Like the bulk shipping industry in general, owners in the Handysize sector have had something of a tumultuous year. As
the end of September approached, the Baltic Handysize Index
was hovering between 1,050 and 1,100 points — someway short
of the year-high achieved in late May of 1520, but a significant
improvement on the 940 points witnessed in mid-July. All sectors
of the bulk shipping market were affected by the bearish summer
lull. Although much of the downturn was related to the decline
in iron ore imports to China, the end of the South American
grain season and the traditional quiet season in Europe also
featured. These demand factors were, of course, exacerbated by
the high rate of newbuilding deliveries this year which, according
to Cotzias Shipping, saw some 728 ships added to the global dry
bulk carrier fleet between August 2009 and August 2010.
According to most analysts, the outlook for freight rates
across the bulk sector looks decidedly poor for owners, with
net fleet growth set to increase at around twice the rate of
tonne-mile demand through to 2012. However, and with the
caveat that the Handysize sector is not entirely immune to the
market forces that afflict the larger ships, there are a number of
reasons why a general bulk carrier freight rate lull or downturn
might not impact the Handysize sector to quite the same extent
as vessels in the larger segments.
For starters, the age profile and newbuilding orderbook for
vessels in the 10,000–39,999dwt range looks significantly
healthier than those in the larger categories. According to
Cotzias, between August 2009 and August 2010 the Capesize,
Panamax, and Supramax fleets grew by 24%, 8% and 35%,
respectively. However, the Handysize fleet increased by just 6.2%
thanks to vigorous scrapping.
Moreover, during the 12 months to August some 148
Handysize ships on order were cancelled compared with 75 new
orders. The upshot according to leading owner and operator
Pacific Basin, which uses the size range of 25,000–34,999dwt to
define the Handysize fleet, is that the current orderbook in this
range constitutes 38% of the existing fleet, a major contrast with
the 81%, 58% and 48% ratios evident for the capesize, panamax
and Handymax classes. Of the 492 Handysize vessels on order
totalling some 15.5m dwt, as of 1 July 15% were still due for
delivery this year, 16% were expected in 2011 and 6% in 2012.
The Handysize age profile also looks very different to those
for larger vessels. The capesize fleet has an average age of 11
years, while the panamax fleet averages out at 12 years. By
contrast, the Handysize fleet of some 1,382 vessels in the
25,000-34,999 dwt range totalling 41m dwt is 15 years old on
average. Moreover, some 12% of active vessels are over 30 years
of age with 17% between 25-29 years and 14% aged 16-24 years.
Many of these older vessels, which are expensive to operate and
maintain, are expected to be scrapped over the coming years.
Others will disappear from the usual international shipping lanes
to poorly administered shipping backwaters or domestic trades
to escape port state control oversight.
Handysize vessels tend to carry a range of minor bulks ranging
from sugar and scrap, to salt and alumina. Grains, cement and
coal also feature but iron ore is a rarity. This separation from
the cargo breakdowns evident for larger vessels which are
limited to a few major bulks provides cause for optimism –
demand is not just dependent on the iron ore, coal and grain
This year Chinese demand for logs, copper concentrates and
building materials has been a major factor for Handy owners.
This is likely to continue given that recent announcements from
China suggest the economy will continue to drive world
economic growth.
A positive can also be found in the fact that the US and
Europe continue to emit signs of economic weakness. This
continues to widen the East-West trade imbalance for Handysize
carriers, meaning that more bulk carriers are returning to
export ports under ballast, adding to overall tonne-mile demand.
The Russian ban on grain exports allied to faltering exports
from Argentina looks set to drive more exports from the US.
This could be a major factor for Handysize vessels according to
Drewry’s latest Dry Bulk Forecaster report.
Drewry predicted average trip rates would fall by 2% in the third
quarter of this year. Pacific Basin also forecast a relatively weak
third quarter followed in the fourth quarter by a seasonal
rebound in grain activity, resumed buying and restocking of raw
materials by China, plus strong growth in India, Brazil and Russia.
