On 6 October, BIMCO — the world’s largest international shipping association, with more than 2,200 members globally — published the next in its series of reports looking at the ‘road to recovery’ for dry bulk shipping beyond the current market difficulties. The foundation for the new report follows the conclusion of BIMCO’s previous analysis — that due to the severity of the current crisis the sector can only return to profitability in 2019 if shipowners deliver ‘zero supply side growth’, year on year. This is where ship demolition is equal to or greater than deliveries. This is not an easy task, as the dry bulk shipping industry has only achieved zero supply side growth in three of the last 35 years.

Total dry bulk trade has grown by 40% since 2007, largely driven by developing nations in Asia. The demand for dry bulk commodities has peaked in advanced economies, for instance demand from Europe, North America and Japan has not returned to pre-crisis levels and is unlikely to in the future. The question is: how close to the peak are the larger developing nations in Asia that have driven dry bulk demand over the last eight years? It is clear that the future potential for growth is focused on a few key countries.

Dry bulk shipping relies strongly on heavy industrial activity and the use of fossil fuels. The future growth of the related cargoes is uncertain. While China’s economic growth has slowed, its focus is moving away from infrastructure, housing and heavy industry towards a consumer- and service-driven economy. This transition has already hit China’s import of dry bulk commodities and will continue to play out in coming years.

Various countries have announced their will to end the use of fossil fuels and have started to close coal-fired power plants due to their declining political and social acceptability. It was recently reported that energy from coal hit zero for half a day in the UK for the first time since it opened its first coal-fired generator in 1882. Thermal coal imports to the UK were reported down 80% year on year in the first half of 2016.

As if this were not enough, the shipping industry as a whole is being required to invest heavily in equipment to satisfy up- coming environmental regulations on ballast water treatment, and NOX, SOX and greenhouse gas emissions. The new ballast water convention will enter into force in 2017 and will require more than 50,000 ships to be retrofitted with ballast water management systems costing up to US$5 million per ship. This will force many owners to scrap their ships prematurely. While this will have a negative financial impact for many individual owners, it will be a positive move towards rebalancing the supply side of the market and hasten freight rate recovery in general.

This prolonged crisis is likely to have a significant impact on how dry bulk shipping business is conducted in the future, and many of the changes are likely to spill over to other shipping sectors as well.

The current industry model in dry bulk shipping is characterized by very fragmented ownership of the 10,800 ships in the global fleet. There are only four companies owning more than 100 dry bulk ships and on a DWT basis, the largest owned fleet represents less than 4% of the total fleet. So each individual owner has very little influence and bargaining power with its customers and is often reflected in low levels of mutual trust.

Many dry bulk shipowners have highly leveraged fleets and are focused on the asset play (buy low, sell high) rather than acting as logistics providers focused on return on capital employed. This is a high risk business model especially when it is combined with a high proportion of ships on the spot market.

Some more conservative owners, who had a strategy of running many of their ships on long-term charter, have been caught out by the length and severity of the downturn with most, if not all, of their long-term charters now expired. Today, locking ships into loss-making time charters is not an attractive option for the owner.

There is consolidation going on amongst the dry bulk shipping customers, many of whom are already very large global players. So while the dry bulk shipowners remain highly fragmented, their customers are ever-increasing in their influence and bargaining power. Customers are spoilt for choice: there are too many ships to choose from and, as a result, freight rates are firmly in the gutter. Dry bulk shipping is in fact a good example of what economists call an oligopsony: a market with a limited number of buyers and a large number of sellers.

Due to the small size of many owners’ businesses, today a very large part of dry bulk chartering continues to be done via brokers. This means that the relationship with the shipping customer is effectively owned by the broker, further weakening the negotiating capability of the owner.

Since 2011, 34 giant Valemax ships have been launched (380,000dwt or more). It was announced in March 2016 that a further 30 Valemax ships have been ordered for delivery in 2018 by three Chinese owners for a combined $2.5 billion with back- to-back 25+ year contract of affreightments (COA) with Brazilian mining giant Vale. Once these orders have been delivered, the Valemax fleet will be able to carry over 50% of Brazil’s current iron ore export volume, eating into the business currently carried by the existing Capesize fleet.

