The cyclical nature of bulk shipping is part and parcel of the constant supply and demand equation which faces the industry. The period from 2001–2008 was no exception, witnessing a golden era for bulk shipping. In this period, total trade grew from 2.1 billion tonnes to 3.05 billion tonnes causing a ‘super cycle’ of demand which ultimately created a response by the way of a huge upsurge in orders for new building to meet the demand. The demand side curve was driven by China’s entry to the WTO (World Trade Organization) and created huge demand, notably for major bulks such as iron ore and later coal as China became a net importer of this product from late 2008.
The credit crunch, of course, changed the picture as trade softened considerably and the overall dry bulk trade reduced by 3% in 2009. However, in some respects, this was a distortedpicture given that China’s import volume continued to grow due to a government-led domestic expansion programme on the back of low commodity prices which actually maintained reasonable demand for the large bulks. In contrast, the minor bulks trades did contract by 13% in 2009, which created some demand for scrapping of a large number of older Handysize units. Trade recovered strongly for both major and minor bulks in 2010 (by 11%) and created a further distorted picture given the delivery schedule that was building including further ordering of tonnage given low shipyard prices.
As we enter 2011, we now have a scenario where, in spite of healthy super cycle demand proportions, an opposite effect to shipping market rate levels has now begun. This is purely due to the sheer weight of the delivery schedule and presents a challenging road ahead for bulk vessel owners as the supply side equation is now on everyone’s minds. The current BDI (Baltic Dry Index) is trading in the 1,150–1,250 range — more or less where it was at the beginning of 2009, but for entirely different reasons. We are now faced with the very hard supply side conundrum and how to balance this equation.
The graph for delivery clearly demonstrates the impact of the orderbook schedule in millions of DWT (forecast to allow for slippage), set against actual demolition and forecast and a growth rate trend for the fleet. It should be noted that the actual orderbook for 2011/2012 is close to 250 MDWT (million dead weight tonnes) so the below delivery schedule of approx 171 MDWT allows for order book slippage of just over 30%. Given the thirst for building and lower yard prices in the last two years, it is possible that slippage could be even greater given that deposits could have been a lot lower, which could make it easier to default on completing orders.
The graph clearly also illustrates the supply side problem caused by deliveries in spite of healthy growth in dry bulk trade, as the fleet will have grown from 349 MDWT in 2005 to nearly double that at 655 MDWT in 2012 (whilst trade has ‘only’ grown by a very large 60%).
 
SALE & PURCHASE PROBLEM
Whilst the trading of second-hand tonnage has not been quiet it would be safe to say that given the over-supply market, it could have and should have been a more brisk market. The main problem here is per below price comparisons: in early February, a five-year-old vessel was only marginally cheaper than a new build price from a shipyard. The demand for second-hand quick Panamax tonnage is in fact so great that the second-hand price is higher!
If new ordering is to slow down for some time especially given the excess supply then a fall in second-hand prices will greatly assist this process.
The effect of fleet growth is even more graphically displayed by the fleet age profile shown above (based on fleet deadweight capacity end 2010). It can be seen that for the major bulk vessel classes of
Panamax and Capesize (where massive new building has taken place) that we now have an extremely young fleet with both having 30% and 40% respectively of their vessels between one and five years old. Conversely, vessels of 20 years and over represent only 20% or less of their fleet size. This graph will simply widen further in favour of a younger fleet as the orderbook for both classes of vessel represents 50% of the existing fleet. A similar picture exists for Supramax tonnage although the order book ratio is a lot less at 34%.
The one healthy picture is the Handysize (10–40,000dwt) sector where fleet age over 20 years remains high (nearly 50%) and therefore in spite of an order book of 23.5% of existing fleet has the right mix to ensure healthy balance in the years ahead. Given good growth in the minor bulks trade, and the need for these excellent work horses, their future remains relatively bright.
 
DEMOLITION
Whilst order book slippage will slow down the supply side, we have not as yet seen large-scale lay-ups of vessels (as witnessed by liner shipping in 2009) and, similarly, the demolition of vessels has been relatively slow as detailed in the first graph. Much of the delayed scrapping of vessels was caused by the marginal slowdown in trade in 2009 followed by a fast recovery in 2010. Therefore, whilst scrapping did increase, it was largely the Handy sector and overage vessels.
The focus on this area to address the supply side is however likely to gain considerable momentum in 2011 and 2012 given the sheer weight of the orderbook and increasing fleet size. There are forces other than this at play which will, it is hoped, assist the decision-making process and that is demand for scrap steel in India and Asia — this is forcing up prices and this is illustrated in the price breakers are paying per LDT (Lightweight Tonne) covering the period week 27/2010 through to week 06/2011 as per the graph below. The demand does not appear to be easing and it should be noted that, with Bangladesh still out of the market, their eventual return could increase prices further.
We are already seeing an encouraging trend developing in demolition of vessel types in the table above, right, covering the same pricing period of Q3–Q4/2010 through to Q1/2011. It
should be noted that Q1/2011 represents the period week 1–6 only and highlights that scrapping is already surging ahead of previous quarters in less than half the time. Provided current prices are maintained and the thirst for tonnage continues it is possible to see over 20MDWT go to breakers in 2011 and more
There are various views from different sources in respect of the realistic scrapping rate for 2011 and 2012 from lows of only 10 million DWT per annum to what we believe to be a more realistic report in Maquaries on 7 February suggesting 19–20 million tonnes in 2011.
The Maquaries report even suggests levels of 37 million tonnes in 2012. The fundamentals are there given the size of the fleet and the simple supply/demand equation. Conditions have never been better for large scrapping and it is likely many owners will increasingly be looking at price and special surveys to address this problem.
The supply side of the bulk fleet is of great concern given the growth but there are factors in play which can address this in coming months which will, it is hoped, improve the health of the industry. Unfortunately, this takes time and, like all cycles, we are likely to go through a period of soft returns for owners potentially through to end 2012 until the supply/demand equation returns to a better balance. It is however worth reflecting that the demand side of the equation is very positive and growth rates in trade of 7–8% per annum are likely over the same period which will assist the process as well and could balance the equation faster.

Iain McIntosh