This time last year DCI predicted the Handysize sector would prove more appealing than the overall dry bulk carrier market during 2011. Within the parameters of a bearish freight environment, that prediction has proven prescient. More of the same can be expected in 2012 and perhaps beyond, writes Mike King.
In mid-October the Baltic Dry Index finally started to perk up, reaching 2,173 on 14 October, down from 2,769 a year earlier but representing a considerable gain compared to the level of 1,700 it had sunk to at the start of the year. But this relatively positive autumnal trend disguised the rather grim returns bulk carrier owners and operators have suffered for most of 2011.
As summer turned to autumn this year rising Capesize demand dragged bulk carrier freight rates up by their collective britches as Chinese buyers returned to coal and iron ore markets with a vengeance. As demand spiked, port congestion further twisted the supply-demand balance towards the latter, with key load terminals in Australia and Brazil briefly overwhelmed by the sudden arrival of large numbers of vessels awaiting berths.
But for much of 2011 the Cape market has been stagnant. According RS Platou Research’s analysis, for example, earnings for Capesizes in the first half of this year averaged out at just $9,500 per day before rising to $17,000 per day in the third quarter. Although this constituted a marked improvement, it was hardly cause for celebration given that operating costs in the sector are thought to average around $10,000 per day, not including capital expenditure overheads.
But while the Capesize sector’s early dip and third quarter surge was reflected to some degree across the bulk carrier range, the exception has been the Handysize sector which, as in 2010, has remained a market apart during 2011.
Handysize earnings in the first half of the year stood at a relatively respectable $11,000 per day, actually higher than those achieved by the much larger Capes during the period. As the other sectors recovered from a weak first half in the third quarter, Handysize earnings then fell — but in keeping with their decidedly less volatile nature, not by much — to average out at $10,000 per day in the third quarter, before climbing again rapidly in the early part of the fourth quarter. The Baltic Handysize Index stood at 822 on 14 October, still historically low but around about the same level as a year ago.
This relative stability is partly explained by strong demand this year for minor bulks, coal and steel products, as well as healthy movements on coastal and intra-Asia trades where smaller ships are often deployed and geared Handysize vessels often prove attractive. Chinese coastal traffic, for example, has risen by 20% this year compared to 2010 to around 300mt (million tonnes) as higher world iron ore and coal prices have prompted domestic producers to boost output, according to RS Platou.
“The smaller segment is doing well compared to Capes,” said Rahul Sharan, senior Research Analyst at Drewry. “[This is] because of a considerable increase in coastal trade. [Also] new sources and new destinations of trade are helping this smaller segment.
“Cargo for smaller vessels is also less affected by downturns because minor bulks and grains are normally less prone to these [economic] shocks.”
Norwegian owner and operator Norden reached a similar conclusion in its latest financial results analysis. “Despite relative market weakness, the smaller [bulk carrier] vessel types continued to outperform larger vessel types, an indication of a relatively sound demand for coal, grain and minor bulk cargoes,” said the carrier.
The other positive factor for Handysize operators in 2011, as was the case also in 2010, has been the aged nature of the fleet. With over 40% of active Handysize vessels over 20 years old at the start of the year, high rates of scrapping in the first half of 2011 saw the fleet grow by just 2.5%. This compared to 6–7% across other bulk carrier segments.
Of course, this is all relative. While the Handy sector has generally been more robust than the larger bulker segments, most owners have still seen profits slide because the overall market has quite simply been swamped by excess capacity. And this excess supply has been exacerbated by the generally weak global economy.
Pacific Basin Shipping, one of the world’s largest operators of Handysize vessels, predicted earlier this year that by the end of 2011, the potential upside vis-a`-vis returns received in 2010 were difficult to identify. PB identified the continued influx of newbuildings and the ongoing economic uncertainty in Europe and the US as the key market softening influences.
“Generally better supply and demand dynamics in our minor bulk segments are unlikely to measurably boost Handysize rates, and this unsatisfactory market will to a large extent dictate our full-year performance,” said the Hong Kong located and listed owner. “However, we should benefit meaningfully from the value of our dry bulk cargo book and the earnings leverage generated by the scale and flexibility of our fleet.”
There are reasons to suspect that the Handysize sector could more dramatically outperform the bulk market in the years ahead. Norden, which has been investing heavily in Handysize vessels and still has some 16 on order, calculated earlier this year that around 45% of the Handysize fleet was still over 20 years old.
Indeed, vessel supply looks set to be the key for Handysize operators in both 2012 and 2013. According to RS Platou Research, the orderbook for bulk carriers overall currently totals some 39% of the active fleet – a higher percentage even than the equally destitute container sector with only 30%. In the first eight months of 2011, 66% of bulk carrier newbuilding orders were delivered as scheduled and for the full year the fleet will see a net growth of around 14–15%.
According to the analyst, weak freight rates are likely to continue in 2012 due to the excess supply of vessels on order. This will see fleet growth of around 10.4% in 2012 compared to demand growth of just under 9%. However, despite the poor general global economic outlook, the analyst also identified an upside for the market in general in the shape of lower world market prices for iron ore and coal. This could see Chinese industry source more of its requirements from overseas.
Thereafter the overall market should improve with demand growth of 9.3% predicted in 2013 compared to fleet growth of 7%. “In 2013 there is a good possibility that demand growth will exceed fleet growth and thereby start to absorb the surplus of tonnage and therefore result in higher earnings.”
But while the general view of the market in 2012 is rather negative until 2013, the outlook for the Handysize sector looks rather different, and certainly more positive.
Based on the limited newbuilding orderbook and the expected scrapping of large numbers of older vessels, Drewry believes the Handysize fleet will barely grow at all in number and only marginally (see chart) in terms of tonnage from now until 2016.
On that basis Drewry is forecasting one-year time charter rates to rise from an average of $11,300 per day this year, to $12,300 in 2012, $14,600 in 2013 and then continuing upwards to reach $22,200 per day in 2016.
The Handysize sector will, it seems, remain a market apart for some time to come.