Dry bulk: Tonnage oversupply to “choke” freight rates in the coming months says BIMCO
In a new report assessing the dry bulk market, BIMCO’s analysis suggests that freight rates for Capesize vessels are likely to remain depressed in the coming months, with supply-side pressure being the dominant factor in the fundamental supply-demand equation.
According to BIMCO’s shipping analyst, Peter Sand, “for the smaller ships, modest increases in earnings might be seen in the second and third quarters, boosted by demand for Australian, US and South American grains. At the end of the day such low freight rates spell out disaster for ship owners - in particular the ones trading in the spot markets or on long-term charters on a floating rate linked to the BDI. And when rates are low, even more vessels play the spot markets as they don’t want to enter into long-term deals on such low levels. Brokers are reporting that some owners are refusing charters at current rates in a move to improve the situation” he said.
During most of 2010, Capesize rates have defied gravity on the back of strong demand for particularly coal and also for iron ore. Average time charter rates of $33,298 per day in 2010 were a positive surprise to what was expected to be a hardship year. The strong demand positively affected the market and significantly reduced the downside effects stemming from the heavy inflow of new tonnage into the market. In 2010 the Capesize fleet grew by 202 vessels of 38 million DWT (+22.4%) and the forecast for 2011 is an equally challenging supply side growth said the report.
Still, demand proved to be pretty robust for the most part during 2010. According to Clarksons demand for major and minor bulk grew by 10% last year, with iron ore leading the forray, as advanced economies returned to the market to supplement the stand-still growth from China. Strong coal demand also proved to be a new market parameter and 2011 is also set to provide very solid demand growth figures. Iron ore and coal are basically the only two commodities that are shipped on Capesize vessels. A large amount of vessels continue to be chartered to haul iron ore to China, but the firm volumes are not enough to fully stem the ongoing decline in Capesize rates.
“As an extreme example of too many ships and trades being increasingly front-haul biased from the Atlantic into the Pacific came as the C11 back-haul route slipped into negative territory. On 13 January, the Baltic Exchange Capesize Route C11 from China/Japan to Europe was estimated at minus USD 229 per day. Since then the rates have worsened even further. At those rates, far below break-even OPEX-levels, owners are literally paying charterers to carry their goods in order to reposition the vessel at the lowest possible expense.
Meanwhile, the smaller segments are kept afloat on the back of the multiple commodities transported in those vessels alongside strong demand for grain shipments from the US Gulf. This is helping to ease some of the negative sentiment in the market deriving from the weather-related problems in Australia, Colombia, South Africa, and Indonesia” said BIMCO.
As has already been mentioned, one way for the industry to ease the way to a recovery in freight rates is by demolition of large amounts of old tonnage. So far in 2011, as much as 1.5 million DWT of an average age of 32 years has been reported ready for breaking. In the course of 2010 just 5.7 million DWT was demolished, as the freight rate level did not encourage demolition of tonnage.
Despite low freight rates and high scrap prices, BIMCO expect that 2011 will only see 12 million DWT sold for scrap. Currently, 24 million DWT is 30 years of age or older.
As the World’s number one demolition location, Bangladesh, remains closed for business, India, China and Pakistan offer prices close to $500 per ldt. These price levels have not been around since the tight demolition markets in mid-2008 before the financial crisis.
The active fleet has grown by 1.1% so far in 2011, caused by deliveries of 7.6 million DWT in the form of 85 new built vessels offset by considerable 1.5 million DWT being demolished.
BIMCO forecasts inflow of new dry bulk tonnage in 2011 to reach 83 million DWT, offset by demolition of 12 million DWT. This will make the fleet grow by 13.3% in 2011.
Already in January deliveries in the Capesize segment amounted to 22 ships comprising 4.1 million new DWT.
Last year Vale converted 9 single-hulled VLCC’s into very large ore carriers. In total, 13 million DWT of converted tankers
has entered the dry bulk fleet during the past two years. Only a significant amount of converted DWT is expected to enter the fleet in 2011.
Nikos Roussanoglou, Hellenic Shipping News Worldwide
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