Flooding and gravity hits Capesize earnings

Overview

The current weakness in the Capesize segment will not go away any time soon. Capesize rates have defied gravity on the back of strong demand for particularly coal

The current weakness in the Capesize segment will not go away any time soon. Capesize rates have defied gravity on the back of strong demand for particularly coal but also for iron ore during 2010. This has neutralized some of the downside effects from the heavy inflow of new tonnage into the market. Last year alone, the Capesize fleet grew in number by 200 and tonnage-wise by 22%, and the forecast for this year is an equally challenging supply side growth. With dry bulk demand in 2011 expected to be a little less strong than in 2010, the freight rate outlook for the Capesize segment is a bit bleak. Twenty new Capesize vessels have already joined the fleet in 2011 and with ongoing weather related disruptions not only in Australia – volumes and shipments will be too few to support a significant rate rebound over the coming months.

Currently, some 110 Capesize vessels sit outside the Australian east coast – normally something that would be healthy for freight rates as actual supply is reduced. But this time around it merely spells out the trouble and indicates what’s in sight for the large vessels in 2011. Orderings of new Capesize vessels have come relatively down as only 31% of all dry bulk orderings were Capesizes last year. This compares to a relative portion of 50% in the year 2006-2009.

Since Capesize freight rates fell below USD 13,000 per day the daily negative change has slowed down and Capesize rates might rest within the interval of USD 7,000-13,000 per day in coming months.

As a clear illustration of how bad the situation for the Capesize vessels is, all of the smaller dry bulk segments currently obtain better freight rates than Capesizes. As per 24 January, Capesize average time charter rates were as low as USD 8,665 per day. Meanwhile Panamax earned USD 12,725 per day, Supramax USD 14,789 per day and Handysize USD 11,232 per day.

Even though selected back-haul routes have slipped into negative territory, the time charter averages have not gone that sour. In December 2008 when demand evaporated due to the letters-of-credit issues (and the overall crisis – of course) average T/C rates were as low as USD 2,316 per day. This time around demand is strong as indicated be rising commodity prices – so one should not expect rates to dig that deep.

At the end of the day, such low freight rates spell out disaster for ship owners, in particular the ones trading in the spot market. Ways out of this would probably be massive demolition of older tonnage, vessels being laid-up like back in the 80’es, postponements of newbuilt deliveries to an even larger extend than what we saw in 2010 and hesitation about signing new contracts for vessels.

BIMCO - Shipping Analyst: Peter Sand PS@BIMCO.ORG

in Copenhagen, DK
 

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