Another year of volatile, bottom-dwelling rates faces owners as excess
supply swamps the market. The idling of vessels could provide some
respite in 2012, but only an unlikely demand growth surge can rescue rates from the newbuilding overhang, writes Michael King.
As the end of 2011 approached, Capesize freight rates had soared to
their highest levels of the year. But this end of year surge disguised
the painful reality facing owners as they entered the New Year — almost
any analysis of the shipping markets points irrevocably to the
conclusion that vessel supply growth will far-outweigh any increase in
demand for seaborne bulk cargo capacity through 2012 and beyond.
Indeed, even as charter rates for Capes surged in December, pulling up
the Baltic Dry Index in the process, secondhand values were plunging.
This was a sure sign that even amidst the enthusiasm generated by a
rebound after a moribund 2011 during which many vessels had been
operating below the cost of operation, buyers remained staunchly bearish
in their forward outlook.
The late Cape rates push was primarily caused by a jump in iron ore exports from Brazil into China and Korea as world prices for the commodity fell. Indeed, China’s National Bureau of Statistics said that Chinese iron ore imports would total more than 560mt (million tonnes) for 2011, an 11% increase compared to 2010.
The big tonne-mile demand gain any uptick in this long distance trade always brings to the market was given additional impetus by improved exports of coal from Australia as the year came to an end.
This pushed the Baltic Dry Index past 1,900 points in mid- December, a vast 84% improvement on the low point of the year in early February of 1,043, and also far above the 1,535 average index in 2011. However, the resurgence still left rates a long way behind the average index recorded in 2010 of 2,758 points.
Analysts disagree on the extent to which coal and iron ore shipments will continue to drive bulk carrier demand growth in the coming years, not least because of factors such as global economic uncertainty, slowing growth in China and wide divergences over when exactly India’s huge predicted coal import volume leap will kick in. But the elephant in the room for bulk carrier owners and operators is the monstrous size of the orderbook, notwithstanding the huge number of vessels delivered last year.
In the 12 month period to the end of November, RS Platou figures revealed that the post-Panamax fleet had grown by 68.5% compared to a year earlier, the Capesize fleet was up 17.6%, the Handymax/Supramax fleet by 13.3% and the post- Panamax/Kamsarmax by 8.6%. Only the ageing Handysize sector with substantial numbers of older tonnage had escaped the excesses of owners, growing just 3.8% in the 12 month period.
But despite the substantial number and size of deliveries in 2011, Drewry said the orderbook still totalled some 231,745dwt at the end of October, a whopping 39.3% of the active fleet of 589,894dwt. Moreover, over 170,000dwt of orders were due to be delivered by the end of 2012.
The orderbook is even more harrowing reading for owners with vessels in certain classes.As a percentage of the active panamax/mini-cape 80- 110,000dwt fleet in October 2011, orders on the books due for delivery within the next few years totalled 99.2%. Newbuilding deliveries due in the coming years in the 200,000+ dwt range which includes the controversial Vale-class super iron ore carriers will total 88.4% of the current active fleet.
Even though 2011 was difficult for vessel owners and operators, it could have been worse. Analysts vary on the exact numbers, but scrapping brought some stability last year with something between 22–30m dwt deleted. Even so, this still meant net fleet growth of around 70m dwt in 2011, a historically huge jump in fleet size and, at more than 10%, easily outweighing
demand growth. Looking forward, Drewry
expects tonne mile demand of some 5–7% per annum over the next five years with Chinese imports of iron ore and coal leading the market. However, the analyst warns that a “prolonged slowdown in many countries in Europe or a double dip in the US could lower the growth in dry bulk demand”. Any Chinese government action to cool down its housing market, curb inflation or consolidate its steel industry could also see iron ore
demand slow. Brokers RS Platou predict that dry bulk trade volumes will
increase by around 5–6% in 2012 with more long-hauls of iron ore and factors such as port congestion adding a further 1–2% of demand.“But even though tonnage demand could increase strongly next year, the recurring problem in the dry bulk sector is still the oversized orderbook,” said the company’s latest report.“Even though we estimate 25–30% slippage compared to the scheduled orderbook, deliveries will most likely end up in the region of 90–95m dwt.Assuming around 30–35m dwt will be sold for scrapping, the net fleet increase will be in the region of 11–12%.”
