Out of the doldrums

Although freight rates have fallen further in May, they remain well above cash flow break-even levels. We are now entering a period of seasonally lower demand for dry bulk transport (until September) during which lower freight rates should not worry us too much.

Capesize market evolution vs shipping stock price(Source : BanqueThaler; Bloomberg)

The fundamentals of the dry bulk shipping market are still moving in the right direction. Around 20 million deadweight tons of new ships were delivered during the first five months of the year (largely in line with the last couple of years) but scrapping was very subdued at only 6 million deadweight tons (less than 1% of the fleet, versus an average of 16 million deadweight tons for the same period of the last two years).

If this slow pace of scrapping continues, net fleet growth will be around 3% this year. On the other hand, demand has risen by some 3.3% year-to-date, offsetting the poor scrapping figures. And new build orders remain very low: only 8% of the current aggregate fleet capacity will be delivered between now and the end of 2019, and close to no deliveries are scheduled for 2020. This bodes very well for freight rates in the medium term.

If demand grows again near 3% next year, as is generally expected, and scrapping comes back to a more normal level (due to new rules on the installation of ballast water systems that are unaffordable for older vessels), the market should find itself short of vessels in the course of 2018.

(Last update : June 2017)