Taal selectie

Shipping

Out of the doldrums

In recent weeks, the Baltic Dry Index has undergone a sharp correction, shedding some 35% relative to its mid-December three-year high. This should come as no surprise: lower freight rates were to be expected going into the first quarter of 2018, with Chinese steel production cuts aimed at controlling winter air pollution temporarily lowering imports of iron ore and coal.

evolution capesize graphs(Source : BanqueThaler; Bloomberg)

On the other hand, the value of ships in waters continues to increase, as ship owners remain very positive on the medium-term outlook and look to buy existing tonnage in a shrinking second-hand market.

Unfortunately, stock prices of listed bulk shipping companies have followed the downward path of freight rates rather than benefitting from the increasing second-hand value of their fleet.

That said, our underlying investment thesis remains very much in place. The strong global economic outlook for 2018 will drive 3-3.5% demand growth for bulkers in a year that will see few newbuilds hit the waters. The pick-up in vessel orders in the second half of 2017 will only impact the fleet from 2019 onwards, to the tune of 3% per annum, at which point scrapping can be expected to accelerate due to the introduction of the IMO ballast and sulphur emission rules. Ship owners will be hesitant to install costly treatment systems on ships that are more than 15 years old, accounting for some 14% of the total fleet.

All told, we expect bulker fleet growth to be limited for the next couple of years, and vessel supply-demand equilibrium to be reached – even turn short – sometime this year. Once the market becomes convinced of this perspective, a second leg up in bulk shipping stocks can commence, assuming of course a stable geopolitical and financial context.

(Last update : February 2018)