Bulk carrier freight rates are still being dictated by excess vessel supply. However, some analysts believe new operational strategies forged at the darkest depths of this year’s shipping market will help support utilization rates next year and beyond, writes Michael King.
Two-thousand-and-twelve was never forecast to be anything but a tough year for bulk carrier owners. Even so, it turned out be even more challenging than many had predicted. From a peak of almost 2,200 in October 2011, the Baltic Dry Index collapsed to near 650 at the end of January. For most of 2012 it fluctuated violently but, by mid-December of that year, it had not once surpassed 1,200 points and looked set to average around 928 points for the year, down from 1,549 in 2011.
“The current state of the dry bulk market is dire,” said Petter Haugen, a dry bulk analyst at DNB Markets. “Apart from the obvious fleet growth, we believe that one of the major contributors to this is the lack of growth in the tonne-mile demand for Brazilian iron ore exports which was down in the first three quarters of 2012 by around 9%. The fact that Australian exports were up 7% in the same period does not help much when the distance is about one third of that from Brazil to China.”
Yet following the desolation of 2012, there is cause for long- suffering owners to hope that 2013 will prove slightly more lucrative. DNB Markets predicts that tonne-mile year-on-year demand growth (see chart on p22) will increase from an estimated 4% in 2012, to 11% next year and in 2014. This growth will be driven by growth on round voyage Pacific lanes and Pacific–Atlantic trades. Indeed, DNB Markets expects tonne-mile demand growth of 11% over 2013–2015 — higher than the nine per annual growth recorded during the freight rates boom of 2004–2007.
Haugen said the key to the demand side of the bulk carrier equation next year will, as ever, be the coal iron and iron ore sectors, in particularly expansions of export capacity in Australia and Brazil which are moving forward at some speed despite lower commodity prices.
With major producers of coal and iron ore pushing forward with huge capacity enhancement projects, DNB believes that even if some projects are cancelled due to low prices, global exports will still grow at healthy rates because the lion’s share of expansions will materialize. “We continue to believe that coal and iron ore mined and transported to port will be sold, simply because the cash-cost of that production, including freight costs, will be lower than the locally produced iron ore and coal in China and India,” said Haugen.
While Australian producers have won market share off Brazil’s Vale in 2012, in the coming years shipments from both countries will expand significantly. This will see the iron ore trade grow by over 12% next year, from just 4% in 2012, and surge by over 14% over 2014-2015. “Lack of Indian iron ore exports are no longer a significant threat as the incoming coal
makes India a net dry bulk importer and iron ore is not a back-haul route,” he added.
Growth in the coal trade will also increase over 2013–2015 to average around 7%, up from 5% in 2012. However, Haugen said the role of Indonesian coal exporters next year was hard to quantify with so much ongoing regulatory uncertainty over the availability of exports, not least after the Indonesia Supreme Court overturned a ban on raw mineral ore exports on 5 November.
“But,” he added,“in the very short term we think of it as negative, while it should have a positive longer term effect as coal into Asia would need to travel longer.
“When we have spoken with the Indonesian coal industry, we find them confident that authorities will not impose drastic measures, but we still highlight this as a significant risk.”
As has been the case for more than a decade now, the accuracy of trade growth forecasts will be bound to the strength of demand from China. “Lack of Chinese demand is very, very devastating for dry bulk demand,” said Haugen. “The biggest risk, as we see it, is that Chinese authorities subsidize domestic mining and/or yard capacity; each of which has the potential to curb a meaningful dry bulk recovery.”
Good news for owners can be found in owners’ representative Bimco’s analysis of Chinese demand. This predicts that iron ore imports for the steel industry and coal imports will both rise next year. “As we are heading into 2013, iron ore demand from the world’s largest consumer, China, is likely to provide a solid lift in demand alongside coal imports in Asia,” said Bimco’s Chief Shipping Analyst Peter Sand.
Bimco forecasts that Chinese iron ore imports will grow at a rate of 7.5% in 2013, up from 6.4% in 2012, driven by higher steel demand and the cost of lower quality domestic ore. The forecast is predicated on two key factors. Firstly, that China’s imports of iron ore in September reached 65 million tonnes, the largest total since the record high of January 2011, suggesting that the steel industry is still reliant on imports.And secondly, growing signs that the iron ore content of domestic production is falling, which should improve demand for imports further during 2013. Indeed, while imported iron ore has an average iron content of 63%, Bimco believes the iron content of domestic ore fell below 10% in September, while average iron content for Chinese iron ore in 2012 is estimated at around 14%.
“Bimco’s calculations show that Chinese iron ore content has declined since early 2008,” said the organization.“This is good news for the dry bulk market, as it implies that the real cost of using domestically produced iron ore has increased.
“It is this issue that presents a strong case for growing imports going forward at the expense of domestic production alongside a general growth in steel demand.”
On the supply side of the bulk shipping market, DNB forecasts net fleet growth excluding slow steaming of 6% in 2013, down from 13% in 2012. Fleet growth will then further slow to just 3% in 2014.
“While we do not believe yards will be able to convince vessel owners to order significant new tonnage, as new orders are strongly correlated to spot earnings, we have assumed contracting of 20 million dwt each year in 2013 and 2014, and due to increasing rates we model 40m dwt of new orders in 2015,” said Haugen.
He does not expect scrapping to be a major factor on the supply-side in the coming years. “In our modelling we take delivery of the whole orderbook as it stands now, but allow for a 10% slippage – that is, no cancellations,” he said. “This is done in order to be conservative; our best guess would be that there will be some cancellations, but not very significant.We forecast scrapping of 20m dwt in 2013.”
A critical factor in terms of the supply-demand balance in the coming years will be slower average speeds. Haugen expects 2012 to prove the nadir of bulk fleet utilization with freight rates set to improve as operators and owners learn the lessons of the lean years and continue to control excess capacity through slow steaming.
DNB analysis found that if all bulk carrier vessels steamed at full speed through 2012 then utilization would be a lowly 68%. However, slow steaming strategies, encouraged by low time
charter rates and higher bunker costs, drastically altered that equation.
“The average speed of the fleet continues to slow, and we now estimate 83% utilization of the fleet in 2012 when we adjust for this slower speed,” said Haugen.
DNB’s utilization forecasts use a ‘hybrid’ approach to ship speed weighted towards ‘full-speed’ utilization with optimal speeds to be determined by bunker price and time charter rates. Using this analysis, DNB now expects utilization to rise to 84% next year and 87% in 2014.
“The main determinant of ship speed is bunker prices and charter rates. In our modelling we ‘solve’ our forecast of the speed and rates simultaneously as speed is directly influencing supply which obviously is affecting rates,” said Haugen.
“As a 10% speed reduction gives a around 30% reduction in fuel used per day — about 20% less fuel per mile — high bunker prices will make it cost efficient to keep sailings speeds low even if time charter rates come up. A slower speed obviously implies less availability of transport capacity which should provide support for rates.”
Indeed, DNB believes speed will become the marginal factor in the supply of dry bulk services. Haugen said that over 2013–2015 a declining orderbook, longer sailing distances and slower ship speeds will aid owners and operators in securing higher charter and freight rate returns.
“On balance, we now forecast significant growth in dry bulk fleet utilization, both on full- and reduced speeds,” he added. “We expect both to increase in the range of 6–10 percentage points from 2012 to 2015, with rates also rising from US$16,000 per day in 2013 to US$25,000 per day in 2015 for Capes, and from US$13,000 per day in 2013 to US$19,000 per day in 2015 for Panamaxes.”