The Baltic’s Asia-Pacific director Chris Jones headed a panel of Baltic members discussing prospects for the dry bulk market at the Asia Logistics & Maritime Conference which took place in Hong Kong last week. The panel consisted of Peter Kerr-Dineen, Chairman of Howe Robinson Group and Baltic Director; Michael Nagler, Head of Global Freight, Noble Group; Mats Berglund, CEO Pacific Basin Hong Kong and Sverre Bjorn Svenning, Head of Research Fearnley Astrup Oslo.
The topic of the discussion was “Can The Dry Markets Bulk Up?”
According to the panelists, the existing dry bulk fleet combined with new ships yet to come and low steel prices point to a tough road ahead. Discussion centered around the prospects for the Chinese economy; the impact of the plunge in bunker prices.
Chris Jones opened with a quote from Dr. Martin Luther King, “Only in darkness can you see the stars” setting the stage for some optimism for the day’s panel discussion.
Sverre Bjorn Svenning Presentation: An Analysis of Supply and Demand in the Dry Bulk Market
- Dry bulk demand: coal, grain and iron ore represent two-thirds of demand; for a fleet of 50,000 dwt+ the share is almost 86%.
- Recent market factors include the mid-90s boom, GFC crash and Chinese economic takeoff in Oct 2003 when steel mills started to import major volumes of iron ore.
- 1987 to 2003 CAGR for all commodities was 3% to 6%; 2004 to 2015 growth was 5% to 8% CAGR for all commodities.
- Does not predict doom and gloom in China; no hard landing. As economy changes from fixed asset-driven to consumption-driven; that said a decline in Chinese housing stats is concerning.
- Fleet development 1999 to 2009 increased 71% or 5.5 p.a. CAGR; 2009 to 2014 fleet increased 63% or 10.3 p.a. CAGR.
- High order book defined at >20%; estimated real order book to be 100 mdwt with 13 mdwt coming out due to delays and deferrals
- Fleet surplus is substantial and will have a dampening effect on freight markets for years to come.
- Forward demand for Chinese steel production and iron ore imports indicate that there is no momentum and growth in a way that benefits dry bulk carriers; China is sourcing more from the Atlantic.
- Coal shipments have contracted significantly; prices are low, China battles air pollution; India aims for self-sufficiency which in five years will cap imports; investors flee from coal, in several US regions, renewables (PV) are cheaper than coal.
- In India it is cheaper with PV/battery packs and micro-grid if a village is located more than 5 km from the main grid; South Africa is building large PV power utilities.
- In conclusion: net fleet growth coming off.
Peter Kerr-Dineen Presentation: Does 2 + 2 =? Riddles of the Dry Bulk Market
Remarks prepared to explore why dry bulk markets have been much weaker this year as well as oil and its plunging price.
- Pessimism is gripping dry bulk markets.
- The simple model of a market structure is when prices reflect the balance between supply and demand. If reference is by fleet employment rate of 82%, freight rates will be at or below the level of cash cost of operations; if employment rates fall below 82%, earnings remain flat but tonnage accumulates.
- As time charter earnings decline and bunker prices reach record levels, the operating speed of the fleet is reduced and this results in the need to adjust the model using actual and potential employment rates.
- The bunker price collapse has had the most profound and significant and negative impact on the dry bulk market.
- A further collapse has forced a greater increase in speed despite increasing rates; this then can affect the fleet by 15%.
- The markets are reaching a structural vs. cyclical turning point. Iron ore trades have continued to grow, this year expected to be 6 to 7%.
Chris Jones asked the panelists about their confidence in acquiring assets in the handymax sector and whether or not they give more consideration for eco-vessels?
Mr Berglund said Pacific Basin buys when times are bad and that the company has a more industrialized model with more than 90% laden, giving the ability to make margin even in a weak market. He further indicated that Pacific Basin is managing for a continued weak market and will continue to study and assess opportunities. Mr Kerr-Dineen added that brokers thrive on changing markets. And what matters most is putting the right value on the ship.
The panelists concluded by agreeing that since everyone is negative on the market, sentiment would likely turn bullish. Mr Kerr-Dineen added that the market is not yet bad enough, saying, “It becomes bad enough when you can’t trade your ships.”
Summing up Chris Jones said:
“Today we are at a very important point in our development and a crucial point in the development of the global shipping industry. China has emerged as an economic superpower which is here to stay. The era of a European dominated global shipping industry is past as the Asian economies continue to develop. New owners and charterers from across the region are making their mark.
Collectively as an industry we face challenges on so many fronts. We are facing a tougher operating environment than ever before. We are rightly expected to play our role in minimising human impact on the seas and the air. This involves investing in the latest technologies, developing new engines, fuels and operating systems. It involves changing the way in which our ships are operated. It involves investment. Yet all these pressures come at a time when the industry is under financial pressures. Poor freight markets and uncertain economic times make it a difficult time to be a dry bulk shipowner.
I cannot pretend to have the solutions to these problems, but the answers can only come about through international co-operation and through trust. Charterers, owners, legislators, shipbuilders, insurers, financiers and ports each have their part to play. By working together, by talking, by meeting and by eating together, we as an industry can find the solutions and ensure a sustainable, profitable and safe industry.”