Dry bulk: Why the Year of the Dog can Wag its Tail

A DELUGE of vessels has meant that dry bulk shipowners have had to endure years of hardship amid poor freight rates, but a sense of optimism seems to have returned to the segment with the demand for tonnage experiencing a revival.

News ID: 77838

Date: 24 December 2017 - 08:43

According to MANA, This newfound hope has been triggered by numerous factors, such as trade in the segment surpassing the global economic growth rate and net fleet growth falling to the lowest levels in the past 13 years. With the Baltic Dry Index close to a three-year high, owners are betting on further upward momentum.

Call that a trend — if the industry is lucky, 2018 will show better earnings and restore the supply and demand balance in the segment. A Lloyd’s List survey shows the consensus among analysts is for freight rates in 2018 to be well above operating costs.

For the owners who invested in cheaper ships in the last few years, the market is sufficiently ripe for harvesting the benefits of low acquisition costs.

But wait — despite the industry’s talk of digitalization, so much so that BHP (one of the world’s largest charterers) is studying gas-powered autonomous ships, it might serve one better to be a little cautious, or even superstitious, when it comes to China — most importantly because China still remains the deciding factor for the dry bulk market.

Next year, the Year of the Dog according to the Chinese horoscope, can appear to be murky for Chinese demand outlook when taking into account Beijing’s policies to transform China into a low-carbon economy with cleaner fuels, not to mention the curb on steel production from November this year until March 2018.

On paper, those measures are negative for coal and iron ore imports. But they can also point to more demand from China for high-quality imports of those two types of cargoes to feed its gigantic steel industry.

The closure of domestic iron ore and coal mines amid a pollution crackdown in China will require import substitution of high-grade iron ore from Brazil and Australia as well as better quality coal from Australia, the US, South Africa, Colombia and other exporters far from China, Precious Shipping chief executive Khalid Hashim said.

Another key factor adding to the tonne-miles would be the increase in the supply of Brazilian iron ore as Vale’s S11D project is expected to be fully operational in 2018. Additionally, there is also the potential of a restart of the Brazilian Samarco iron ore mine, which was shut by a deadly dam burst in 2015.

The Brazilian miner is seeking permission from Chinese port authorities to allow it to double the amount of iron ore it blends to 46m tonnes in China next year, which clearly shows the growing demand for the longhaul trade. Overall, the tonne-mile demand related to iron ore would be around 8.6bn next year up, from 8.3bn in 2017, Clarksons predicted.

For the long run, President Xi Jinping’s Belt and Road initiative, which aims to build out infrastructure — new ports, roads, railways, power plants and pipelines — along the old Maritime Silk Road across Asia and Europe, would require huge quantities of cement, steel and wood that Mr Hashim points out would be carried in dry bulk ships.

With the market seemingly poised for further gains as demand is expected to grow by 2%-3% in 2018, the supply side looks even more attractive.

Some analysts even project the fleet to grow by less than 1% in 2018 to around 819m dwt as a wave of scrapping would remove some aged ships

Banchero Costa Group head of research Ralph Leszczynski expects demolition activity to recover over the next two years on “regulatory pressures and probably a recovery in bunker prices driven by higher crude oil prices, which will put pressure on older, less-fuel efficient ships”. Moreover, newbuilding deliveries should be much fewer in 2018 — about 50% down in dwt terms, Mr Leszczynski estimated.

However, slow steaming still remains a concern. The lower fleet growth can be easily spoiled if sailing speeds increase, said BIMCO lead analyst Peter Sand.

Additionally, shipping finance — at this stage, and in the near future — plays a critical role in the industry, Karatzas Marine Advisors chief executive Basil Karatzas warned. “Lack of financing keeps the market in control, but any new sources of financing can drive the market out of control and result in a spike in tonnage.”

There remains a lot of idle shipbuilding capacity that begs for new orders, so low offers by shipbuilders plus a hotter freight market with some export credits could lead to a new wave of newbuildings and another phase of an oversupplied market, Mr Karatzas added.

Small but powerful

Capesize and newcastlemax vessels are in riskier markets than others as they can be seen as “one trick ponies” that rely heavily on China trades, while the smaller segments will be the catalyst for improved charter rates next year, according to Mr Karatzas. Modern handysize to ultramax vessels offer most flexibility and economics for trading, while panamax tonnage could benefit from grain shipments in existing and new pattern of trades, such as some Atlantic-Southeast Asia movements, he added.

The Lloyd’s List earnings survey provides evidence that the highest growth in freight rates in 2018 would be enjoyed by the panamax segment, whose earnings are expected to rise by 14.9%, followed by supras and handies with an improvement in rates of 11.2% and 10.3% respectively.

Capesizes would show the lowest growth, of 8.4% year on year.

The grain and minor bulk trades, which significantly improved in 2017, will play into the fortunes of the panamax and supramax bulker owners in 2018.

This improvement has been supported by robust demand for grains and soyabeans, as strong population growth and improving living standards across Asia and the Middle East boost food and animal feed requirements that are largely sourced from the Americas, Australia, Ukraine and Russia.

Moreover, grain exports from the US saw spectacular growth of 10% in 2017 on account of strong wheat demand in the Middle East, Africa and Asia, due to US’ pricing competitiveness. This is expected to produce further demand in 2018, impacting the overall tonne-miles positively.

Moreover, the emergence of scrap steel exports from China — with the closure of induction furnace capacity — will open up new trades for handies and supras.

Having been a net importer of steel scrap, China could export 5m-10m tonnes of it next year, Maritime Strategies International analyst Will Fray said.