that the sliding of rates comes at a time when global port congestion is at a record high. As port congestion lowers the supply of tonnage in the market, which means improved rates. But it seems as if congestion in today’s oversupplied markets are merely preventing the earnings from dropping at a faster pace. Despite growing demand, this suggests that downside risk could be doubled in 2010 when you also take both the congestion and the scheduled order-book for delivery into consideration.
More and larger contracts of affreightment (CoA) are being placed at quality shipping companies than before the crisis. This suggests that financially strong counterparts are more likely to team up in dire markets than in red hot markets.
The fleet grew by 9.9% in 2009, caused by deliveries of 42.5 million DWT of newbuildings and delivered converted tankers of 10 million DWT, offset by just 10 million DWT being demolished.
Delivery of the order book was 40% behind schedule in 2009. 71.3 million DWT should have been delivered but only 42.5 million DWT were launched. The total order-book stays huge, as cancellations have more than been counterbalanced by new orders. A total of 201 vessels comprising 21.3 million DWT were surprisingly contracted during 2009, of which 52 were Capesize and 50 Handysize vessels. The order-book to active fleet ratio for Capesize is now up to 82.3% and 34.8% for Handysize. Capesize fleet could be as much as 30% in 2010 alone.
Scheduled deliveries of 100+ million DWT in 2010 is not going to happen, but nevertheless influx of newbuild tonnage will be massive. The green field and newly established yards, which take 5% and 25% of orders for dry bulk vessels respectively, seem to face the highest risk of order cancellation due to shipyards’ eventual delivery default. This could mean down payments will return to owners due to yards’ delivery default.
The main part of demand growth is expected to come from developing economies, while demand from advanced economies is expected to stay fragile during 2010. China is expected to remain the main engine supplemented by firm support from India and Indonesia.
The housing market and huge infrastructure projects have been primary beneficiaries of the Chinese Government’s stimulus package. With the construction sector being the number one steel user, consuming around 50% of Chinese steel, it goes without saying that a continuance of the strength in this sector is vital for the health of the dry bulk freight rates.
Overall, dry cargo volumes are forecasted to grow by 5%, with the strongest growth to be seen in iron ore and steel products.
Freight rates are forecast by MSI to slide downwards from current levels over the next 6 months. Capesize rates are forecasted to go down to around USD 30,000 per day and the smaller vessel types down to USD 17-20,000 per day, primarily caused by supply-side pressure.
Last year, Indian breakers demolished close to 400 vessels of a combined 9 million DWT. This produced speculation that the Indian ship recycling industry was about to work close to its capacity limit, as the previous record of demolished tonnage was getting close with a reading of 11 million DWT back in 2002. But industry sources deny these rumours, talking about at least some 15-20% extra available dismantling capacity.
A BIMCO analysis from December 2009 found that dry bulk owners had been able to negotiate deferrals of a lot of ships for delivery. One out of six vessels had been postponed during the previous three months. Whether this also means that we will see a smaller amount of tonnage being delivered remains to be seen.
Every deferral of delivery is a result of intense and protracted negotiations between parties with mutual survival interests – yards needing cash in the short term and employment in the long term and owners on their part trying to balance their need for capacity against sour markets and financial challenges.
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