At the start of 2011, it was clear that the sheer weight of the delivery schedule would impact heavily on the dry cargo market and certainly in Q1/2011 this was the case with the Baltic Dry Index (BDI) reaching levels of 1,100–1,150 dragged down by the very low Cape Index. This certainly helped on the demolition rate of vessels, which started to accelerate. However by late July 2011, the Capesize index started to show
remarkable recovery as demand for tonnage increased on the back of good demand for iron ore and coal in the second half of the year. This was also coupled with an upturn in congestion to vessels in key loading and discharge ports as the demand picked up. Finally, the tonne–mile equation showed some upward changes, notably with iron exports declining from India and having to be sourced from longer haul areas. The irony, however, is that in a year of good demand with 2011 producing 5.5% growth over a previously strong 2010, this was however damaged by over supply of new tonnage.
The rally in the Capesize index does look weak as we enter Q1/2012 and already in the opening days of trading it has lost 25% of its late December highs.
During 2011, whilst both the Panamax and Handy sectors were less robust, they did generally hold up with reasonable employment throughout the year.
An updated graph below, showing delivery and scrapping with demand and supply curves overlaid. This goes through to 2013 and, in spite of 22mdwt of tonnage scrapped in 2011, over 95m dwt of tonnage delivered, representing the largest-ever delivery volume, ensured a flat performance in the market with 14% fleet growth. The total bulk fleet has moved from 540mdwt in 2010 to approx 615mdwt at the end of 2011, and the delivery schedule of 2012/ 2013 also looks extremely robust. The graph takes account of some order book slippage, but has assessed demolition to continue and at a stronger pace. Whilst most assessments for demolition allow for vessels 30 years and over, this would only represent scrapping of 18mdwt during the next two years and this is simply not enough. What did happen in 2011 was that as well as a large number of both Capesize and Panamax being scrapped, the profile of these vessels was a lot younger (for example, of the total 70 Capes which were scrapped, some 32 of these were in the age category of 20–25 years old). It is very likely that this pattern will continue in 2012 and we are therefore showing a conservative 45mdwt of scrapping over the next two years which will help move the supply curve a little closer to the demand curve but the gap is still large.
The demolition market has its own challenges whether it’s the ongoing on/off Bangladesh situation (when open, this did accelerate demolition in Q2–3/2011), the price of and demand for steel and as we saw in the second half of the year a deceleration of breaking due to the upswing in cargo demand. The large delivery schedule over the next two years will ensure
that demolition should accelerate again.
 
SALE & PURCHASE MARKET
One of the main problems of the 2006–2008 new build ordering boom followed by stagnant orders was that newbuilding prices fell in 2009/2010 and were not much higher than 5YO S&P prices. With the cargo boom in 2010, this stimulated further growth in new building rather than S&P and has in many ways worsened the supply side problem.
Since February 2011, a significant reduction in both new build prices and 5YO S&P prices has happened but more importantly in the larger size category the S&P price reduction has accelerated faster. Whilst yards will of course be encouraging newbuilding orders as existing deliveries complete, the S&P price for relatively new tonnage is becoming increasingly attractive; whilst the market continues to remain soft as purchasers no doubt wait to see if further reductions arise, there is no question that — importantly for the market — new building orders remain light whilst S&P picks up, and this will greatly assist the forward supply side equation. The current numbers favour S&P growth.
 
BULK FLEET AGE PROFILE AND DEMOLITION
One year on, an updated age profile of the current fleet is worthwhile looking at. Predictably, due to the large scale of deliveries, the percentage of fleet 0–4 years old has grown dramatically in all sectors with Capesize notably accelerating from 42% to nearly 50% in 2011. Panamax also followed a similar path moving from 32% to 38% over the same period. Supramax vessels also accelerated to a much younger fleet profile by late 2011 due to a large delivery schedule in 2011.
The key area, being over 20 years old, remains the focus with still good opportunity for re-cycling a sizeable portion of the older fleet to re-balance the supply side; however, owners of larger tonnage will need to continue to re-cycle younger units as they did in 2011.
The Handysize (10–40,000dwt) sector, where fleet age over 20 years still remains high (42%) — and even with an order book representing 24% of the existing fleet — the fleet continues to be a well managed one, due to good recycling keeping fleet growth in check. With good growth in the minor bulks trade, their future remains healthy.
A summary of demolition activity is shown below and illustrates a year of two halves, still resulting in the highest-ever demolition of tonnage. In the first half, sales were dominated by large Capesize scrapping and, to an extent, Panamax demolition. The weak Cape market forced an increase in scrapping where vessel age was less of a consideration and, coupled with good scrap prices, this aided the process. Once the freight market improved, this slowed down scrapping in Q3/2011 and the driver once again became age of vessel. Panamax demolition followed a similar path, with age being less of a consideration. Owners of tonnage less than 70,000dwt also took the opportunity to recycle this less attractive tonnage, with 44 out of the 69 units scrapped less than this size.
In the Handy sector, this followed a normal process of over 30 years old tonnage being the driver, and a healthy volume of tonnage was recycled which has kept this fleet sector in a healthy supply side position.
The supply side of the bulk fleet continues to be of great concern given the growth, but there continue to be factors in play which will address this in the coming year. The facts remain that the bulk sector has always been influenced by period cycles, and we can expect to be in a low cycle for the next two years as the large order book continues to be worked off. Further strong deliveries in the first half of 2012 will continue to depress the market and, in turn, increase demolition again, whilst other factors like an improving S&P market at the expense of newbuilding will also help.
The demand side also does continue to grow with 3–4% per annum forecast over the next two years and with tonne-mile growth exceeding trade growth; coupled with inevitable port congestion, this will further soak up tonnage demand. The Handy and Panamax sectors will more likely trade at a better level than Capesize with the latter fleet size placing enormous pressure on its supply side.
 
Iain McIntosh