Richard Scott 

Freight rates for bulk carriers in the Handymax size group have recovered in the past twelve months, after plummeting to very depressed levels. Cautious optimism, from a shipowner’s viewpoint, suggests that the improved market could continue over the year ahead. Signs have emerged indicating further progress towards a better global balance between demand and supply, implying more remunerative freight rates.

Handymax bulk carriers, medium-size dry cargo vessels with a carrying capacity range of 40,000 deadweight tonnes up to 65,000dwt, are benefiting from two trends. Growth in the commodity trades employ- ing these ships has picked up, while fleet expansion has decelerated, resulting in a reduction of over-capacity and, conse- quently, a tightening market.

The popularity of Handymax bulkers, with their highly flexible employment potential, led to over-investment in the segment. In the early months of last year, after a lengthy period of subdued conditions, freight rates sank to distress levels and prospects for recovery seemed to have receded into the distant future. Low market sentiment finally ended shipowners’ enthusiasm for ordering new ships. Since then, newbuilding orders placed have been minimal.

Amid a stronger performance this year by many global commodity movements, the dark clouds overshadowing the market are beginning to lift. There is still uncertainty about the sustainability of solid trade expansion. But the decline in Handymax and other newbuilding orders implies a sharp slowdown in fleet growth over the next twelve months — assuming that lower deliveries are still accompanied by substantial scrapping — which could assist freight market recovery.

TRADING POTENTIAL

Positive ideas about employment growth potential in the future reinforced past popularity of these ships as investment opportunities. Handymax bulk carriers are among the most flexible ships for operating around the world, providing versatility within a very broad range of dry bulk commodity trades. While that character- ization remains valid, an adjustment of the vessel demand and supply balance in the market became necessary to ensure viable trading.

Handymax design features promote their inherent attractions. A typical ship is a ‘geared’ vessel (cargo-handling gear installed), with cranes and grabs for loading and discharging cargo. Sub-categories of larger ships within the group are Supramax and Ultramax.

Installed cargo-handling equipment enables efficient operation in trades where shore-based equipment is either unavailable or inadequate. It also facilitates handling cargo offshore, from or into barges, at an anchorage. Bigger bulk carriers in the Panamax and Capesize groups usually are ‘gearless’, and therefore are totally dependent on cargo-handling by port equipment.

Handymax dimensions are acceptable at a wide range of ports, on most trade routes, while offering some economies of scale. The result is often an extremely varied Handymax employment pattern. Usage in the coal, and grain and soya, trades is frequent and there is sometimes involvement in iron ore. Minor bulk commodity trades also provide numerous cargoes: steel products, ores and minerals such as nickel ore, other industrial cargoes, fertilizers and various agricultural commodities including oilseeds and meals all feature prominently.

Investment interest firmly shifted towards higher capacity vessels of 60–65,000dwt, provided by ‘Ultramax’ bulk carrier designs at the top end of the Handymax size range. Previously the ‘Supramax’, typically 52–57,000dwt, was the preferred unit and became ubiquitous, taking over from smaller Handymaxes below 50,000dwt.

SLOWING FLEET GROWTH

The world fleet of Handymax bulk carriers is still growing quite briskly, albeit at a decelerating rate. After expanding by well over 7% in 2015, last year’s increase was under 5%, followed by an estimated 4% growth this year, as shown in the table. But in 2018 a further, much sharper, slowdown seems almost certain to occur.

Figures compiled by Clarksons Research show that Handymax capacity reached 188.4 million deadweight tonnes at the end of 2016. There were 3,442 vessels within the size group. This total comprised 24% of the entire world fleet of all sizes of bulk carrier. Over a period of five years Handymax capacity had increased by more than two-fifths.

During the 2017 first nine months, fleet deadweight capacity was augmented by over 3%, boosting the total to 3,536 ships amounting to 194.9m dwt at the end of September. Newbuilding deliveries remained large, accompanied by reduced scrapping.

Since a newbuilding deliveries surge ended five years ago, shipyards around the world have completed between 11m and 16m dwt of new Handymaxes annually, including 13.2m dwt in the most recent period. Scrapping in the past few years has remained quite modest, within a fairly tight 3–4m dwt range, including 4.3m dwt in 2016, equivalent to about 2% of the fleet recycled each year.

One prominent feature is the difference between the average size of newbuilding vessels delivered into the fleet, and the average size of those sold for demolition. Last year deliveries averaged 60,800dwt, confirming the popularity of the Ultramax category at the top end of the Handymax range. Ships sold for scrapping averaged 44,800 dwt, representing an earlier era when the 40-50,000 dwt size was seen as most valuable.

