After registering significant gains in the second half of 2013 dry bulk freight rates should remain buoyant through to 2015. But excessive newbuilding orders remain a threat, writes Michael King.
The bulk carrier shipping sector saw a marked improvement in 2013 as most indicators of health — second hand vessel values, the Baltic Dry Index, time charter earnings and newbuilding prices — took a turn for the better. The BDI, for example, was slumped at 698 on the 2 January 2013 but by 6 December had climbed to 2,176, its highest point all year. Indexes for Handy, Capesize, Panamax and Supramax vessels followed a similar trajectory (see BDI chart), all seeing surges in late summer, declines in October and November and a final bounce as New Year loomed.
Most analysts expect market volatility to continue this year but with rates swinging between higher parameters than in 2013. Peter Sand, Chief Shipping Analyst at BIMCO, said there was now clear evidence of structural recovery in the market after five years of pain for owners, operators and investors. “The way BIMCO sees it is that the fundamental balance is now slowly starting to improve as demand is outpacing supply growth,” he told DCI.
Certainly the demand side of the shipping equation looks bright, if not bullish. Analysis by Jayendu Krishna, senior manager at Drewry Shipping Consultants, illustrates that tonne mile demand increased by a Compound Annual Growth Rate (CAGR) of 5.5% over 2000–2012. But in 2013–18 tonne mile demand
will accelerate to a CAGR of 5.8%, with iron ore and coal gradually taking a larger share of the bulk shipping pie through the period, displacing minor bulks and grains. Krishna also expects the gradual rise over the last decade in the size of parcels shipped to continue increasing in the years ahead, a trend apparent across all commodities.
Krishna forecasts that India’s coal imports will double through to 2018 from around 100mt (million tonnes) per annum now, while increasing US coal exports will also boost shipping demand. But while the economic health of Japan, the EU-27 and South Korea will remain critical to sustaining demand growth, the major demand question facing the industry is whether China’s seemingly insatiable consumption of raw materials like iron ore, coal, bauxite, nickel etc. can endure. “Despite slower Chinese GDP growth in 2014, commodity imports could very well stay strong,” concludes Sand. “This is due to the factors of diversity in suppliers, lower commodity prices, and the lower quality of domestically produced iron ore and thermal coal.”
On the supply side, he was also positive, with the number of fleet additions falling in 2013 as yards deferred deliveries. In November some 521 vessels had been delivered totalling 43m dwt, down 45% year-on-year. “Overall, there will be a fall in the delivery of dry bulk vessels in 2013 for the first time in five years,” said Krishna. “This,” he said,“will go a long way in bringing back healthy earnings for ship owners”.
However, the threat of over-supply which has plagued the sector for the last five years has not disappeared. Newbuilding orders — as opposed to deliveries — increased by 50% year-on-year in 2013 as owners took advantage of low yard prices and invested heavily in new fuel efficient ‘eco’ ships (see box).
Although fleet additions are expected to only increase the size of the bulk carrier fleet by low single digit figures in 2014 and 2015, a further surge in newbuilding orders could hurt the supply-demand balance thereafter. Indeed, Sand argues that the biggest threat to improved earnings comes from the fierce competition between shipyards which is anchoring newbuilding prices. “If we look at recent orderings they are likely to postpone the eventual comeback of much stronger earnings if not offset by a large increase in scrapping,” he said. “The drive behind this ordering is improved designs available from yards, better fuel efficiency on the newer ships, improved access to finance and the impression that newbuilding prices are seen as moving up only up from here.
“Not all will applaud the fact that more new ships with improved characteristics will be afloat in a few years’ time. But some will get lower breakeven costs across the fleet with the new ships and may concluded this will help them to return to profitable levels sooner rather than later.”
This is a view shared by a number of owners, not least Euroseas. “We believe that investing in young assets when prices are low is a sound proposition as one is to gain not only from the trading of the ships, but also from possible asset appreciation,” said Aristides Pittas, Chairman and CEO of Euroseas as he explained in December why his company had signed contracts to build two Ultramax dry bulk vessels. “Both vessels are of eco-design and we expect them to have an additional competitive advantage in the marketplace. This contract heralds the further growth of our company alongside with the gradual recovery of the markets that we expect.”
Konstantinos Chatzitolios Business Development Manager for Dry Cargo & Container Ships at classification society Bureau Veritas, also notes that the increased orders placed in 2013 cannot only be attributed to the improved efficiency of new eco bulker designs (see box). “The main drivers for new orders will continue to be connected to other market dynamics, for example, low new building prices or a foreseeable market improvement,” he said. “As long as these drivers exist, then more ships will be ordered in the future and it is certain that they will be eco ships.”
Perhaps of more concern for owners in short to medium term is the latent excess of supply. This is currently being masked by slow steaming strategies, but as Sand points out, “the recent jump in Capesize rates also meant ship speeds went up a bit to cater for the sudden jump in demand.” In short, if owners decide that sailing more quickly makes sense, the supply-demand equation can rapidly change.
Sand concludes that if owners could resist the temptation of further mass orders and continued to keep an eye costs by cutting speeds and fuel consumption, then the outlook is positive. “Quarter one is set to be the toughest quarter next year, as seasonality puts on some pressure,” he said. “BIMCO expects demand growth for 2014 in the range of 4.5–6%. Such strong growth will outstrip supply and bring about an improvement to the fundamental balance.”
Krishna forecasts that supply will expand by a CAGR of 3.5–4% over the next three years and tonne-mile demand by a CAGR of around 6% over the same period. This will see latent excess supply gradually weaned down from its current 20% to as low as 10% by 2016.
“Late 2014/early 2015 looks like more probable for sustained recovery in the earnings of vessels as the supply surplus goes down to less than 15% including slow steaming,” he said. “Hopefully the recovery is not coupled with another round of new orders. In that case the same saga of low rates will continue in the years ahead. But most of this year’s orders won’t be delivered until 2015, so the market looks healthy, at least until then.”