Taal selectie

Shipping

Out of the doldrums

The Baltic Dry Index (BDI), the reference for single voyage rates in the dry bulk shipping market, fell 3% in October. Freight rates were strong until the last week of the month, then started to weaken. This trend continued in the first week of November, with a sharp 9% drop. Should we be worried?

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

Let us note first that the BDI pertains to vessels active in the spot market, which make up only a (very) small portion of the bulker fleet. Ship owners assign most of their vessels to the time charter market, where freight rates are fixed for a period of ca. one year (sometimes longer) and are much more stable. This year, Capesize daily rates in the time charter market have evolved around USD 20,000, with a USD 22,000 peak last summer and USD 17,000 trough during the spring. Panamax time charter daily rates have averaged USD 12,500, with a USD 14,000 high and a USD 11,250 low.

Being based on the marginal “tonne-miles”, spot market rates are extremely volatile and heavily impacted by events such that happened last week in Australia, where a train accident disrupted iron ore shipments to China for a fortnight or so. This caused a collapse of spot rates for this trading route and is the main explanation for the BDI plunge (see graph). So while the trend in the BDI does provide a good indication of where the time charter freight rates are headed, long-term investors should ignore its huge volatility.

Market specialists remain very optimistic and expect freight rates to move substantially higher, at least towards the Chinese New Year.

For the time being, the dry bulk market as a whole does not seem to be suffering from the ongoing US-China trade war. Demand for iron ore and coal remains very strong, thanks in part to Chinese domestic stimulus measures implemented to counter the effect of trade tariffs on exports to the US, but also to surprisingly high Indian demand.

bdiy(Source : Bloomberg)

The only negative that we can see at this point is the total lack of scrapping of older vessels, which is preventing the bulk transport market from becoming tight. With a normal scrapping rate, the fleet would have contracted this year. Instead, it has expanded by ca. 2.5%. Newbuild orders have also been very low for the last couple of months, meaning that the order book still stands at 9.8% of the existing fleet, to be delivered within the next two to three years. Over the course of 2019, we expect an acceleration in the scrapping of older vessels due to the IMO 2020 sulphur emission rules. With demand also likely to hold up next year (at least), we see no reason for the bulk shipping companies’ sharp stock price correction, beyond being unwarranted victims of the general and severe October market sell-off.

Update : November 2018

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