Deliveries of newbuilding Handymaxes in 2017 as a whole look set to diminish. The pace seen so far, coupled with expectations for the remaining months, suggests that a 10–15% or more reduction compared with last year could be seen. It is still very difficult to estimate a figure precisely because orderbook slippage, delays and postponements are hard to assess.

Scrapping this year also seems likely to decrease, possibly by around 20%, although this also is not easy to predict. An unexpected sharp change in freight market rates and secondhand vessel values in the year’s final weeks could have a large impact on the total.

FURTHER FLEET DECELERATION

Looking ahead to 2018, an abrupt deceleration of fleet capacity expansion seems certain to happen. The global orderbook schedule for new Handymax bulk carrier deliveries in the next twelve months or more is very low, which is expected to greatly reduce the inflow of  additional capacity. Meanwhile scrapping will be at least a partial offset. But both flows will be affected by how freight market conditions evolve, and by market expectations and sentiment.

A rough guide to the amount of future fleet capacity likely to be added is provided by newbuilding orderbooks at shipyards. Although contracting for new Handymaxes almost ceased last year, previous heavy ordering (especially for Ultramax designs of around 60,000dwt) has resulted in a total which is still sizeable. This total has been declining rapidly, however, as deliveries far exceeded incoming new orders. Currently, four-fifths of the Handymax orderbook’s deadweight capacity is comprised of Ultramax vessels.

Events over the past two years dramatically changed perceptions about the outlook for the freight market and investment returns, affecting willingness to invest in buying new ships. Previously (in 2013 and 2014) a remarkable ordering spree for new Handymaxes was heavily influenced by ideas that a freight market recovery might be on the horizon. Coupled with attractive prices quoted by shipbuilding yards, many shipowners saw a strong incentive to invest. During those two years 790 Handymax ships were ordered, a colossal number totalling 48m dwt, equivalent to about one-third of the fleet at the beginning of the period.

Newbuilding contracting dynamics changed spectacularly during 2015 and 2016, one of the most striking changes in the modern era. Collapsing new orders placed were seen in all bulk carrier size groups. Within the Handymax sector ordering became minimal. Just 11 ships were ordered in 2016, after a reduced 131 in the preceding year, according to Clarksons Research, followed by a further 18 added in the first nine months of the current year.

Reflected in this collapse is the prolonged period of depressed freight rates and sceptical views of potential for market recovery, although shipowners’ confidence has begun to revive during recent months. Over-capacity in the Handymax and other bulk carrier segments is still a prominent feature, and an extended adjustment period appears to be needed before a more balanced market is fully restored.

While continuing to contribute to enlarging fleet capacity, the Handymax orderbook for all delivery years is now down to a low total of about 10m dwt or 5% of the existing world Handymax fleet. A large proportion is scheduled for completion in the period up to the end of next year.

Fleet growth will be affected also by another major influence. Uncertainty about future recycling activity is always a key imponderable for the immediate future and further ahead. Vessel age aspects alone indicate limited potential for scrapping old tonnage. The Handymax fleet is relatively young. Only 6% (about 12m dwt) is over 19 years old, mostly in the 40–50,000 dwt size sub-group. Nevertheless, tightening regulations and compliance costs are likely to encourage more scrapping, although not necessarily in the short-term.

ENLARGING EMPLOYMENT PATTERNS

Trading patterns show that typical features offered by Handymax bulk carriers ensure wide employability. Almost all dry bulk commodity trades are accessible, with only a few limitations. However, major propor- tions of global iron ore and coal movements do not normally employ Handymaxes, because the bigger Panamax, Kamsarmax and Capesize bulk carriers can be accommodated on many routes. Preference for these larger sizes reflects greater economies of scale, usually providing cheaper transport.

One of the most prominent users of Handymaxes is coal trading. Both main parts, steam coal and coking coal, often use bigger ships but Handymax size cargoes amount to huge volumes. In total, seaborne coal trade is the second largest global dry bulk commodity trade after iron ore, amounting to a massive quantity exceeding 1,100 million tonnes last year, comprising well over one-fifth of all global dry bulk cargo movements.

Coal trade remains extensive despite negative influences which prevented growth in the past two years and resulted in the annual world total declining. Weakening import demand in a number of countries caused consecutive falls of 6% in 2015 and under 1% in 2016, after vigorous growth over many years. During 2017 signs of reviving growth have emerged. Movements consist of steam coal (used chiefly in power stations, and also in other industries), and coking coal (used in the steel industry). Steam coal is the largest category, comprising over three-quarters.

