Taal selectie


Out of the doldrums

While the Baltic Dry freight index moved higher again during the month of September (+15%), reaching its highest mark since 2014, shares of listed bulk shipping companies took the opposite direction. Investors thus appear to be questioning the sustainability of current freight rates. Shipowners are also hesitant, assigning more vessels to one-year time charters at rates much lower than they could get for single voyage charters. For instance, a modern Capesize vessel could recently charge up to USD 22,000 per day for a single voyage versus “only” USD 16,500 per day for a one-year time charter.

A correction in the making ?

evolution capesize graphs(Source : BanqueThaler; Bloomberg)

Why such hesitation and should it be seen as the signal for a new severe correction?

Let us first point out that demand for bulk transport is substantially higher than was generally anticipated at the onset of the year, mainly due to increased Chinese imports of coal and iron ore. This has brought the bulk shipping market closer to equilibrium, explaining the much higher freight rates. Together with the postponement of new IMO ballast rules to 2019, these stronger rates caused the accelerated scrapping of older Capesize and Panamax vessels that was witnessed during the very tough 2015-2016 period to come to an abrupt halt. We consider this ending of accelerated scrapping as unfortunate because the bulk shipping market could find itself oversupplied should Chinese demand falter.

A second factor pertains to the 195 new bulker orders recorded year-to-date by shipyards, as compared to only 56 last year (source: Clarksons Platou). Some 100 of these new orders are for Panamax vessels (source: VesselsValue.com). Beyond renewed optimism, this resurgence in orders has been driven by the very low prices charged by shipyards for newbuilds and the possibility of ordering vessels under former IMO Tier II nitrogen oxide emission standards or, even more recently, buying existing keel layings that comply with these former cheaper standards.

Chinese and Indian Demand

How Chinese (and to a lesser extent Indian) demand for coal and iron ore evolves over the coming months and years will be key for the bulk shipping market. This is, however, difficult to forecast given the multiple variables at play. The currently strong Chinese demand stems from the roll-out of the “one belt one road” project, as well as infrastructure investments in north-west China and the country’s efforts to reign in pollution. BHP Billiton estimates that Chinese annual steel output should grow 3-4% over the next couple of years, mainly pertaining to the “one belt one road” project. This would imply increased imports of iron ore and coal – all the more so since China intends to cancel a third of its domestic (poor quality) iron ore mining licenses. Even if steel production remains constant in the near term (which is likely to be the case following a government decision to keep air pollution under control during the winter), substitution of domestically-mined products by foreign imports could still push demand for bulk transport higher.

In India, steel production, and hence demand for iron ore and coal, should grow 5-10% this year, to exceed 100 million tons (source: World Steel Association). Indian steel mills expect to double their production over the next ten years in order to meet the greater steel requirements implied by the government’s large infrastructure investment plans. Relative to Chinese steel output of an estimated 850-875 million tons this year, Indian production remains “small” (although already larger than that of the US and almost equivalent to Japan’s) but nonetheless provides a non-negligible support to (mainly) coal shipping.

Putting the surge in newbuilds into perspective

As regards the recent surge in newbuilds and lack of scrapping in the Capesize and Panamax segments, one should bear in mind that the current bulker order book is at its lowest level (as a percentage of the existing fleet) since 2003. Fleet growth through the end of 2018 is estimated at a modest 1% (source: Jefferies) due to very low orders in 2015 and 2016. This year’s orders are for delivery in 2019-2021 and represent only 2% of the total bulker fleet – with the exception of the Panamax segment, where orders represent 4% of the existing fleet. With higher scrapping likely again from 2019 due to the introduction of the new IMO ballast and sulphur emission rules, which require costly installation of treatment systems, the recent order pick-up does not (yet) threaten the supply-demand equilibrium.

Over coming months, we expect the pace of orders to subside, considering that the recent surge was, at least partially, linked to the possibility of still acquiring IMO tier II compliant vessels. That said, if ordering does continue at the same pace as during the first eight months of this year, we will have to reassess our thesis of a balanced shipping market for 2019 and onwards.

All told, and for the time being, we hold to our scenario of higher freight rates and second-hand vessel values during the next 24 months, assuming of course that the geopolitical and financial situation remains stable.

(Last update : October 2017)