The dry bulk market could return to profitability within three years but only if shipowners maintain demolition and say no new builds
The dry bulk market could become profitable again in 2019, but only if a series of extremely tough and sustained measures are taken by shipowners year on year, BIMCO president Philippe Louis-Dreyfus has warned.
Among these measures, BIMCO is promoting a zero supply side growth scenario which requires shipowners to counteract the delivery of new ships every year by scrapping an equal amount of capacity from the existing fleet.
The dry bulk market relies heavily on the development in China and will, therefore, continue to be hugely affected by its economic rebalancing efforts going forward, says BIMCO.
Between 2007 and 2015, dry bulk demand grew by 4.5% per year as China continued to invest in its housing, construction and infrastructure sectors. Danish Ship Finance also estimated that China accounted for 38% of global dry bulk demand in 2015. This included 73% of seaborne iron ore demand; 21% of seaborne coal demand; 24% of seaborne grain demand; and 23% of minor/other bulk demand.
“It is clear that we cannot expect to be helped by growth in demand. The recovery of the market is wholly and exclusively in the hands of us, the shipowners. We must act together and stop growth in the supply side.”
Today, China’s economy is in a transition from export and investment to consumption services. BIMCO expects that this will continue to slow down China’s overall economic growth and dampen dry bulk demand in the time ahead.
Taking this into consideration, BIMCO’s best estimate for demand side growth rate for 2017 through to 2023 is 2% per year.
Mr Louis-Dreyfus adds: “It is clear that we cannot expect to be helped by growth in demand. The recovery of the market is wholly and exclusively in the hands of us, the shipowners. We must act together and stop growth in the supply side.
“The medicine is not going to be easy to take. Zero supply growth has been achieved only three times in recent history, in 1986, 1987 and 1998. The task ahead of us is huge and must be sustained year after year.”
Road to recovery
BIMCO has developed a ‘best-best’ scenario by looking at the period from 2007 to 2015, selecting the best/lowest level of deliveries and the best/highest level of demolitions and applying those to forecasts from 2017 onwards.
“The best/lowest level of deliveries was 25.08 million dwt delivered in 2008 and the best/highest level of demolitions was 33.41 million dwt scrapped in 2012,” it continues. “This produces an annual net contraction of the fleet of 8.33 million dwt from 2017 onwards.”
This scenario brings profitability forward by one year to 2018. It is also, however, not the mostly likely as the fleet has only contracted in size three times since 1970.
In fact, it is clear that there will be no quick and easy fix at all. Mr Louis-Dreyfus says: “Whichever way you look at it, the sustainable recovery of the dry bulk industry is not around the corner.
“If we can succeed in keeping the fleet size at the present level, while the demand size grows by 2% per year going forward, BIMCO analysists imagine that the dry bulk industry should be profitable by 2019.
“Failure to do so, by letting the fleet grow by just 1% per year, while the demand side grows by 2% per year will postpone the recovery by an additional three years to a distant 2022. That is simply not an option – we need to act now.”
Again, Mr Louis-Dreyfus concludes that the whole dry bulk shipowning community must work together to realise the demolition of ships and avoid the temptation to order new ships, requiring a fresh look at the business model in dry bulk shipping.
“I have long advocated scrapping all bulkers over 20 years old and I have none in my fleet,” he says. “But I don’t seem to have convinced everyone yet in the shipping world. Too bad for the safety of crews, the environment and the market.
“No one is shielded anymore. We are all at the mercy of the spot market. To stay in the business, you need to adapt or you need to leave the industry.
“I am confident that all players in the industry feel the severity of the downturn. Now they also know where we are, how serious it is and exactly what needs to be done to turn it around.”
The prospect of yet more years of loss-making freight rates will change the industry. Not only will there be bankruptcies and consolidation of fleets, but successful owners of the future will operate fleets with the size and scale to be able to adopt a risk management approach to chartering. They will also have sufficient ships deployed on longer term charters to ensure that the business has the cash flow to sustain it through future downturns.
Furthermore, consolidation may mean that the larger customers are able to fulfil the majority of their dry bulk shipping requirements from a small number of larger shipowners, which will make it much more difficult for smaller asset play owners to survive in the major dry bulk trades, BIMCO warns.
Undoubtedly then, the next three years will be a real game changer for both dry bulk shipowners and the broader industry.