Shipments from Indonesia, mainly steam coal, utilize Handymaxes extensively. Indonesia is the world’s largest exporter of this coal type, with a total estimated at about 311mt last year. That annual volume is the equivalent of about 6,000 Supramax cargoes, although many individual cargoes are larger. Much of this trade comprises short-haul shipments to China, which limits the vessel employment duration on a single voyage, restraining demand.

China’s huge steam and coking coal imports together regained momentum in 2016 after a sharp
downturn, and have continued to strengthen this year, benefiting Handymax involvement.

Coal imports (including lignite) rose by 25% to reach 256mt last year.
Conversely in India, also one of the world’s largest importers, annual volumes have fallen in the past two years. An 11% decline to 196m was seen in 2016 and another reduction may follow, with negative implications for bulk carrier employment.

Global trade in grain and soya also provides numerous cargoes for Handy- maxes. This market segment is character- ized by highly variable and unpredictable changes in geographical patterns and quantities. During the past crop year ending mid-2017 global trade in wheat and coarse grains, and also in soyabeans and meal, increased solidly. The current 2017/18 year ending mid-2018 could see further increases.

According to International Grains Council calculations, world trade in wheat plus corn and other coarse grains was 7mt or 2% higher in crop year 2016/17 ending June, compared with the previous twelve months, reaching 352mt. World trade in soyabeans and meal was 10mt (5%) higher in marketing year 2016/17 ending September, at 205mt, based on US Dept of Agriculture estimates. Additional soyabeans but lower grain imports into China was the most notable change among importers in the recent period.

The versatility of Handymax bulk carriers enhances their suitability for carrying grain cargoes. A constantly changing global pattern of trade is clearly visible. Many large variations from year to year in the volumes available in exporting countries and variations in quantities required in importing countries, often reflecting the latest harvest fluctuations, frequently benefits Handymax usage. Port and storage limitations in many countries also provide opportunities.

Over the twelve months ahead, wheat and coarse grains imports into the Middle East area, North Africa and the European Union may rise, but China’s purchases are expected to continue falling as a result of excessive corn stocks. Conversely China’s soyabeans buying could continue on an upwards trend, accompanied by additional soya imports into a number of other countries. 

Handymaxes are widely employed carrying cargoes in the ‘minor dry bulk trade’ category as well. Many elements of this commodities group are actually large, collectively amounting to massive annual volumes. The commodity range is extensive and in 2016 the overall total appears to have been over 1800mt. After apparently minimal growth in the past couple of years, a pick up now seems to be under way.

Steel products (coil, sheet, plate and other items), and forest products form the biggest individual minor bulk trade components, although not all quantities are carried by bulk carriers. Big volumes are contributed by the bauxite/alumina (aluminium raw material), fertilizer raw materials and semi-finished fertilizers, and cement trades accompanied by large quantities of ores and minerals such as nickel and manganese ore.

Exports of steel products from China is an especially prominent example, a huge trade frequently employing Handymaxes. This trade weakened last year amid a strengthening domestic market and pressure to cut shipments to some foreign markets. The annual total of China’s steel exports to all destinations declined by 3% in 2016, down to 108mt. Another decrease seems likely in the current year.

FREIGHT MARKET PICK UP

Improved freight rates for Handymax bulk carriers have been seen this year, amid signs of a reduction in surplus capacity both in this size group and others. Slowing growth in the world fleet of Handymaxes has unfolded, coupled with a stronger performance in some of the commodity trades employing these ships. Consequently, the market imbalance has begun to diminish.

Following a rebound in the second half of last year from very depressed levels earlier, further progress in the upwards trend has occurred during 2017. The Baltic

Supramax Index (calculated by the Baltic Exchange), a useful indicator of the sector’s freight market progress, recently reached around 1,000 points, after remaining mostly within a 700–900 band in preceding months. These levels are much higher than the first half 2016 band below 600 points and down to 243 at its lowest.

What are the prospects for this market sector over the next twelve months or so? Although the Handymax size group is a distinct market segment, it is not isolated from the bulk carrier market as a whole. Over-capacity is still substantial but there are now clearer signs of a better balance evolving across the bulk carrier size groups. An imminent, possibly sharp further slowing in fleet growth could ensure that trade and vessel demand expansion matches or exceeds capacity enlargement during the next twelve months.

There are still many uncertainties, both on the demand and supply sides of the dry bulk freight market outlook. Despite a brisk revival of global seaborne trade momentum this year, key elements of the commodity flows carried by Handymax bulk carriers — coal, grain and soya, and minor bulks — remain difficult to predict. Nevertheless, more controlled fleet growth in the Handymax and other vessel sizes could enable a sustainable solid improvement in the market balance and freight rates to become firmly established.