Today the financing of ships comes largely from banks — with the bank able to dictate the terms to the small ship owner. European banks have cooled their interest in increasing their exposure to the shipping industry. At the same time, more finance is now entering the industry from Asian banks. Global ship financing was heavily reliant on banks before 2008 and, according to Petrofin Research, this reliance has dropped markedly since then as the proportion of non-bank finance sources has grown. The gap is made up by alternatives such as export credit agencies, bonds, public and private equity. Further declines in bank financing are likely as existing and future banking regulation will make lending to shipping more expensive.

There is far too much ship-building capacity. Government- backed export credit agencies financing new buildings has contributed to the unsustainable level of new ships hitting the water. State support for the yards could be for a number of diverse reasons, such as to create/retain employment in some countries and/or attain leadership in the global transport system.

Consolidation is the natural consequence of a prolonged and deep shipping recession. Less well capitalized owners will be forced to sell their ships, and some will wish to withdraw their capital from the dry bulk sector. Their ships will be bought at bargain prices by better capitalized competitors. While the existing business model is set up to service the requirements of the smaller shipowner, there are a number of significant benefits from size and scale for larger shipowning companies:


  • Larger owners will seek to develop long-term direct relationships with major customers without the requirement of an intermediary or broker. They will have the resources and capability to deliver creative, flexible and value-adding logistics solutions. The larger owners will eventually develop more balanced and trusting long-term relationships with these customers and have more negotiating power.
  • Major shipping customers will want to work directly with fewer shipowners, each of which can provide a significant part of their shipping transport requirements. This is seen in the Brazil China iron ore trade with Vale recently signing long- term COAs with Coscocs, China Merchant Group and ICBC.
The key stakeholders in large shipowning companies, both debt and equity providers, will require a more sophisticated business model with a greater focus on risk management. We will see them adopt risk management in a number of ways:
  • Through the availability of better quality information — a deeper knowledge of the market and better forecasting. This will help companies achieve a deeper understanding of customers and the market, and ultimately support better resource allocation and asset purchase/disposal decisions.
  • Putting a charter portfolio strategy in place. Owner companies will wish to have a large part of their fleet on longer-term charters to ensure a steady cash flow to maintain the business through down cycles. They will also want to avoid too large an exposure to any one single customer.
  • Shipowners will seek to control their commercial risk better via forward freight agreements, currency and bunkers hedging, and counterpart checking among others.
  • Larger owners may also wish to reduce risk and capital requirements by operating a fleet of pooled ships alongside their owned fleet.



A number of owners believe that running an efficient shipping company requires a certain number of ships under its control. Some said around 80 to 100 ships. It should be noted that on a pure ownership basis, there are only eleven companies that currently own 80 or more ships. In summary, in the future there will be many larger dry bulk shipowning companies whose business will be as logistics providers to the commodity giants with a focus on risk management and Return on Capital Employed (ROCE). The asset play will be a subsidiary benefit to these businesses rather than the number one business goal.

It will be a demand-driven industry with most ships purchased against long-term charters by large businesses that are better able to forecast future market demand. This will ensure that supply and demand are much more closely linked in a mature market where large and unforeseen trade fluctuations are rare. Ultimately this will mean a less cyclical industry, leading to steadier and more predictable ROCE for the larger companies.

This is a real risk for the small shipowner, many of which are family-run businesses, as the business model will become less attractive over time for many reasons:

  • Finance will be harder to find, requiring a higher proportion of equity, and be more expensive than their larger rivals who are able to demonstrate a lower risk business model.
  • As a stand-alone company, small owners will not be able to participate on the major routes for the major commodity sectors. They will mostly be limited to niche trades arranged through brokers, alternatively they may place their ships in a pool operated by a larger shipowning company.
  • The large and frequent shipping cycles that made the asset play so profitable in the past will be dampened in intensity and reduced in frequency. This will make the asset play a less attractive business model in the future. 


Dry bulk shipping has the least sophisticated ships requiring low levels of crew specialization, so there is a low barrier to market entry and therefore small dry bulk shipowners generally struggle to benefit from their experience and reputation.

All these changes are not expected to happen overnight but will accelerate over time, particularly if the current recovery is delayed. There are already some larger shipowning companies acting as logistics providers to the commodity giants with a focus on risk management and ROCE.

Brokers are already facing challenging conditions due to the supply demand imbalance across almost all shipping sectors and the resultant low levels of charter rates, spot freight rates, resale values and newbuilding prices. Consolidation will mean bigger shipowners in all the major shipping sectors. Owners of big dry bulk fleets will want to deal directly with larger customers for major commodities on the major trade routes. They will want to own the customer relationship and reduce the cost of doing business by eliminating broking commissions. The larger organizations will have the scale and resources to manage their key customer relationships directly. Maybe these larger owners will also have the resources to deal directly with shipyards and ship breakers in the future too?

