The dry bulk sector is struggling to absorb the escalating numbers of new ships competing for business.
Global fleet overcapacity was heightened in January with flood-related disruptions at coal export ports on the east coast of Australia and maintenance at the key Brazilian iron ore export terminals of Tubarao and Ponta da madeira, which resulted in declines in shipments booked for larger vessels.
On January 12 average capesize vessel earnings had fallen to a two-year low to equal cash breakeven rates. Owners are now accepting rates below operating costs on the world's largest trade lane, shipping iron ore from Western Australia to Asia.
There are hopes, however, that these events may spur quicker and more decisive action to address overcapacity.
Janet Lewis, an analyst for Macquarie in Tokyo says shipping companies will be forced to accelerate scrapping.
Tim Huxley, chief executive of Wah Kwong Shipping, a Hong Kong based owner and operator of dry vulk ships, says "The dry bulk industry got a free pass in 2009. That is not going to happen this year."
The continued decline in the Baltic Index since November 2010, and the acceleration of its fall since the onset of the floods (from 1,693 on Tuesday January 4 to 1,439 on Monday 17), has added to the likelihood that owners will have to scrap.
But levels of scrapping are lagging far behind newbuilding deliveries. According to Clarksons data, some 957 vessels entered service in 2010, with just 115 scrapped, bringing the global dry bulk fleet to a total of 8,154 at the end of the year. This compared with 550 deliveries in 2009 versus 265 scrapped, which saw 2009 end with a fleet of 7,295.
Ms Lewis says the dry bulk fleet needs to reduce 10% of its ships – by a mix of scrapping and order cancellations – to restore equilibrium between supply and demand.