BIMCO: dry bulk shipping should take good care of the recovery 

Capesize ships have (as of 26 October) been in profitable territory (above US$15 300/day) since 11 August and panamaxes likewise, since 5 September (above US$10 200/day).

Handymax/supramax/ultramax owners and operators who fixed their ships after 21 August, have also seen freight rates covering, not just OPEX but also CAPEX, leaving a slim return on investment. This has only happened three times – for more than two days in a row – in the past two years. Finally, the handysize segment has, for the first time since April 2014, reached a freight rate level above US$9000/day.

This ongoing recovery is still in a “fragile” state – demand has increased but so has supply. This means only a slight fundamental market improvement. The return to permanent profitable freight rates is still way off. The transport demand for dry bulk cargoes in 1Q18 is considerably lower than the volumes transported in 4Q17, and that’s the first hurdle to cross. Maintaining slow steaming is another prerequisite to hold onto the gains that have been achieved.

At the centre of dry bulk demand, as always, is China; growing its seaborne imports of coal during the first nine months of 2017 by 18.7%, and its seaborne imports of iron ore during the first eight months, by 6.9% year-on-year. In total, this is a demand growth of 79 million t (27 + 52 respectively) for the two commodities year-to-date.

Setting a new world record in steel production for the month of August of 74.6 million t, resulted in total growth of 5.6% for eight months’ production in 2017, compared with the same period last year.

Another record was reached in September, when Chinese iron ore imports exceeded 100 million t for the first time.

While this is much needed by the dry bulk shipping industry to get out of the doldrums of recent years, there may be a limit as to how far this can go. Imagine if steel production stalls, then iron ore imports are likely only to grow at the expense of domestically mined ore.

BIMCO calculates that substitution of low-quality, domestically mined iron ore in China, for imported high-quality iron ore from Brazil or Australia, would have increased imports by 17 million tpm in the first eight months of 2017.

Regardless of recent reports, about one in three Chinese iron ore mines being at risk of losing their mining licences due to environmental issues, the output from Chinese iron ore mines is still up by 5% in the first eight months, year-on-year. One of the key risk elements in the equation is actual steel consumption in China.

In addition to the strong growth that we have seen into China, US coal exports have certainly added to the panamax and capesize demand in the Atlantic since 4Q16.

From November 2016 to July 2017, we have seen a monthly average of 6.4 million t of coal being exported from the US to a vast number of destinations such as Japan, Egypt, Turkey, South Korea, China, Guatemala, India, Spain and Morocco. This is up by 61% versus the same nine months of the year before. Key export ports, mostly on the Atlantic side, are Hampton Roads and Baltimore, where panamax and capesize ships are used to export 60% of the total volume. In the US Gulf, Mobile dominates exports with shipments of coal in panamax. On the Pacific side, US coal exports are handled via Vancouver.

The total tonne-miles adjusted demand growth rate in 2017 is forecast to be 3.9%, the highest in three years.

Supply

The delivery pace has reduced significantly since 1H17, but so has demolition activity. During 1H17, 28 million DWT was delivered, while 8.5 million DWT was demolished. Whereas 3Q17 has seen only 6 million DWT delivered, and 3.6m DWT permanently leaving the active fleet.

Demolition of handymax tonnage, has been dominant this year – a natural reaction from owners operating in that segment, which has seen fleet growth around 5% pa for some time now, clearly outpacing all the other dry bulk segments.

Contracting activity for the year so far, has as expected, gone up from the extraordinarily low levels that we experienced in 2016. While Q1 2017 was still quiet in terms of actual orders, newbuild interest was growing in the background. The larger segments are popular. Panamax and very large ore carriers (VLOC) account for 15 out of the 17 million DWT ordered in total, year-to-date (until 2 October). It’s worth noting that many of the VLOCs have been ordered against a long-term charter, most likely replacing existing long-term chartered VLOCs when they are retired. Later in October, another five VLOCs were ordered.

For the first nine months of the year, the dry bulk fleet has grown by 2.7%, already a three-year high. BIMCO expects the fleet will end up growing by 3.1% to 16 million DWT as demolition expectations are lower than the previously anticipated 19 million DWT.