RS Platou concludes that even with record growth in tonnage demand, this will still be easily absorbed by fleet expansion.
Other analysts believe that RS Platou is overly optimistic on fleet deletions. They expect that the recent surge in scrapping rates will be short- lived. Not only will rising volumes and the recent rate increases dissuade owners from scrapping, but the recent upsurge in deletions has already seen most older vessels leave the fleet leaving fewer obvious options in 2012 and beyond.
Janet Lewis, Macquarie Capital Securities’ regional head of industrials and shipping research, said the point on which there was unanimity between analysts was that the orderbook overhang would remain a problem and keep rates under pressure throughout 2012.
“Buoyed by the pick-up in scrapping activity in 2011, optimism was expressed (by other analysts and industry insiders) that this would help to restore balance,” she said.“We agree that this is a key element — we are looking for 25m dwt to be scrapped in 2011, up from just 6m in 2010 and a further 37m dwt in 2012.
“Against this, however, we expect 96m dwt in deliveries in 2011 and 70m dwt in 2012, keeping pressure on rates, especially for Capesize and Panamax, for which the overhang of capacity is greatest.
“In addition to gradually working through the orderbook — and hoping that the restraint in limited orders seen in 2011 extends into 2012–13 — scrapping remains the main hope of bringing the market back into balance as bulk volumes to be carried gradually grow.”
Rahul Kapoor, a Singapore-based shipping analyst with investment bank RS Platou Markets, believes 2012 will see bulk carrier rates remain “highly volatile” with a weaker start to the year followed by various surges through the year much like in 2011. Through to 2015 he believes that any major upsurge in the markets will only come from Chinese import policy.
If China carries on with another round of monetary easing and sticks to its plans to rely more iron ore imports, then demand growth could contain a few positive surprises for owners. “The Chinese government on 7 December said it forecasts steel consumption to reach 750mt in 2015, thus giving iron ore consumption of 1,130mt, mainly to be secured from overseas,” added Kapoor.
“The statement said iron ore imports accounted for 67% of [China’s iron ore] consumption in 2010 and had grown by about three percentage points per year over the last decade.Assuming the same trend going forward, imports would be 82% by 2015, which would mean 927mt of imports, up from 675mt estimated for 2011.
“We believe that this 252m tonne increase would give work for an additional 218 standard Capesize vessels, assuming a declining market share of iron ore supplies from India, based on assumptions from RS Platou Economic Research.”
“By comparison the orderbook in late 2011 stood at 390 Capesizes, although many were larger than 180,000dwt. If we assume 33% permanent slippage, actual deliveries would be about 260 ships. Hence, China alone could potentially absorb a large part of the Capesize orderbook.
“As can be seen currently, despite the muted steel demand, the latest iron ore import data reaffirms the fact that Chinese iron ore buyers are highly price sensitive and any price below the cash costs of domestic iron ore production — estimated in the range of USD$120-140/tonne would inevitably pull the Chinese buyers into international imports.”
However, Kapoor still takes the view that, given the current global economic uncertainty and general lack of market confidence, the downside risks in the supply-demand equation easily outweighs the potential upside risks. “We still expect a weaker 2012 and things to turn positive late 2012/early 2013 as the fleet orderbook gets absorbed and demand stays modest,” he said. “That said, if demand was to slowdown materially, and we experienced a global slowdown and a hard landing in China where construction spending still accounts for +50% of GDP, I would say all bets are off and we could see a protracted low freight rate environment for the next three years.”
Singapore-based Jayendu Krishna, senior manager at Drewry Maritime Services, said with low rates and high bunker prices driving up operating costs, the best hope for rates was that some owners begin to lay-up vessels. “It’s hard to see much more older tonnage being scrapped, but lay-ups have already started to happen,” he told DCI. “This has increased demand, but it’s a temporary solution because these ships will come back to the fleet if there is cargo.”
Lewis said there was a general consensus among analysts that rates — and the bottom lines’ of most owners — would remain under pressure in 2012, but how long the supply overhang will dominate demand growth was open to debate. “A few optimists expect scrapping to put the market in balance by the end of 2012, while others expect the overbuilding to be a problem until 2015,” she said. “We believe 2012 will be the low-point for
rates but that the recovery back to a BDI average around 2,000will take until 2014.”