Dry Bulk Shipping - last year was a good year for demand, and supply growth is falling

Overview

The record-high Chinese imports towards the end of 2012 ensured that quantities of Chinese iron ore reached an all-time high of 744 million tons for the full year, according to Chinese customs data. Meanwhile, port inventories have been decreasing considerably since early September, suggesting that the demand should stay sturdy in the coming year.

The demand situation looks rather solid and underpins the optimism that also originates from a lower inflow of tonnage as the year progresses.

Demand:
The record-high Chinese imports towards the end of 2012 ensured that quantities of Chinese iron ore reached an all-time high of 744 million tons for the full year, according to Chinese customs data. Meanwhile, port inventories have been decreasing considerably since early September, suggesting that the demand should stay sturdy in the coming year. For 2013 BIMCO expects that the majority of the strong Chinese iron ore demand will benefit seaborne imports, as the preference for imported iron ore continues to be strong. In spite of a strong demand for this key commodity, earnings have been modest on the reference routes from Tubarão (Brazil) and Western Australia to Baoshan (China), reflecting an oversupply of Capesize vessels.

Similar to iron ore, Chinese coal imports (excluding lignite) were record-high in 2012, with 233 million tons throughout the year; up 28% year-over-year. According to Japanese trade statistics, Japan imported 185 million tons in 2012, up 5.7% year-over-year, following a stronger demand for thermal coal last year. Similar to China, Indian power demand has spurred a heavy demand for thermal coal and India is expected to overtake Japan as the second-largest thermal coal importer this year. The largest coal exporters in the world, Australia and Indonesia, are expected to become primary caterers for this demand. Eastern Australia experienced flooding in late January but fortunately this has only temporarily disrupted the coal transportation networks, which are set to operate normally by mid-February.

On the global scale, the United States department of Agriculture (USDA) expects wheat trade to drop by 8.5% in 2012/2013 (the season running from July to June) due to a drought affecting several countries. Worst off is Russia, whose projected wheat exports for season 2012/2013 have been cut by half from a year earlier. For coarse grains, global trade is expected to fall by 6.9% in 2012/2013 (season running from October to September), as US exports are expected to fall by 31% this year, which is partially offset by a heavy increase in Brazilian exports by 77%.

Supply:
2013 marks a new start in terms of a downward sloping trend. This stands in very positive opposition to the case of the previous four years with escalating deliveries. 2013 is likely to see 66 million DWT delivered, representing a significantly lower level than in 2012.

Deliveries in January of 8.1 million DWT represent a 7-month high, as the slow-down in deliveries during the second half of 2012 was significant. This is in line with our forecast of a “front-end loaded” year, where the strongest inflow is expected to take place during the first half year.

Throughout the whole of 2012, just 278 new contracts for dry bulkers were signed. This was the slowest contracting year since 2001, representing a much needed and very positive development. Owner’s hesitations were especially pronounced in the last four months of 2012. January, however, marks a new beginning, with a 12-months high level at 2.3 million DWT of fresh newbuilding orders. The tally is much impacted by the 8 Capesize orders at Chinese yards due for delivery in 2014 and 2015.

BIMCO expects demolition activity to remain strong in 2013 at 3.6% of total fleet. This is building on top of 2011 and 2012, which saw strong activity at 4.0% and 5.2% of the total dry bulk fleet being sold for demolition.

The total dry bulk order book currently stands at 130.8 million DWT, a level not seen since May 2007. 52.6 million DWT (661 in numbers) represents Panamax tonnage (60,000-120,000 DWT), whereas 44.5 (207 in numbers) represent Capesize tonnage (+176,000 DWT). 45% of January deliveries landed in the Panamax segment whereas 32% entered the Capesize fleet.

The combined sale and purchase activity (in numbers) in the three main shipping segments (dry bulk, tankers and containerships) were the highest on record since 2008 according to Vesselsvalue.com. But if you judge it by value, it was the lowest during the same period of time. Peaking in 2010 at USD 20 billion, the total sales value of 2012 was only USD 10 billion. The numbers are impacted by lower prices and a higher age of the traded assets.

A total of 836 sales were concluded, out of which 452 were in the dry bulk segment, at a value of USD 5.2 billion. The Panamax and Capesize segments saw the largest increase of activity from 2011 to 2012 at 106% and 103% respectively.

Outlook:
Following the scary dip in the strength of the Chinese steel market during third quarter 2012 – a dip that landed a huge blow to an already shaken shipping industry confidence – steel demand now appears to be back on track. Going forward, BIMCO expect Chinese iron ore demand to be amongst the strong demand drivers in 2013.

Global steel production reached 1,548 million tons last year – the highest figure ever. Asia increased its production by 2.6% compared to 2011, where China and India in particular accounted for the expansion. North American steel production increased by 2.5%, but the sheer size of their output is only one-eighth of Asia’s. The EU, producing slightly more than North America, cut back on its production of steel by 4.5%. Going forward, BIMCO expects that a bettering of the European Economy will normalise crude steel production, bringing it up to a higher level and thus also leading to higher demand for iron ore from Europe.

The demand for coal may be affected by the new Chinese five-year energy plan, which outlines a target of limiting the annual primary energy consumption to 4 billion tonnes of coal equivalent by 2015. The cap could turn out as a positive story for the dry bulk segment, as Chinese coal is of a lower quality than imported coal. If coal plants want to increase their power output for a capped amount of coal, their best option is to use the imported coal.

Even though we are seeing a pretty picture of demand, overcapacity in the market prevents freight rates from flying high. To sum up, our forecast for the coming 6 weeks: BIMCO holds the view that Capesize TC average rates are expected to stay elevated around USD 4,500-8,500 per day. Panamax is expected to be found in the USD 3,500-8,500 per day interval. For the Supramax segment, BIMCO forecasts freight rates to remain in the USD 6,000-9,500 per day interval, whereas Handysize rates are forecast to stay at the interval of USD 5,000-8,000 per day.

in Copenhagen, DK

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