“On balance, we expect a half-year period that is somewhat
weaker than the first half, though still generating profitable
returns for our ships and with the Handysize segment continuing
to outperform other dry bulk segments at least until the year
end,” said the company.
Next year the key factors for a fleet that is not expected to
grow as fast as its larger peers will be on the demand side.
China’s grain, soyabean and log imports, overall demand for
minor bulks, and the speed of the European and US recovery
will all have major impacts on cargo availability for Handysize
A report by Macquarie Equities Research predicted an
acceleration in scrapping of older Handysize vessels which would
keep rates more stable than for larger vessels because of the
relatively small newbuilding orderbook. “The small Handysize
fleet is positively elderly, with almost half of the fleet more than
20 years of age,” said the analyst.
Drewry said Handysize period and trip rates would remain
stable for much of 2011–2015. “The fleet is set to keep growing
till at least 2011 before slowing down and bringing some respite
to freight,” said the analyst.
Pacific Basin concluded: “In the longer term, we expect
Handysize and Handymax vessels to fare better than other dry
bulk segments as the orderbook for large dry bulk ships is
significantly larger.”
More scrapping needed to keep Handysize sector balanced
Over the next two years, the delivery of Handysize newbuilds
is expected to exceed by far the number of vessels sent for
demolition. This could be bad news for the owners of
Handysize bulk vessels, as over-capacity could mean a reduction
in daily rates. While the number of Handysize vessels available
shrank last year, demand also fell. This is due not only to the
global economic problems, but also to the trend for charterers
to opt for larger vessels because of economies of scale. This
has had a detrimental effect on demand for these smaller
Handysize (15,000–40,000dwt) vessels.
German bank DVB recommends that owners must
rebalance the supply of ships to keep their balance sheets
healthy. However, there is limited incentive to do so at the
moment. According to DVB’s researchers, “The old age
profile of sub-sector in theory, if scrapped, would have been
able to absorb all new tonnage coming into the market,” the
research team said in its Handysize Bulk Carrier Market Outlook
report. “However, in practice scrapping of old tonnage may
be very difficult for the owners, as most older vessels should
probably be debt free and in general will contribute more to
the bottom line for an owner than a vessel bought at the
peak of the market.”
The report said that DVB had expected 92 Handysize
vessels to be sold for scrap this year. However, with the
lower-than-expected delivery of newbuildings so far, as well as
port congestion and growing demand, only 33 have been
scrapped so far.
With almost 45% of the 2,025-strong global Handysize
fleet built more than 25 years ago, the bank argues there is a
lot of tonnage that is due for recycling.
“Although the potential for scrapping exists within this
sub-sector, it remains an enigma as to when it will actually
take place, but it is definitely long overdue,” it said.
“However, owners normally wait for the other to make a
move towards scrapping and so long as an owner can cover
operating expenses and their payments in some form or
another they will continue to trade... but this will only
prolong the overall agony for the subsector.”
It should be possible to “keep earnings above break even
levels,” but this would mean that owners must sell off their
old vessels and not order any more new tonnage. Doing so
would see the fleet starting to shrink from 2013. However,
this is not thought to be a realistic expectation, and in reality
newbuildings will outpace scrapping, which will keep the
pressure on freight rates going forward. Dry bulk activity is
expected to continue to slow down for the rest of the
second half, but still at levels that will keep owners’ earnings
relatively healthy at around $15,000 per day.
The outlook for 2011 is less positive, with rates remaining
under pressure. The Handysize fleet is expected to grow by
nearly 6% this year to 2,481 ships and then a further 6.5% in
2011, which is in line with forecast demand, DVB said. Having
shrunk last year, the total cargo volume for Handysize vessels
is anticipated to reach 656mt this year, but this is still down
from 686mt in 2008.
In 2009, Handysize bulkers were responsible for 20% of
the total dry bulk cargo movement of 2.9bn tonnes, according
to the report. DVB lists the top three owners of Handysize
vessels as China Shipping Group Co, the Chinese government
and Cosco.