Dry bulk shipping must rely less on positive demand side surprises and more on muted vessel supply if it is to fully recover
According to the latest edition of the Dry Bulk Forecaster, published by global shipping consultancy Drewry, moderating vessel supply growth over the next few years coupled with mild improvement in the outlook for seaborne trade will enable a reduction of chronic overcapacity and, subsequently, mark a recovery in the dry bulk shipping market.
Drewry forecasts that capesize one-year time charter rates will double over the next five years, noting that an improving demand outlook together with a slowdown in vessel supply, due mostly to high scrapping and continued low deliveries along with scarce new orders, have contributed to a sharp contraction in the supply and demand gap.
Further, Drewry says that the impending additional cost of installing Ballast Water Treatment Systems (BWTS) will force owners to continue to send younger tonnages to scrapyards. Currently, it adds, owners have been struggling to cover their operating costs so the extra cost here will mean increasing losses.
The ongoing scarcity of private equity has mostly controlled new orders in 2016, and Drewry expects the orderbook to thin even further over the next two years as investors continue to shy away from the dry bulk market. This promises to keep deliveries low and, in turn, limit supply growth.
We cannot expect positive demand side surprises coming to rescue eternally. The enormous overcapacity of ships must be addressed – starting now – and continued over the next three years at least
Demand for dry bulk shipping, meanwhile, will grow strongly as Brazil’s increasing share of Chinese iron ore imports drives higher tonne-mile demand, says Drewry. It adds that even if the Chinese iron ore trade does not rise as expected, a shift of sourcing towards Brazil will mean that the demand for ships will increase “many fold”.
Coal imports are certainly expected to increase in Asian countries such as Korea and Taiwan as they open more coal-powered generating plants to support their growing demand for energy. Drewry predicts that coal demand will continue to increase in these countries over the next five years.
Rahul Sharan, Drewry’s lead analyst for dry bulk shipping, concludes: “Dry bulk shipping has bottomed out and a market recovery is underway, albeit a slow one. Rising demand for ships to cater for increasing raw material consumption, together with the effect of shifting trade routes will help increase tonne-miles.”
With investment remaining out of reach for dry bulk owners, Mr Sharan adds that even a modest growth in demand will help support market recovery. Meanwhile, he expects the increasing cost of running an old ship to ramp up the number of vessels going to scrapyards.
In shipowners’ hands
International shipping association BIMCO shares Drewry’s vision of a more profitable future for dry bulk shipping on the back of muted vessel supply.
In its updated Road to Recovery report for the dry bulk sector, BIMCO says that scrapping ships and no new builds is still the fastest way for the dry bulk shipping industry to return to profitability in 2019.
It also reveals better demand side conditions for dry bulk shipping, but notes that the supply side is worse off today than earlier estimates projected for 2016 – a fundamental imbalance that BIMCO says must be addressed in 2016.
“We cannot expect positive demand side surprises coming to rescue eternally,” it adds. “The enormous overcapacity of ships must be addressed – starting now – and continued over the next three years at least.” BIMCO says that bringing profits back remains in the hands of shipowners themselves. Peter Sand, BIMCO’s chief shipping analyst, reveals that the dry bulk market is still in a terrible condition despite a significant improvement in the Baltic Dry Index (BDI) from its all-time low back in February 2016.
He says that the market has simply risen from “catastrophic” to “gloomy”, so the need for shipowners to take decisive action remains: “When you claw your way back from the worst market ever, the road is long, rocky and tough. It requires stamina, adaptation and determination from all shipowners.
“The market has improved based on growing demand, but the sector cannot rely on this alone – which is out of its own hands. The industry must act decisively to reduce the enormous overcapacity of tonnage by keeping demolition activity high, even as freight rates go up, to make the recovery a sustainable one.”
Lack of action
For the first five months of 2016, shipowners seemed to be doing the right thing. They were limiting the impact of new deliveries launched into the market by demolishing ships which were creating excess capacity, contributing to a contraction in the supply and demand gap, as Drewry says, and putting the sector on track to reach BIMCO’s projected net supply growth of 10 million for the full year, based on 50m dwt of newbuilds fed into the market and 40m dwt taken out of the market for demolition.
However, BIMCO says that around 38m dwt had been delivered in the first nine months of the year while a lesser 25.2m dwt had been demolished. As a result, BIMCO has reduced its forecast for demolition of dry bulk tonnage for 2016 from 40m dwt to 35m dwt, meaning that the dry bulk fleet will see a net growth of 15m dwt, or 1.9%, for the full year.
Staying on track
Meanwhile, BIMCO agrees that the demand side has significantly improved since the start of the year. BIMCO’s May 2016 forecast for a demand side growth rate of 0.3% on a volume basis is now expected to reach a growth rate of 0.8% for the full year.
More cargoes-tonnes from long-haul trades has also improved the picture, it says, as the tonne-miles demand growth rate has increased substantially. BIMCO’s current estimate suggests that the demand side will improve by 1.4% in 2016, up from 0.1% in its May 2016 tonne-mile estimate.
In its projections, BIMCO has set the demand side to grow by 2% from 2017 onwards, noting that the developments in 2016 appear to have smoothed the path upwards from the low level in 2015.
But improvements like those seen in 2016 so far need to continue for many years to come, Mr Sand adds: “The slowdown in demolition activity is alarming. The work that needs to be done on the supply side is substantial and the low level of demolition merely postpones the recovery. What is clearly keeping the dream of a profitable market in 2019 alive is the fact that global shipowners and investors have stayed away from the shipyards.”
Indeed, apart from 30 VLOCs ordered from Chinese owners confirmed in March and April, there have only been a handful of new orders for dry bulk ships.
The dry bulk market must stay on that track if it is to achieve zero supply growth rate in the coming years, as demolition activity is guaranteed to slow upon a gradually improving freight market.