SIW1085This week the size of the bulk carrier surplus has been in the spotlight, following a recent Analysis article which mentioned that there were about 30% too many bulk carriers on the water. Other recent estimates suggest that the surplus is really much, much smaller, only about 8%. These de-bates are entertaining, but how can there possibly be such enormous difference of opinion between analysts?

Sizzling Surpluses

The first point is that the size of the surplus capacity depends on precisely
how it is measured. The problem is that the surplus is not, strictly speaking, a quantifiable number. The market mechanism ensures that the ships are used effectively and their transport performance is constantly adjusting to market movements. As a result the “surplus” is hidden deep in the commercial operations. What you can see (like lay-up) is the tip of the iceberg and the fleet acts like a rubber band as its transport capacity adjusts. When earnings are low, ships save cash by slow steaming, waiting, multiporting, and ultimately lay-up. Then, as rates rise, this “hidden surplus” creeps out of the woodwork.

Now You See It, Now You Don’t

So, the difference between the surplus calculations is often due to different “hidden surplus” assumptions. Clarksons’ 30% compares the growth of the bulk fleet with bulk trade since 2008. Bulk trade is up 29%, but the fleet has grown 73% (see analysis in Shipping Intelligence Weekly 1083). Although these figures are not precise, with this sort of fleet expansion, there must be a sizeable surplus. But with very few bulkers in lay-up, where has it gone?

The Bulk Supply Curve

The economic answer is that it has been soaked up as “hidden surplus”, through slow steaming, waiting, multiporting etc. Take for example a Panamax bulker trading 70,000t parcels of coal from Roberts Bank in Canada to North West China. With a 10,500 miles round voyage, 6.5 port days and $600/tonne bunkers, slowing significantly reduces costs (see supply curve on the graph). At 15.5 knots the cost of bunkers and OPEX is $16.1/tonne, but slowing to 11.5 knots cuts the cost to $12.7/tonne, yielding a few more much-needed dollars.

By speeding up from 11.5 knots (D1 on the graph) to 15.5 knots (D2) the annual transport capacity increases 28% from 515,000 tonnes to 658,000 tonnes. So speed has a big impact. Of course shippers must pay a little more to go faster, but it’s still cheap.

This helps explain the different surplus estimates. The “pure” fundamentalists say all hidden surplus will eventually be released once the market improves and the ships operate at full capacity. But other analysts believe that some slow steaming is permanent, because high fuel costs and eco pressures mean much of the ap-parent surplus will never be released.

Bigger Than It Seems

So there you have it. The key question seems to be, will the gas guzzlers get squeezed out? Maybe, but the 1970s fleet of turbine VLCCs, with outrageous bunker consumption, traded for 20 years. So survival is possible, even for wildly inefficient ships. Anyway, size isn’t everything and a small surplus might turn out to be much bigger when freight rates start to rise. Have a nice day.