SIW1083Currently there is quite a bit of interest in dry bulk carriers, despite earnings which continue to scrape along the sea bed. On the newbuilding front there is a brisk orderbook, with 42m dwt of deliveries scheduled for 2014 and brokers having difficulty finding berths for 2015. Meanwhile, some big owners who saved their cash in 2008 are in the market,“hoovering up” ships. So does that mean recovery is just around the corner?

Dry Bulk Buzz?

Let’s start with the easy stuff, the supply-demand balance. It’s easy because with today’s fundamentals you don’t need a computer model to work out that, despite heavy scrapping, there is a mega-backlog of surplus bulkers. Since 2007 the dry bulk fleet has increased by 85%, whilst bulk trade has grown by only 32%. This has transformed the 6% shortage in 2007 into the bulker market’s biggest ever “surplus” of around 30% (see graph). For comparison there was an 11% surplus in 1998/9 and 10% in 1986, both grim years with rock bottom rates and distressed asset prices.

Three Shades of Gloom

But the investment market does not see it this way. Admittedly the freight rates are perfectly consistent with the grim fundamentals: the spot market has averaged around $7,500/day for Capes and $5,200/day for Panamaxes so far this year, which barely covers OPEX. But asset prices tell a very different story, with the price of a 5 year old Panamax bulker up 9% in the last three months to about $21m and a 5 year old Capesize about $34m. At the bottom of the 1999 recession the Panamax price dropped to $13m and the Capesize price to $24m. So why are today’s prices so firm?
The conventional reasons for optimism are the economic outlook and shipyard capacity. In spring the world economy was deep in recession, but the bounce-back has started. A few years of 6% trade growth would soon soak up the surplus. Meanwhile, by 2014, bulker deliveries will halve. Encouraging, but hardly decisive.

In reality today’s market is not really about fundamentals. There are other factors at work. The fall in the credit worthiness of banks, and in the interest they pay, has left investors seeking investments with long term “real” value. Ships are core assets which (like bank deposits) are not making much today but will do some day. Meanwhile escalating bunker prices have put icing on the cake; slow steaming has absorbed much of the surplus. When the market tightens, the fleet will speed up, and investors with fuel efficient ships will benefit.

Still No Magic Solutions

So there you have it. Frightening fundamentals are maybe the worst ever for bulkers. But with fewer shipyards and a better economic cycle, the surplus could disappear in a few years, leaving investors with ships performing much better than bank deposits. It will take time, but as Shakespeare said “How poor are they that have not patience! What wound did ever heal but by degrees?” Good advice, but don’t forget that some wounds take longer to heal than others!