The unexpected recovery of dry bulk freight rates in early
2009 which prompted a fresh bout of newbuilding orders is
likely to limit the upside potential of dry bulk freight rates for
at least two years, according to the latest research from
Macquarie Equities Research.
China’s iron ore imports grew by some 42% last year and,
after the collapse of the Baltic Dry Index in late 2008, this
was a welcome boon to owners who returned to profitability
early while operators of container ships, for example, racked
up record multi-billion losses. But the quick rebound also led
to more bulk carrier orders. Many of these were in the
Capesize sector where the current orderbook stands at some
70% of the active fleet.
“The recovery in the BDI and Capesize rates in 2009 from
their very low levels immediately following the global financial
crisis caught the industry by surprise,” said Macquarie. “It led
to an immediate halt to scrapping plans and contributed to
more orders being placed. There was a scramble for vessels
to transport iron ore to China as it took advantage of the
absence of demand from developed countries.”
But this year the introduction of quarterly pricing and the
high price of seaborne iron ore saw steelmakers turn to
domestic producers decimating bulk markets during the
summer. The Baltic Cape Index collapsed to a low of 1,640
points in mid-July compared to a high of 5,455 in early June
before recovering to over 4,000 points in mid-September.
Macquarie believes the recent pressure on Capesize freight
rates will continue for another year given the high rate of
newbuilding deliveries which ran at around one a day for
much of the summer.
The key demand factor will be China’s steel production
which is forecast to decelerate from 13.3% year-on-year
growth in 2010 to just over 6% growth per annum for the
following five years. “Although China’s needs for imported
iron ore and coking coal continue to grow due to the
increasingly low quality of domestic product, growth rates will
look subdued compared with recent years,” said Macquarie.
This, coupled with China’s aggressive state-supported dry
bulk vessel building programme which is keeping newbuilding
prices at low levels, will contribute to excess supply for the
rest of this year. Although this will ease in 2011, it will not
ease enough to support rates. “It looks like supply and
demand could be back in balance by 2012, but much of this
will depend on whether the current low rate environment
discourages new orders even as shipbuilding prices remain
low,” said the report.
“It also depends on China not pushing Capesize building
quite as aggressively.”