Taal selectie


Out of the doldrums

The Baltic Dry Index (BDI), the reference for single voyage freight rates in the dry bulk shipping market, recovered somewhat in March to 689 (vs. 658 at the beginning of the month). The broader shipping index (covering all vessel types) fell 2.5%, while dry bulk shipping stocks lost a further 4.6% on average.

Graph 1 : Shipping stocks since end of October

bulkersEqualWeightedDSX, SBLK, SALT and GOGL equally weighted. Source : Bloomberg

Our selection of bulkers did a little bit better thanks to an important share buyback operation launched by one of the companies present in the certificate. Average spot market rates for bulkers improved slightly from their February levels (but remained below operating costs on some routes for Capesize vessels) and one-year time charter rates were stable (but also at low levels: ca. USD 12,700/day for Capesize vessels and ca. USD 10,800/day for Panamax vessels).

The consequences of last November’s dam burst in Brazil, which forced Vale to shut down a number of its iron ore mines, seem much worse than expected, reducing annual production by 90 million tonnes rather than the 40-50 million tonnes initially projected. Vale also indicated that return to full capacity could take a couple of years. The 30 million tonnes that the company could already bring back to market are currently blocked by a court action. If it is indeed 90 million tonnes of production that “disappear”, more than 100 Capesize vessels would find themselves idle. This will, however, not be the case as Vale’s competitors are ramping up production and Vale itself is increasing output in northern Brazil. With part of the lost tonnage also offset by Australian and South African mines, it would thus appear that up to 5% of the Capesize fleet could be temporarily out of work. The increase of coal shipments to India will not be of help, since China recently decided to lower its coal imports this year by about the same amount (ca. 10 million tonnes). As such, Capesize freight rates stand to remain (very) low for quite some time, unless ship owners resume the scrapping of older vessels.

With the pending IMO 2020 regulations on the use of low sulphur fuel oil, which will make large vessels that are over 15 years of age uncompetitive, and the current high scrapping prices, one would have expected this to already be the trend. Yet, only 10 Capesize/VLOC vessels have been demolished year-to-date, while 9 newbuilds were delivered and 7 new orders placed… A further 60 Capesize/VLOC vessels are planned for delivery this year. Some of these deliveries will certainly be delayed to 2020 but the market will nonetheless remain oversupplied. At least as long as most of the Brazilian production is not back on line, larger-scale scrapping has not resumed and orders of new vessels not subsided.

Astonishingly, all this has had almost no effect on second hand ship prices, nor on company net asset values. With bulker shares trading at roughly half of net asset value, it makes sense for owners to sell (and lease back) some of their vessels and then buy their own shares with the proceeds. Which is precisely what they are nearly all now doing, thereby putting a floor under share prices.

Thanks to the good stock market performance of the tanker companies present in our selection, the certificate was more or less flat for the month. With already 15% of the certificate invested in crude and product tanker companies we aim to profit from the better market perspectives for this sector after it went through a couple of difficult years, mainly due to an oversupply of vessels. This seems to be solved thanks to high scrapping (especially crude tankers) in the last two years and a continued increase of demand. Higher freight rates than normal for this time around are proving this.

Demand for tankers is always low in March and April due to refinery maintenance whilst shifting from producing mainly heating oil (wintertime) to gasoline (driving season). But this time refineries are also preparing for a big boost in (marine) diesel oil production in view of the new IMO regulation coming soon into force forbidding ships to use the classic heavy fuel oil.

Once the maintenance period is over, demand for crude oil (refinery input) will seriously increase and the much higher diesel oil production (refinery output) will have to be transported worldwide to bunker stations.

Demand for crude oil tankers and petroleum product tankers should thus be (way) above normal in the second half of the year pushing up freight rates and the second hand value of the tanker fleet.

Update : 04/2019

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