A mediocre bulk freight market

Changes in the bulk carrier freight market demand/supply balance resulted in a year of mediocre market performance during the past twelve months. An upturn in global dry bulk commodity trade and demand for bulk carriers was a feature. Meanwhile capacity in the world fleet of these vessels continued growing, although mixed productivity influences modified the outcome. Signs of an improved balance in 2024 have not yet emerged.

The broad evolution of freight rates last year was affected by the usual range of factors that determine progress. In 2023 an increased volume of global dry bulk trade was accompanied by lengthening voyage distances, raising tonne-miles and reinforcing tonnage demand. On the tonnage supply side, rising transport capacity provided by the expanding bulk carrier fleet seems to have been augmented by reduced port congestion partly offset by a slight reduction in average voyage speed.

Variations among these influences almost certainly will be seen during the twelve months ahead, although some are difficult to foresee because signs are unclear or subject to differing interpretations. One possible outcome identifiable is a slowing rate of dry bulk commodity trade expansion together with a slowing rate of bulk carrier fleet growth as shown in the table. Whether this combination will provide a boost for the freight market is not obvious. Other Changes in the bulk carrier freight market demand/supply balance resulted in a year of mediocre market performance during the past twelve months. An upturn in global dry bulk commodity trade and demand for bulk carriers was a feature. Meanwhile capacity in the world fleet of these vessels continued growing, although mixed productivity influences modified the outcome. Signs of an improved balance in 2024 have not yet emerged.

STEADY FLEET GROWTH

Looking at the supply side of the market, during the past year bulk carrier fleet growth was similar to the annual growth rate in the preceding year. The world fleet’s deadweight tonnage, a measure of approximate cargo carrying capacity, increased in 2023 by an estimated 3%. A larger volume of new ships joining the fleet was recorded, while the amount of old or uneconomic ships leaving rose, albeit from a low level. The net deadweight capacity added increased, as the table shows.

Twelve months ago at the end of 2022 the world fleet of bulk carriers (including all ships with capacity of 10,000 deadweight tonnes and over) consisted of 13,160 vessels totalling 973 million dwt, according to data compiled by Clarksons Research. One year later at the end of 2023 this fleet was about 29m dwt larger at 1,003m dwt, based on initial estimates that are subject to revision.

A feature of fleet changes in 2023 was a higher newbuilding deliveries total. The newbuildings volume, provisionally calculated at 35m dwt, may be revised upwards when more complete information is available. This figure is one-tenth above the 32m dwt seen in the preceding year. Accompanying this rise was increased scrapping, measured by reported sales for demolition, totalling about 6m dwt, up by about a half from the exceptionally depressed volume seen in the previous year.

Growth rates among the main vessel size groups (Capesize, Panamax, Handymax and Handysize) last year varied in a narrow range between 2% and 3%. Enlargement in the Capesize segment, comprising ships of 100,000dwt and over, forming two-fifths of the entire world bulk carrier fleet, was 2.5%. Within the Panamax 70–99,999dwt size group, including Kamsarmax 80–89,999dwt bulk carriers, growth was 3.3%.

Elsewhere expansion rates were similar. The Handymax 40–69,999dwt segment (including Ultramax ships exceeding 60,000dwt as well as Supramax bulkers of 50–59,999dwt) grew by 3.1%. In the Handysize segment of smaller 10–39,999dwt bulk carriers, growth was 3.4%.

Deadweight fleet capacity figures are not always accurate illustrations of actual changes in transport capacity available, however. Calculating this capacity is often more complex. Changes in world fleet capacity to move cargoes also depend on how productively ships are employed. Large influences on this aspect are ships’ voyage speeds, ballast (empty) voyage patterns, and duration of port visits, data for which is not always available. The advantage of using deadweight tonnage as a measure is that it is simple and available promptly, and is therefore a useful broad indicator of cargo transport capacity.

An important influence is average voyage speed in the fleet. Even a modest change in the bulk carrier fleet’s average speed, resulting in the time taken to complete a voyage increasing or decreasing, substantially affects annual transport capacity available. A declining speed trend has been evident in recent years, resulting in reduced average annual numbers of voyages completed and therefore lower productivity. After a higher average speed in 2021, a reduction evidently occurred in the next two years, reducing the impact of growing deadweight capacity.

