This year has seen the Baltic Dry Index increase from record lows in February to its highest level in more than two years in November.
Although considerable uncertainty persists in the dry bulk shipping market, several analysts believe the recovery can continue in 2017.
Relatively speaking, 2016 looks as if it will go down as a good year for the dry bulk shipping sector. The Baltic Dry Index (BDI), which is a measure of activity and freight rates for moving commodities (raw materials) by sea, had by mid-November risen more than four times on its record low in February. Indeed the 1,257 points was the highest level achieved by the BDI in more than two years, and came after a first half-year performance when the BDI was about 30% lower than in the corresponding period of 2015.
While there is optimism that 2017 will see the BDI post further gains, it needs to be noted that the index remains well below levels scored in 2014, and that second-hand prices for most bulk carriers have fallen sharply.
Moreover, the outlook for the global economy and for key dry bulk commodities, such as iron ore and coal, remains uncertain. In addition, significant levels of over-tonnaging prevail.
The recent recovery has taken place on the back of:
China has been a key factor in the recovery. Although the nation’s economic output continues to slow and its reliance on exporting manufactured goods falls, its consumption of raw materials remains highly significant.
Consequently, the decision by several of China’s largest steel makers to boost their stocks of iron ore as well as replace lower quality domestic supplies with higher quality material from overseas markets had a positive impact on the shipping sector. In particular, shipments of the red ore into China from Australia, South Africa and Brazil rose, and the demand for Capesize vessels picked up.
In November, daily earnings of Capesize vessels had reached US$20,000 a day, up over 80% on the situation just one month previously, with Panamax-class tonnage joining the rally and owners enjoying a more than 50% boost in daily charter rates.
“It has been a very poor market for too long,” said Nicolai Hansteen, head of corporate development at the Danish-based broker Lorentzen & Stemoco. “There are various factors saying it’s recovering, and all are related to China. Beijing’s infrastructure spending, aimed at providing short-term stimulus while the economy is becoming more services-oriented, has resulted in resilient Chinese demand for raw materials this year.”
According to data presented by Lorentzen & Stemoco, the Chinese Government’s stimulus package has totalled RMB5T (US$726B). This level of spending has helped raise the price of steel by more than 70%, with Hansteen arguing that this has allowed China to keep output of steel from its mills high despite the moves being made to “curb overcapacity and to achieve overall consolidation in the industry”.
He expects China’s iron ore imports to increase 8.9% this year and to reach a record 1.38 Bt. Hansteen also pointed to the surge in coal imports, which he said had risen by 18.5% to 201.9M t in the first 10 months of 2016. He
claimed that this was largely attributable to the Chinese Government’s programme of controlling domestic output from its coal mines, in an attempt to cut pollution.
On the demand side, this year’s peak shipping season also appears exceptionally strong. The movement of coal to northern hemisphere countries for power generation and raw materials for manufacturing always picks up at this
time of year, as output from local mines tends to decrease. This year, there is also evidence of more restocking and inventory build-ups taking place as prices for key commodities, which have fallen repeatedly over the past two
years, have started to rise and considerable uncertainty exists over their future direction.
While acknowledging the strong rise in coal imports to China, Bimco’s senior shipping analyst, Peter Sand, believes the impact on the dry bulk sector has been somewhat limited, owing to the proximity of the country’s main suppliers, notably Australia and Indonesia, and, therefore, an overall reduction in tonne-miles and rates.
“The US and South Africa were traditionally big exporters of coal to China, but since 2014 a change in the trade has emerged, whereby China has singled out its key distributors and focused increasingly on them,” said Sand.
According to Bimco, China increased its coal imports in the third quarter of 2016 to its highest quarterly level since the April-June period in 2014, with almost 60 Mt of mainly thermal coal shipped.
Indonesia has taken the lion’s share, absorbing 80% of the additional seaborne volumes in the third quarter, mainly due to a 29% increase in lignite exports versus a year earlier, according to Bimco.
“As the top exporters in 2016 are geographically closer to China, the increase in sheer cargo volumes does not benefit the dry bulk shipping demand to the same extent,” said Sand. Bimco also believes the effect on Capesize vessels’ earnings from the increase in iron ore shipments to China has been muted. This is a consequence of a significant portion of the country’s iron ore imports being transported on what the group referred to as “Vale’s conveyor belt of Chinese-owned VLOCs”.
A group analyst said: “If this continues to remove cargoes from the open market, volume growth on the Brazil to China iron ore trade, which was once the greatest driver of freight rates in the spot market, will no longer affect the
spot market on this trade or the general freight market significantly.”
