Taal selectie

Shipping

Out of the doldrums

The Baltic Dry freight index dropped 20% from its November high of 1,700 to about 1,350 at year-end 2017. This should come as no surprise since lower freight rates were expected going into the 1st quarter of 2018, due mainly to Chinese steel production cuts aimed at controlling air pollution during the winter months (which are temporarily weighing on imports of iron ore and coal).

evolution capesize graphs(Source : BanqueThaler; Bloomberg)

Freight rates should normally pick up from the second quarter onwards, as China speeds up steel production again. This will increase the demand for bulkers in a year that will see few newbuilds hit the water (due to the very low level of ship ordering in 2015 and 2016).

That said, the second half of 2017 did see ship owners start to invest in the newbuild market, pushing up the order book from a low of 7.5% of the existing fleet last July to 10% today. But with these vessels only due to hit the market between 2019 and 2021 and averaging ca. 3% of the existing fleet each year, below the expected scrapping rate, there is no reason yet to panic. Bear in mind that scrapping should normally accelerate from 2019 onwards due to the introduction of the new IMO ballast and sulphur emission rules, which require costly installation of treatment systems. Ship owners will be hesitant to install such systems on vessels that are over 15 years old, accounting for some 14% of the total fleet.

Abundant ordering of new ships can be expected during 2018, with the combination of strong charter rates and still very low newbuild prices (due to high competition between shipyards) bound to make ship owners overly optimistic (as usual). On the other hand, shipyard capacity is getting tighter which should push prices up. This is positive for the second-hand market where ship prices, while trending upwards, still remain low in historical terms. Recent transactions in the older vessel segment were concluded at prices 10-15% above estimates. This bodes well for the NAV of the listed bulk shipping companies and probably explains why their stocks went up in November and during the first days of this year. Our outlook for higher freight rates and (much) higher vessel values in 2018 remains intact, provided of course that the geopolitical and financial situation remains stable. We thus expect (much) higher valuations of bulk shipping companies in the near term.

(Last update : January 2018)