IT IS obvious next year will be a challenging one for dry bulk shipping markets as oversupply woes persist. The question on everyone’s mind is: what can owners do to stay afloat?
The Baltic Dry Index touched record lows several times in 2015. The persistent low freight rates have meant that many operators are only breaking even, or even running at a loss.
The dry bulk fleet has grown only marginally this year after many owners continue to cancel, convert and push back newbuilding deliveries while scrapping ships. But the key factor has been slowing demand in China. The world’s largest dry bulk trade nation by far is facing its weakest economic growth in a quarter of a century.
Amid the slowing demand and bloating vessel supply, Peter Sand, chief shipping analyst at BIMCO, predicts that about 40% of the dry bulk orderbook that was due to be delivered from December 2015 through to 2017 will be deferred by at least a year, while Amit Mehrotra, an analyst at Deutsche Bank in New York, speculates that scrapping could exceed the historical level of 6.3% across fleet segments seen in 1986.
The days of the China-driven commodity boom are largely behind us, with analysts echoing a bearish outlook across the board. A Danish Ship Finance report pointed out that this year witnessed the lowest demand growth since 1999, leaving aside the post financial crisis figure of 2009.
Led by a global economic slowdown, a change of leadership in China and a massive glut of residential housing stock in smaller third- and fourth-tier Chinese cities, global dry bulk commodity demand is now cooling.
Beijing has sought to stimulate its economy via a series of fiscal and monetary measures, but they are not expected to benefit shipping much. They are designed to allow China to focus on services and move away from heavy intensive industrial activity.
Therefore, the Chinese factor is to continue exerting downwards pressure across segments, with capesizes and panamaxes likely to be hit harder than smaller ships. Current woes are a result of the unprecedented ordering spree sparked by blind faith in Chinese dry bulk demand, and owners are reaping what they sowed.
Scrapping may provide the answer to redress the imbalance but demolition can only really take place if steel prices move up, making it economic, say some analysts. The age at which vessels are being demolished has moved to about 22 years from a historical 25 years or older. That may even fall to 15 years, according to Golden Ocean chief executive Herman Billung.
Capes and panamaxes distressed, again
According to analysis by Banchero Costa, 2016 will see a colossal amount of capesize capacity being delivered, about 75m dwt, barring any more cancellations or deferrals, leading to an overall fleet growth of 6%.
Some other analyses expect growth of just 0%-1% in 2016 if supply-side measures seen this year are taken again.
Added to that is slowing demand for iron ore and coal, especially from China.
According to Australia’s Department of Industry, Innovation and Science, China’s iron ore demand will grow 2.4% on average per year to 2020, much lower than earlier estimates, and compared with double digits in previous years.
“I’m still bearish for 2016, even if we have no orders and considerable scrapping, as we still have overcapacity,” says Nick Tobin, a broker at Braemar.
“There is potential for a massive oversupply of iron ore as China moves towards a services economy. A significant reduction in demand for steel could cause serious problems for the capesize sector.”
Coal imports will actually decline, the Australian government department said at the beginning of the fourth quarter, on environmental concerns and slowing steel-making use. China’s rapid adoption of clean energy and a national outcry over pollution has squashed its coal demand, with imports expected to show a 30% decline this year.
Slowing iron ore and coal demand have also hit panamaxes, whose rates have hovered around all-time lows on the Baltic Exchange this year. It’s not just China that’s hurting the fleet either — closures of steel plants in the UK are seen to be negatively impacting the sector, along with a steep drop in coal imports in the second quarter, the lowest quarterly level in 15 years.
There are supporting factors, but not enough to reverse the downtrend. Some regions in India exported their first volumes of iron ore since a ban on extraction was lifted, and that may help panamaxes once full consistent production from all mines is reached, according to another analyst.
While rates continued to be under pressure, a Moore Stephens survey published in October suggested vessel operating costs would rise this year and next, leaving many feeling concerned about the state of affairs. Many bulker owners reported widening losses in the third quarter; if this continues, some may have to seek consolidation or sell off assets.
Supras and handies may show relative strength
The supramax and handysize segments are also battening down the hatches against overcapacity, but the diversity of cargoes they can carry and ports they can call at might offer support
Chinese steel exports to the whole world, while hurting steel mills in other regions and therefore their demand for coal and iron ore, have been particularly good for owners of the two sizes of ships this year, according to BIMCO. Clarksons estimates global coal trade to increase by 2% year on year in 2016 on the back of increasing Indian import demand, partly offsetting weaker Chinese intake.
Demand for supramaxes, which remain some of the most popular choices for Indian coal imports, is expected to remain steady, as a strong grain trade outlook will also keep the vessels employed. Maritime Strategies International’s senior dry bulk analyst Will Fray says low prices and strong output in Latin America will stimulate a bumper season starting in the second quarter.
However, the fundamentals of oversupply in the supramax fleet haven’t changed much. Banchero Costa described the segment as “a victim of excessive investment in recent years” and expected overall fleet size to expand by as much as 9% this year.
For handysizes, the main support comes from the fact that a variety of different cargoes can be carried on them. Clarksons suggests that global seaborne minor bulk trade will grow by 2% to reach 1.5bn tonnes next year, which could help freight rates find a bottom in the coming months.
Falling orders also offer a silver lining for the smallest segment. Lloyd’s List Intelligence data shows that the global orderbook of 35,000 dwt ships and below accounts for 4.6% of the existing fleet, compared with 23.5% in the 35,000 dwt-64,999 dwt segment.
As the market careens towards a downturn, analysts believe the orderbook for the smaller vessels is expected to shrink further as shipowners would prefer to wait for the market to gain some direction. Therefore, they would be able to control supply to push freight rates up when demand recovers.
In any case, the coming year will be tough for owners, who need to come up with a different strategy to retain their earnings as a virulent mixture of supply glut and demand lows is likely to hit the market hard in 2016.