In the smaller size ranges, rates for chartering Handymax and Supramax tonnage have proved resilient. Grain exports out of both US Gulf coast and east coast South America ports have driven the market this year, but with steel, scrap metal and mineral ores also contributing.
“Handymax ships have fared well due to the broadbased growth in cargo demand outside of the iron ore sector,” said Bimco. “The fast-growing Handymax fleet, however, will also, going forward, put a lid on shipowners’ and operators’ chances of lifting freight rates into really profitable levels.”
Critical to a longer-term improvement in performance levels, according to most analysts, is better control over the supply of tonnage. And there is hope. Owners are not building as many new ships, with the order book-to-fleet ratio
at a 13-year low, according to Bimco. Nonetheless, a considerable order book exists, with approximately 1,100 ships aggregating almost 100 Mt contracted, and with 993 vessels and 78 Mt of capacity due for delivery by the end of
The sale of ships to breakers’ yards is also rising, and it is imperative that this continues.
Bimco’s Sand explained: “The dry bulk industry is faced with the lowest earnings ever, and overcapacity is the main problem and demolition the silver bullet. Difficult as it is to part with your ship, it’s what the industry needs the most.”
He added: “Forget about the order book-to-fleet ratio being at a 13-year low, that ratio is irrelevant. What matters is that the fleet will not stop growing unless an equal amount of capacity is demolished at the same time.”
The Bimco analyst estimated that by early August 23M dwt had been sold for scrap and that this had cut overall fleet growth for the year (compared with the same period in 2015) to just 1.1%.
In his presentation at the Eighth City of London Biennial Meeting held at the IMO in London, Hansteen also alluded to the sharp rise in the sale of ships for demolition and to the decisions of several owners to cancel and/or reschedule the delivery of new ships as contributing to the slowdown in the growth of the dry bulker fleet. He projected that growth this year would be 2%, and in 2017 just 0.7%. This compares with growth of 3% in 2015 and about 8% a year in the previous three years.
The latest Dry Bulk Forecaster report published by London-based Drewry Maritime Research also supports a closing of the gap between supply and demand and optimistically projects a doubling in daily charter rates for Capesize ships over the next five years.
“Dry bulk shipping has bottomed out, and a market recovery is underway, albeit a slow one,” said Rahul Sharan, Drewry’s lead analyst for dry bulk shipping.
In particular, the Drewry research team pointed to the impending additional cost of installing ballast water treatment systems in ships as forcing owners to scrap even younger vessels, and to a scarcity of private equity with investors shying away from the dry bulk market, thus limiting the size of the order book.
Sharan also expects demand to pick up. “Brazil’s increasing share of Chinese iron ore imports drives higher tonne-mile demand,” he said. “Even if the Chinese iron ore trade does not rise as anticipated, a shift of sourcing towards Brazil will mean that the demand for ships will increase many-fold.”
The consultancy group also pointed to an envisaged rise in coal shipments. “Asian countries, including Vietnam, South Korea and Taiwan, are expected to ramp up coal imports as they open more coal-powered generating plants to support their growing demand for energy, and this will mean the demand for coal will increase over the next five years,” said Drewry.
Despite the overall optimism, there are immense challenges. Across all shipping sectors, there are growing fears that a lurch towards trade protection measures by several administrations will affect market sentiment and cargo flows.
In a recent report published by Greece-based Allied Shipbrokers, George Lazaridis, head of market research and asset valuations, said that markets had been affected “in part by worries over the outcome of the US elections and a trend by countries to adopt more inward-focused economic policies”.
But he also saw opportunities. “Just one day after the [US election] results came out, we started to see a very different picture emerge in the markets. Trade in most bulk commodities was instantly boosted, with freight rates in both the dry bulk and tanker markets for the majority of size groups shooting up considerably.
“At the same time, commodity prices were in for a major rally, with the most prominent being that of coal, which even managed to peak at some point above US$100 per tonne. While things have quietened down considerably on all fronts since then, Donald Trump’s infrastructure spending proposals will need to be adequately fed by the import of bulk commodities, such as steel, cement and other vital commodities used in construction.”
However, there are fears that the second half of 2016 was a period of transition, as manufacturers and power generation companies addressed lower than normal stock levels and also purchased additional quantities of cargo, owing to uncertainties over price.
There are also concerns that China will revert to using more locally mined coal and iron ore supplies next year, and that this will soften the country’s demand for imports. In addition, China continues to develop its renewable energy programme, and this will result in a longer-term decline in the demand for both Capesize and Panamax tonnage in the Pacific basin.
While all sectors of the bulk shipping fleet are expected to register an improvement in their earnings prospects next year, trading is expected to remain uncertain and volatile,