Five Things to Watch: Dry Bulk

Lloyd’s List analyses the five things to watch in the coming months.

News ID: 74578

Date: 21 June 2017 - 10:24

“Optimism”, “hope”, and “change” spring to mind, with freight rates comfortably above operating costs.

But there is always the threat that the recovery can be short-lived, as the strong demand growth seen in the first quarter may not last much longer.

The other main concern is fleet growth amid continued newbuilding deliveries and slow scrapping. As newbuilding interest improves on low prices, more cautionary words would be “forgetfulness” or even “recklessness”, for over-ordering caused the Baltic Dry Index to hit all-time lows last year.

Coupled with this are potential regulatory developments following the sinking of Stellar Daisy in March, and changes in the way traditional business is conducted.

Consolidation

Listed companies with market capitalization of over $1bn can win confidence from owners and lenders more easily. That, at least, seems to be the prevalent rationale behind the consolidation talks.

A case in point is Golden Ocean’s purchase of Quintana’s entire fleet in exchange for shares. Observers will keenly watch whether some other smaller participants will follow the Greek owner’s example to exit direct vessel operation without cutting ties to shipping.

“The dry bulk market is still fragmented and the smaller ship owners are challenged on market access, positioning of vessels and running costs,” said Torvald Klaveness head of pool management Hans Olstad.

Also, banks and financial institutions preferred to deal with larger firms so they can build corporate services, Mr Olstad said, and their economies of scale enable them to survive in an industry long plagued by weak earnings.

“As the shipping banks restructure their shipping portfolios, we see that they take an active part in the consolidation of the industry,” he added.

Star Bulk Carriers’ long-time director Tom Softeland shared similar sentiments, saying scale will be the driver of consolidation and predicting more activity of this nature going forward.

But Drewry analyst Rahul Sharan said the recent market recovery could reduce incentives for consolidation. “I think when the market is very low and owners struggle to earn a profit, you will see consolidation increase as they come together to reduce costs,” he said.

“But as the market improves, I think the efforts for consolidation will wane away.”

Will demand hold?

Norden’s boss doesn’t think so.

In the first quarter, China imported 271m tonnes of iron ore and 17.1m tonnes of coal, up 12% and almost 50%, respectively, from a year earlier.

But the Danish player’s chief executive Jan Rindbo said he did not expect the rest of 2017 to see similar strong demand as in the first quarter.

That was because the first three months of this year were unusually and unseasonally strong, which surprised many. Coupled with that were concerns about stimulus in the Chinese economy showing signs of slowing.

“We can’t expect these sorts of growth rates to be maintained,” he said.

According to brokerage and reserach firm Banchero Costa, Chinese lending has eased for the real estate sector, raising questions about the country’s level of steel production. By mid-May, stockpiles of iron ore at Chinese ports reached a record 139m tonnes, which adds to an uncertain outlook for the rest of the year.

The World Steel Association has forecast flat steel demand growth in China this year, Bancosta noted.

And according to Clarksons Platou, falling iron ore and steel prices are negatively influencing chartering interest. “In our view, the market has realised that the first quarter was likely overshooting fundamentals,” the Clarksons unit said in a note.

However, the coal and grains trades remain strong.

Despite coal volumes being curtailed from Queensland, Australia, in the wake of Cyclone Debbie, shipments from further afield such as the US to China were helping tonne-miles, according to BIMCO.

The BIMCO shipping association’s analyst Peter Sand added that for grains, which had seen healthy flows to date, shipping demand should go up as greater global soyabean volumes were expected to be shipped in the second quarter.

The International Grains Council raised its forecast for overall grains trade in the 2017-18 season to 346m tonnes as of May 25, 4m tonnes higher than the previous month’s projection. The figure for the 2016-17 season reached a new high of 349m tonnes

Supply side concerns

As secondhand prices have risen towards newbuilding values, owners may find placing orders an attractive investment — and many industry officials warn that newbuilding orders, if they materialised in a large number, would prolong oversupply.

For the prudent ones, the good news may be that Chinese yards are trying to raise newbuilding prices because the current levels are not profitable.

The guidance price provided by China Newbuilding Price Index for a 38,800 dwt handysize climbed 1.6% to $19.9m in April; that for a 64,000 dwt ultramax rose 2.2% to $22.7m; for an 82,000 dwt Those prices have inched up in May.

The pace of newbuilding deliveries will slow, according to BIMCO. Its calculations show 20m dwt were delivered in the first four months, out of a total amount of 37m dwt due this year.

Drewry’s Mr Sharan said oversupply was easing. Vessel supply was expected to exceed demand by 26.5% by the end of 2017 versus 28.5% at the end of last year, according to his consultancy.

Thus charter rates would stay on the upward trajectory over the next couple of years at least, Mr Sharan said.

Regulatory developments

Stellar Daisy, a very large ore carrier converted from a very large crude carrier, has prompted owner Polaris Shipping to conduct a review of all such vessels in its fleet.

Only two out of 24 crew members were rescued after the VLOC reportedly split and sank in high seas off Uruguay at the end of March.

The company’s VLOCs, converted mostly at second-tier yards in China, will be thoroughly inspected at loading or discharge ports by the Korean Register and Lloyd’s Register, as well as officials from Polaris and a hull strengthening firm.

Intercargo has called for an investigation, as has the International Maritime Organization. But it may take months before a clear answer is found, if at all.

Many European industry participants have called for the removal of these converted vessels over safety concerns surrounding the technicalities of such engineering work.

Polaris has 24 VLOCs, with a total carrying capacity of 6.78m dwt; 21 of those are conversions. There are 26 other conversions in the global dry bulk fleet at present, according to Lloyd’s List Intelligence data.

The removal of these vessels would certainly improve market balance, which is already in a gradual recovery mode. Whether any such ban may be enforced will likely depend on how regulators view the results of the investigation.

Nevertheless, the vessels are very old and may well exit the fleet through a natural end-of-life process.

Another regulation on everyone’s minds is the International Maritime Organization’s ballast water treatment rules, due to come into force in September.

Under the new regulatory framework, ships trading in international waters will have to be fitted with type-approved systems. But each system costs about $1m to $1.5m.

The industry has been slow to act not only because of the cost of installing the systems, but also due to uncertainty over their approval by the US, which applies more strident rules in its waters.

Digitalisation

BHP caused a commotion when it launched its online freight trading system in January.

While the consensus is that the e-platform could only work for standard, non-complex routes such as the Western Australia to China iron ore trade on capes for now, the world’s largest miner’s digital initiative has still sent shockwaves across the shipbroking world.

In yet another case, Klaveness has established a platform called Klaveness Digital, which assists its customers in post-fixture contract workflows.

But many shipping executives still think brokers remain invaluable in facilitating trades, especially for smaller vessels in non-standard trades. Artificial intelligence with strong trade knowledge and networking ability has yet to be developed for shipping.

That said, they are also waiting for brokers to add more value to their services. Perhaps via digital means.

The trend seems to have been set and some owners believe digitalization is the way forward for the industry.