Taal selectie

Shipping

Out of the doldrums

The Baltic Dry Index (BDI), the reference for single voyage freight rates in the dry bulk shipping market, collapsed in January – losing 668 points, or 50%, to a level not seen since the first half of 2016, when the sector was in very deep crisis. The broader shipping index (covering all vessel types) moved in the opposite direction, gaining 8.7% over the month.

Graph 1 : Shipping stocks since end of October

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

Dry bulk shipping stocks were hit again: they shed almost 15% in January, with sector analysts revising down 2019 expected daily earnings for Capesize vessels by 10% to USD 19’000-20’000 (versus daily operating costs of USD 5’000-6’000). Are we missing something? With projected earnings (even after downward revision) still exceeding last year’s realised earnings and second hand ship values remaining steady, why are bulk shipping stocks continuing to fall?

Is it panic because of the dam burst in Brazil (a real human disaster that killed more than 300 people) which has forced the mining company Vale to shut down nineteen of its iron ore mines and will thus remove 50+ million tonnes of yearly iron ore production for export to China? This surely explains the collapse in the spot market (single voyage charters) since it takes away cargo for 35-40 Capesize vessels on an annual basis, or about 2% of the entire fleet, right at the time when demand is at its seasonal low, due to the Chinese New Year holiday, and deliveries of newbuilds are at their yearly zenith.

That said, looking out a little bit further, this triple whammy will not stay with us. Chinese iron ore stocks currently stand at low levels because Chinese steelmakers, afraid of the possible consequences of the trade war, cut their imports in the 4th quarter of 2018 in anticipation of lower demand for their products. This drop in demand did in fact not materialise, forcing steelmakers to dig into inventories. Some restocking effort can thus reasonably be expected starting in the second half of February, supporting demand for Capesize vessels.

Also, deliveries of new vessels (estimated at 2-3% of the fleet in 2019) will be over before the summer. And the scrapping of older vessels, which came to a complete standstill in 2018, will resume due to the compulsory instalment of ballast water treating systems and the imminent shift to IMO 2020 compliant (costly) fuel oil. Their well above average fuel consumption will make older vessels unsuitable for long-term charter contracts. Some 18% (!) of the existing fleet is more than 15 years of age and thus subject to possible scrapping.

It may seem a weird statement to make in the current dire market circumstances, but it could truly be party-time for bulker stocks in the second half of this year. So please bear with us.

evolution capesize graphs09.18(Source : BanqueThaler; Bloomberg)

Update : 02/2019

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