Future looks bright for resurgent dry bulk sector

A panel of dry bulk experts at the TradeWinds Charterers’ Forum in Singapore agreed that the future of the sector looks good — provided market players continue to show restraint on the ordering front and more owners send older bulkers to the scrapheap

Seaborne dry bulk trade reached record highs in the third quarter of this year, which means owners of bulkers should be coining it right now. But while rates have improved significantly since they hit rock-bottom in 2012, they are still far from fantastic.

The fundamental reason for this is the imbalance between supply and demand caused, for the most part, by the vast volume of bulkers delivered between 2009 and the beginning of this year. Since then, the number has tapered off, allowing demand to finally begin catching up with supply.

Simpson Spence & Young (SSY) executive director Yahya Karahasan attributed the recent spike in bulker earnings to the continued growth in the dry bulk trade, combined with the low number of newbuilding deliveries in the third quarter of this year — a 40% drop year on year and the lowest since 2009.

According to Karahasan, the growth of the dry bulk fleet so far this year has been modest. The capesize fleet has grown by 12.8 million dwt (4.6%), the panamax fleet has risen by 14.3 million dwt (8.7%), the handymax fleet has increased by 6.2 million dwt (4.2%) and the handysize fleet has shrunk by 0.4 million dwt (0.5%).

“Net fleet growth is set to slow further in 2014 as annual newbuilding deliveries fall to a five-year low, offering the prospect of improved fleet utilisation,” said Karahasan.

Figures quoted by Chih Chwen Heng, a senior analyst at ACM Shipping, show that things are looking decidedly bright on the demand side too. China’s appetite for iron ore continues unabated.

Iron ore, Chih says, accounts for 31% of global dry bulk demand and China is responsible for 65% of all iron ore imports. In 2013, they are expected to have grown by 13%, to nearly 850 million metric tonnes, and should top the one-billion mark by 2015.

Similarly, global demand for coal, driven by both China and India, is also expected to increase by 9% this year to just over 1.3 billion metric tonnes, and it is predicted to grow by a further 12% in 2014 and 11% in 2015. Coal accounts for 30% of dry bulk demand, Chih claims.

At first glance, these combined supply-and-demand figures suggest dry bulk is steadily sailing out of the doldrums it has been wallowing in for several years, but, as forum panellists pointed out, it is not all plain sailing just yet.

Karahasan encourages more scrapping. He says total removals from the bulker fleet in the third quarter of this year slipped below the five-million-dwt mark for the first time since the fourth quarter of 2011 — and is down 34% year on year.

“The impact of slower newbuilding deliveries on net fleet growth has been blunted by the fall in demolition activity,” he said.

“This trend started before the spike in dry bulk, caused by the rise in vessel values and the improved outlook in the minds of shipowners.”

Karahasan points out that there remains a large number of potential demolition candidates in the dry bulk fleet. There are 116 capesize bulkers and 261 panamaxes that are older than 20 years. The sooner they go, the better — although Karahasan admits firmer trends in the secondhand market may reduce incentives for owners to scrap.

Also of key importance is the continued restraint on the ordering front. Non-delivery rates have been running at high levels in recent years, but improved market conditions could add incentives to deliver for both yards and owners.

R Raghunath, head of chartering at Noble Chartering, says the unknown number of option vessels attached to firm orders that have already been placed could also boost the amount of newbuildings if owners decide to declare them.

Yet another unknown variable is the impact of freight rates on slow steaming.

Brian Nixon, managing director of Lavinia Bulk, warns that slow steaming has reduced the capacity of the dry bulk fleet by around 11%, but if rates reach a level where it makes commercial sense to speed up, this capacity could come flooding back into the market.

Despite all these potential problems, there was a bullish consensus at the forum. Peter Borup, president of Lauritzen Bulkers, perhaps summed up the prevailing attitude by saying demand looks good, supply is reasonably healthy and, provided there is not another ordering binge, dry bulk shipping can look forward to better days ahead.

The above article by Jonathan Boonzaier appeared in TradeWinds on November 15th.