STRONGER SEA TRADE

After the downturn in global seaborne dry bulk trade experienced in 2022, an upturn last year more than reversed the preceding weakness. It was a much stronger performance than widely expected at the outset. A detailed trade overview is contained in another article in this edition of DCI (‘Resumed growth in dry bulk trade’ on p4), so the following comments are a brief overview.

Based on provisional estimates, global seaborne dry bulk trade expanded by about 4% in 2023 following a 3% decrease in the previous twelve months. Among the main segments, coal was the strongest performer last year, growing by an estimated 6% after a flat performance. Other categories also evolved positively in 2023. The iron ore, and grain and soya trades appear to have grown by about 4%, while the minor bulk commodity segment is estimated to have seen about 2% growth. Consequently the 2023 overall dry bulk total is provisionally calculated to have risen by about 220 million tonnes, reaching 5.5 billion tonnes.

Higher imports into China were a prominent feature of last year’s world upturn. China’s economy began to recover after pandemic restrictions on activity were removed, and energy demand increased. As a result the volume of dry bulk imports into China is estimated to have risen by perhaps as much as 10% in 2023. Additional coal imports probably contributed over half of the total growth in cargoes. This outcome is especially significant because China comprises over one-third of all global dry bulk commodity import volumes.

Another aspect from a shipping market perspective also determines demand for the services provided by bulk carriers, affecting how much ‘employment’ is created. Trade volumes transported are the usual focus, because these can be measured relatively easily and are a convenient proxy for vessel demand. But voyage distances are influential as well. Distances affect the number of cargo-carrying trips performed annually by a ship. Any significant change in the annual average voyage distance performed by each deadweight tonne of cargo-carrying capacity has an impact on vessel demand.

These measurements are incorporated within a ‘tonne-mile’ unit, including both cargo (trade) volume and voyage distance, providing a more accurate gauge of demand for transport capacity. But statistics compiled on this basis are often not as readily available or as timely, because additional information and extensive calculations are required. In 2023, according to preliminary estimates by Clarksons Research, the annual tonne-miles percentage growth was about one percentage point larger than the tonnes volume increase, enhancing the boost for bulk carrier demand.

THE DEMAND/SUPPLY BALANCE

Changes in the balance between demand for, and supply of, bulk carriers over the past twelve months contributed to the generally subdued freight rates trend in this market. The enhanced dry bulk commodity trade and vessel demand was accompanied by rising capacity in the world fleet of ships carrying these cargoes.

Patterns evolving in recent years have been especially variable on the demand side of the balance. Two of the past four years saw decreased global dry bulk trade, alternating with increased volumes. The increases were larger than the decreases so, over that period since 2019, dry bulk trade has expanded by about 3%. The principal disruptive influence was the pandemic in 2020-2021 and its impact on economic activity and trade volumes in many countries.

Simultaneously the expansion of the world bulk carrier fleet was sustained through this period since 2019, although the annual growth rate slackened. As a result, the fleet’s deadweight capacity at the end of last year was about 14% higher than four years earlier. Within this period the pace of newbuilding deliveries fell, but scrapping also diminished, restraining the reduction in the fleet growth rate compared with earlier years.

These changes affected the trend of freight market rates, and there is uncertainty — a fairly typical perception — about how influences will evolve in the period ahead, during 2024. The effects from the direction and trend of the market demand/supply balance will be modified by complications from many temporary developments. Estimates suggest that minimal or no growth in dry bulk trade could be exceeded by growth in the bulk carrier fleet. Other influences could alter this relationship.

FREIGHT MARKET IMPACT

During 2023 bulk carrier freight rates varied within a fairly wide range. Rates obtained by all the main bulk carrier sizes tended to move in similar directions, because of linkages among the size groups. As often happens though, freight rate changes were often larger in the capesize segment than elsewhere. Capesize rates are especially volatile, reflecting short-term demand fluctuations in the two commodity trades — iron ore particularly, and coal — on which these bulk carriers mostly depend for employment opportunities.

In early 2023 the bulk carrier freight market experienced downwards pressure followed by a temporary strengthening in the second quarter. Another subdued period was seen around mid-year before higher rates were seen in the second half. But the improved pattern was not sustained throughout this entire period and towards year-end signs of a slackening pattern had emerged.

The Baltic Dry Index (BDI) provides a representation of the evolving bulk carrier market freight rates trend, although this index does not fully illustrate the sector’s performance.

