What’s going on right now in dry bulk shipping?

Overview

Is it true that this is the first time dry bulk carriers have been taken out of the market since the start of the global recession in late 2008

Q1: Is it true that this is the first time dry bulk carriers have been taken out of the market since the start of the global recession in late 2008?

A1: There is always laid-up tonnage in every segment (bulk, tanker or container) even at high markets, but we differentiate between idle tonnage, hot (up to 3 months), warm (up to 12 months), cold (up to 5 years) or long-term (5 plus years) lay-up, depending on how fast these ships can be re-activated. Moreover, vessels are temporarily laid-up for repairs, scheduled dry-docking etc., or just waiting for the next fixture. However, it is a rare phenomenon that ships in the dry bulk sector are laid up for longer periods in large numbers. Recently you have seen lots of container ships being laid-up (as much as 500 vessels at the peak in 2009), and during the oil crisis during the 70s-80s you saw a lot of oil-tankers being laid up, some actually going as newbuildings straight from the shipyard into cold lay-up, and as much as 10% of the world tanker fleet at the peak in 1983. That year you also saw dry bulkers being laid up in record numbers but still just around 4% of dry bulk fleet. As per end of Q2 2010 – just 39 bulk carriers were laid-up. Owners normally prefer to re-position their vessels e.g. from the Pacific basin into the Atlantic basin in the hunt for the next fixture. When you lay up vessels for longer periods it takes time to reactive them, starting up the engines, and the vessel may need to go direct to dry dock before trading again depending on the extent of any hull marine growth.  Crewing is obviously also an issue, as the vessel manning has likely been reduced to below trading limit in agreement with Flag State, Classification, insurers and local authorities.

Q2.What are the factors behind this? How much new supply is coming on stream? What is the overcapacity right now? How much idle capacity do you foresee in the future?

A2: Two overall reasons: primarily – oversupply of tonnage; secondarily - slowdown in Chinese iron ore imports. In 2009 the dry bulk fleet grew by 10% and in 2010 the fleet is on target to grow by 15%. Much of this tonnage is Capesize vessels and Very Large Ore Carriers (VLOC) of 180,000-400,000 DWT (the largest ship sizes and those primarily engaged in hauling coal and iron ore into China). A new Capesize vessels is launched every second day – and even with dry bulk demand from US and Europe to supplement the demand from China the fundamental balance between supply and demand in the Capesize segment is currently “in favor of charterers” – as one might say. Capesize fleet has already grown by 10% this year and we are only in mid-July.

Estimating overcapacity is hard to do – but if you take the approach of utilization of the entire dry bulk fleet, this was close to 100 during the heydays of 2007 and 2008. At the midst of the crisis utilization of the dry bulk fleet went down to 85% resulting in rates below break-even. Since mid-2009, utilization rates have returned to a level above 90 – indicating a sustainable freight rate environment. This level has been maintained since then – but the arrow is now pointing south. And I guess it’s safe to conclude that the utilization rate for the Capesize segment is below 90% right now and has probably been down there the last month. I see a maintained firm low level of laid-up tonnage going forward, but talking about 500 ships lying idle as the container shipping industry did last year – I don’t see that happening. But I wouldn’t be surprised to see 50 Capesize vessels lying idle in 3 months time or so.

Q3. And what are the main factors behind the fall in demand for dry bulk carriers? Is it really a China story?

A3: The main factor is oversupply and in particular, the Capesize fleet. But the slowdown in China doesn’t make things better. China imported 47 million tonnes of iron ore in June – that was significantly lower than the first five month average of 2010 on 52 million tonnes iron ore. Going forward, the monthly imports of iron ore could stay anywhere between the low and the high 40’s – depending on new iron ore contract prices, steel prices and the temperature of the Chinese housing and construction market.

Look at it this way – rates have been healthy over the last year – at the same time we have seen China firing on all cylinders, making the dry bulk demand equal out the dry bulk supply. Now, that tight balance is getting heavy on the supply side, resulting in freight rates going down. Having said that, the ongoing tumble in BDI is tough for all market participants, in particular owners running a spot market business. Meanwhile, those companies running a more time-charter based business are more shielded against the huge volatility you see in particular the Capesize market unless they have chartered in vessels in a high market for longer periods.  In fact, operating owners are better shielded because they can select to lay-up ships.

Q4. How much have dry bulk rates fallen? And how much longer do you expect this to persist?

A4: BDI has been falling for 35 consecutive days – hitting 1,700 points just last week. Friday, however, saw first an upward tick ending this landslide as BDI gained 20 points to close at 1,720. The BDI is the composite index for all dry bulk segments (Capesize, Panamax, Supramax and Handysize). The BDI has fallen from 4,209 on 26 May down to 1,700 on 15 July, equal to 60%. The biggest decline has been in the Capesize segment where the average of the 4 time charter routes have dropped from USD/day 58,904 to USD/day 14,000, equal to a drop of 75%.  We are now down at freight rate levels where only debt-free vessels can break even. If you, on the other hand, are considering a newbuilt Capesize vessel with a 60% debt financing, you need to service capital costs – debt, interests and write-downs – on a scale equal to  a break-even level above USD/day 30,000 before you start getting some return on your investment. As I guess these figures makes it quite clear, these are painful times for many market participants.

The dry bulk freight rates have surprised on the upside during the last year – defying the gravity of a large inflow of new tonnage which was ordered during the boom years. I don’t expect markets to hit the lows of early 2009, but tramp shipping will always see significant market volatility. I do not expect to see the dry bulk market reaching USD/day 100,000 for Cape-size tonnage during the coming 2-3 years; however, the average rates of the market should be sufficient to keep owners going but nothing more than that. But as you say, it is difficult to predict, especially the future!!!!

Read more about this here: “Does the new foreign trade record from China support shipping demand?”

ContactPS@BIMCO.ORG 

in Copenhagen, DK

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