Despite strong forecast demand the huge bulk carrier
orderbook looks set to plunge freight rates lower next year,
writes Michael King.
The overall demand outlook this year is rather bullish, but from
the perspective of bulk carrier owners the market still looks dire.
The bulk carrier market relied on iron ore imports into
China to keep it on something of an even keel in 2009. In 2010
coal was the main growth area. Speaking in December to
delegates at the McCloskey Asia Pacific Coal Outlook
conference in Indonesia, Kunal Kapoor, Head of Global Freight
Research at Louis Dreyfus Commodities, said that while China
had increased iron ore imports in 2010, the prime demand
driver in bulk markets had been coal (see table on p106.)
“Two-thousand-and-nine was the year for China on iron ore,
the rest of the world was in decline,” he said. “Two-thousandand-
ten was the opposite. Most economies, like Japan, imported
a lot of iron ore.
“China and India saw growth in thermal coal and coal
outperformed iron in overall volumes and tonne miles growth.
“One of main reasons for this was new export destinations
such as Colombia exporting coal for the first time to China.
South Africa was also exporting to China and India.”
Drewry’s third quarter Dry Bulk Forecaster predicted that
total dry bulk trade would rise almost 10% year-on-year in 2010
to over 3,321mt (million tonnes), with the seaborne trade in
coal increasing 16.8% to 915.9mt, iron ore up 7.7% to 1,033mt
and grain movements up 18.1% to 247mt.
However, despite all this demand growth, bulk freight rates
languished for large parts of last year. In early December the
Baltic Exchange Dry Bulk Index was on 2,155 points, higher than
over the summer months but on a downward trajectory for the
latter part of the year. The problem for the market’s balance has
been the huge number of newbuilding deliveries in 2010. “In
regards to supply, as projected at the start of this year, new
building deliveries for 2010 should be around 70mt, with
approximately 40% slippage [of newbuilding deliveries from ship
yards],” said chairman and CEO of bulk carrier operator
DryShips, George Economou recently.
 
2011: MORE OF THE SAME
Drewry predicts a 4.8% rise in global seaborne shipments next
year. Other analysts see additional upside potential depending
on coal imports to China and Indian, although Kapoor said
China’s construction industry was a possible downside risk to
steel production growth and hence also for iron ore imports.
“On the demand side, I believe that China and India will
continue to be the driving forces for 2011 and beyond,” said
George Karageorgiou, CEO of dry bulk operator Globus
Maritime.
“Several people are concerned about China slowing down,
but even if it happens, China is on a robust growth trajectory so
whatever slow down occurs, if any, will still leave room for a
healthy growth rate. Also, we have the tonne-mile effect, as our
business is positively affected by the fact that cargoes, especially
iron ore and coal, have to travel longer distances between
exporting and consuming nations.”
David Bull, Senior Market Analyst at Lloyd's List Intelligence,
told DCI that if the government could keep inflation under
control then China would continue to drive import mineral
demand globally. “Airports, motorways, rail networks, housing
are all under way and being constructed — with many more in
the planning,” he added. “It will be interesting to see what the
next five year plan will say about future development.”
George Economou said he was “bullish” on demand. “The
long-term case for the dry-bulk market remains intact based on
the impact of urbanization in China and India which is expected
to continue to grow over the next decade by levels exceeding
what we have been seeing for the better part of this past
decade,” he added.
But the supply side of the equation looks less healthy with
some 120mt of capacity set to join the global fleet next year.
“For 2011, the order book is again quite large and it remains to
be seen if the yards can actually deliver anything close to this
number. We expect slippage in 2011 to be around the same
level as 2010,” said Economou.
Bull was doubtful that delays at yards would be such a
significant factor in 2011 as they had been in 2010 “With over
540 Capes on order, which is around 49% of the current fleet,
there is no doubt that freight rates can only go one way, and
that’s down unless there is either massive scrapping or lay-up or
complete abandonment of contracted newbuildings — but I can’t
really see either happening,” he said.
Most doubt over delivery dates relates to smaller vessels
sizes, prompting some to claim that ships in the Handy sector
could outperform Capesize vessels in the next two years. Dale
Ploughman, CEO of Seanergy which operates a number of
Handysize vessels, said that although the risk of oversupply is
still a factor in the dry bulk market, the rate of actual deliveries
remained unclear.
“Industry sources remain sceptical concerning the ability of
green field shipyards that have never built vessels before, to
deliver vessels ordered, while at the same time vessel deliveries
in 2011 reflect orders that were contracted at prices significantly
above current market levels,” he said. “In addition, the capital
needed to finance the completion of these newbuildings remains
a concern for many companies. We expect to benefit from the
fact that there have been fewer deliveries of smaller types of
vessels, such as the Handysize, which constitute a significant
portion of our fleet, as this should make this segment more
attractive for the owners.”
Port congestion, another supply-side saviour in recent years,
is thought to tie up around 6% of the bulk carrier fleet at any
given time but, according to Bull, port investments could see
some of this tonnage return to the market. “The normal
congestion in Australia will continue — Newcastle is planning to
change the berthing system but this has been met with a lot of
protests. Other than that, investment has been pouring into
ports to speed throughput up. I can’t see congestion being a big
issue in the future,” he added.
 
FREIGHT RATE FORECASTS
The upshot of such a huge overhang of vessels due for delivery
with freight rates already declining is that most analysts are not
expecting much in the way of succour for owners next year.
Speaking in early December, Bull said: “I would suggest that
the BDI would be lower [in 2011] than it is currently. So far this
year the average BDI is 2,834, this compares to 2,617 in 2009, a
really bad year, 6,390 in 2008 and 7,070 in 2007! I think these
times are well in the past. Surely we must now be looking at a
return to the low-2,000s.”
Ian Shirreff, the Shanghai-based chief executive of Zodiac
Maritime, is even gloomier. He told a delegates at a recent
Coaltrans conference that the decision by steel giant Vale to
build a fleet of Chinamax ore carriers of 400,000dwt would
“have the biggest effect on the market that we’ve seen in 30
years.”
He claimed it was Vale’s intention to drive rates down so the
differential between the landed cost of ore from China and
Brazil was minimal. He said daily charter rates could fall as low
as $10,000.
Speaking recently Globus CEO, George Karageorgiou, was
more optimistic for the long-term. “Admittedly, we expect
market volatility to continue, but frankly volatility is always part
of our market, so we can cope with it,” he said.
“On the supply side, we expect cancellations and delays in
the delivery of newbuildings, with significant slippage in the actual
deliveries, as happened in 2010. In any case the rate of actual
deliveries in 2011 will be strong, maybe even stronger than the
one of 2010 but from 2012 onwards the orderbook drops
significantly and for the long term we believe that demand will
be able to absorb the supply of new ships.”
Drewry said freight rates fell in the third quarter of 2010
because of uncertainty about iron ore prices. “A continued fall
in rates is expected across all dry bulk sectors,” said the analyst’s
third quarter 2010 report. “A recovery can only be expected
after 2012, but only if new orders in 2010 and 2011 do not
outstrip demand in 2013 and after, since an average vessel will
take two years to build.”
Kapoor said that with some 2010 deliveries shifting into 2011
when the order book would hit a new record, and the
orderbook in 2012 also well-stocked, particularly for the heavier
vessels, in the mid-to-long-term “demand would be strong, but
supply strong” with “Capes to suffer most”.