There is also pressure from the shipping customers to eliminate brokers from their supply chain with Vale having recently put in place very long-term COAs for over 50% of the Brazil China iron ore trade from 2018 onwards. It is only a matter of time before there will be similar moves to control the Australian iron ore and coking coal trades.

In summary, shipbrokers that add value to a deal will always be in demand in the shipping market and will continue to bring together shipowners and dry bulk shipping customers for niche trades and for minor trade routes. Shipbrokers are already broadening their commercial offering to what they describe as their full service client offer, seeing themselves more and more as advisers. Brokers are offering services such as consultancy and data provision to a broader range of clients and will need to continue to expand these offerings to survive. For example, a leading broker has recently announced a strategic investment in a company focused on leveraging knowledge.


While banks are expected to continue to provide the majority of finance for ships across all the major shipping sectors in the coming years, there will be a need for alternatives such as export credit agencies, bonds, and both public and private equity.

The cost of finance for shipping from banks will undoubtedly continue to increase as a result of the raised quantity and quality of capital levels required by banks due to the Basel III regulations being phased in from 2013 through to 2019. There are further regulations being discussed by the Basel Committee, termed Basel IV. These proposed regulations focus on customer credit risk which, if adopted in their current form, will further increase the cost of bank finance for shipping.

Smaller ship owning companies without an established relationship with a bank will struggle to raise bank finance for the purchase of ships. If successful, the finance will be expensive and the owner will be required to fund a higher proportion of the purchase price with equity. Smaller owners may be forced to seek alternative forms of ship finance; private equity might be an ideal solution, both for shipping companies who need money, and for investors who need a return.


The fundamental business model for shipyards may not change as much as so many jobs are supported by ship building and therefore state sponsorship is unlikely to entirely go away. Overall capacity could be expected to be reduced as governments recognize that shipping across all sectors is forecast to grow at a much slower rate in the future.

Many yards will close. Others will seek alternative or specialist work. On a brighter note, there will be a need for substantial yard capacity to retro-fit equipment required by environmental regulations including ballast water systems, and possibly SOX scrubbers once the global SOX cap is enacted.

It is essential that shipowners and other investors shy away from ‘early-bird discounts’ and other ‘attractive’ offers from the shipyards — otherwise the road to recovery may never be found. The result will be a much reduced ship building capacity and a more consolidated industry with intense on-going competition between China, South Korea and Japan.


This report focuses on what is likely to happen as a result of the prolonged and deep recession that is currently gripping the dry bulk shipping industry. The predicted outcomes are realistic and based on experience in other shipping related markets.

The underlying model for BIMCO’s Road to Recovery Report returns the industry to profitability in 2019 assuming 2% per annum trade growth. This growth prediction may well be too optimistic meaning that the recovery could be delayed well into the 2020s. The shipping economist Olaf Merk, in his well-known blog, talks about the three reasons why global maritime trade will reach its peak. These are: 1. peak in consumption; 2. peak in trade; and 3. peak in fossil fuels. Merk summarizes: “Shipping and ports both live in a bubble: there is huge overcapacity of ships and terminal capacity. It might take a decade or more to reach a more balanced situation. The possibility of the three simultaneous peaks highlighted here should make anyone wary to add even more capacity.”

Even if trade growth of 2% is achieved, shipowners must scrap ships in far greater numbers than has been seen to date. The other key metric to the recovery in 2019 is ‘zero supply side growth’ which if not achieved will delay the recovery into the 2020s.

Danish Ship Finance in its recent shipping market review made a prophetic comment: “Based on past experience, some seem to view low secondhand prices as a good investment opportunity. In some segments, however, we argue that the low secondhand prices are just as likely to represent an industry in transition in which overcapacity needs to be addressed and value creation needs to be re-thought.”


It is difficult to have an optimistic outlook for the coming years in dry bulk shipping. The industry is in charge of its own destiny, each and every shipowner must take tough decisions to help deliver, at a minimum, year on year ‘zero supply side growth’.

Not only must the dry bulk shipowners resolve the supply situation, they must also face up to the substantial changes needed to their business in a rapidly evolving macro-economic environment affecting future demand. This may well be intimidating for those involved, and many may choose to take their dwindling capital elsewhere.