This index is calculated daily by the Baltic Exchange, based on a basket of time charter hire rates for various bulk carrier sizes and typical employments on the specific long-distance international routes included. It is an approximate indicator of changes in the cost of transport for dry bulk cargoes.

From around 1,000 points at the beginning of 2023, the BDI declined and then rose to around 1500 at the end of the first quarter and into the second quarter. This index then retreated to about the 1,000–1,200 points level over several months around mid-year. Later an upturn towards the 3,000 points level occurred, followed by a weakening in the final month of the year.

MARKET PROSPECTS

Expectations for a sustainable strengthening of the bulk carrier freight market, during the course of 2024, are restrained by uncertainty about whether last year’s rising trend in cargo movements is likely to continue. Current signs, arguably (interpretations vary) point to little or no growth in global dry bulk trade. Decelerating growth in fleet capacity could provide support but the extent of this change may be limited, and it appears to be dependent mainly on a greatly increased pattern of scrapping that is not yet visible.

One positive background influence is declining inflation rates in many economies. Assuming this improvement continues, a reversal of the upwards trend in interest rates — that was designed to restrict economic activity and thereby bring inflation under control — can be expected to eventually lead to higher economic growth rates. Benefits for spending on products manufactured by industries importing dry bulk commodities may result, although this process probably will be gradual with limited benefits during 2024.

Prospects for China’s imports, in particular, are a focus of attention given the large share of global dry bulk commodity trade that these comprise and potential for large changes both upwards and downwards as seen in recent years. The Chinese economy has resumed a stronger growth trend but, assuming it continues, a similar trend in dry bulk imports may not occur. Partly this depends upon government decisions about related industries and import policies that are not easy to predict. Moreover much of last year’s growth was comprised of additional coal imports, perhaps proving a temporary feature.

Among market observers some optimism has been expressed about the tonnage supply outlook. Bulk carrier fleet growth is widely expected to decelerate, restricting any tendency for excess capacity. If this deceleration occurs, it could contribute to tightening the demand/supply balance but currently there are no convincing signs of a large impact from such a change.

The role of ‘disruptions’ in bulk carrier employment patterns, adversely affected the fleet’s carrying capacity is an important influence modifying the demand/supply balance and freight rates. Recent signs suggest that logistical and operational delays and disruptions have diminished, enabling the fleet to provide more efficient transportation activity. Port congestion and delays in a number of countries are reported to have eased in the past twelve months, enabling bulk carriers to improve productivity. Yet restrictions in major ship canals have become more evident, having the opposite effect.

Expectations of slowing bulk carrier fleet deadweight capacity growth over the past couple of years — supporting the freight market rates trend — have not proved accurate and there is potential for another phase. One part of the theory, restrained newbuilding deliveries, has proved a reliable assumption. By contrast the second element, expected higher or at least maintained scrapping has not materialized. Scrapping has been minimal for the past three years.

Looking at prospects for slower bulk carrier fleet growth in 2024, newbuilding deliveries seem fairly certain to remain around last year’s level. This calculation implies that much higher scrapping must be the main contributor to fleet deceleration. As shown in the table, a doubling of scrapping from last year’s minimal level (equivalent to just 0.6% of the start of year fleet) could contribute to a one percentage point fleet growth reduction.

Increased scrapping of old or uneconomic vessels may seem predictable. But forecasting recycling volumes more specifically is largely based on guesses. It is a speculative exercise because market sentiment among shipowners — reflecting recent, current and expected future freight market rates, and how secondhand vessel prices are evolving — is often a major influence on demolition sales decisions. Collective changes in owners’ attitudes and actions are not usually predictable, except very broadly.

Nevertheless, signs still point towards substantially higher scrapping volumes both next year and in later years. Two main influences could boost scrapping in 2024. First, the world bulk carrier fleet is ageing. Average age is increasing amid low demolition sales in recent years, and there is a large fleet element that has reached an advanced age.

More shipowners may decide not to incur extra costs of extensive surveys and maintenance involved in older vessels with a limited remaining lifespan. Second, international maritime regulations aimed at cutting vessels’ greenhouse gas emissions are progressively tightening. Compliance costs may not be justifiable on some older bulk carriers, resulting in extra sales to recycling yards.

Richard Scott, Bulk Shipping Analysis