Archives for posts with tag: Baltic Dry Index

There have been plenty of record breaking facts and figures to report across 2016, unfortunately mostly of a gloomy nature! From a record low for the Baltic Dry Index in February to a post-1990 low for the ClarkSea Index in August, there have certainly been plenty of challenges. That hasn’t stopped investors however (S&P not newbuilds) so let’s hope for less record breakers (except demolition!?) in 2017.SIW1254

Unwelcome Records….

Our first record to report came in August when the ClarkSea Index hit a post-1990 low of $7,073/day. Its average for the year was $9,441/day, down 35% y-o-y and also beating the previous cyclical lows in 2010 and 1999. With OPEX for the same basket of ships at $6,394/day, margins were thin or non-existent.

Challenges Abound….

Across sectors, average tanker earnings for the year were “OK” but still wound down by 40%, albeit from an excellent 2015. Despite a good start and end to the year, the wet markets were hit hard by a weak summer when production outages impacted. The early part of the year also brought us another unwelcome milestone: the Baltic Dry Index falling to an all time low of 291. Heavy demolition in the first half and better than expected Chinese trade helped later in the year – fundamentals may be starting to turn but perhaps taking time to play out with bumps on the way. The container market (see next week) had another tough year, including its first major corporate casualty for 30 years in Hanjin. LPG had a “hard” landing after a stellar 2015, LNG showed small improvements and specialised products started to ease back. As reported in our mid-year review, every “dog has its day” and in 2016, this was Ro-Ro and Ferry, with earnings 50% above the trend since 2009. Also spare a thought for the offshore sector, arguably facing an even more extreme scenario than shipping.

Buy, Buy, Buy….

In our review of 2015, we speculated that buyers might be “eyeing up a bottoming out dry cycle” in 2016 and a 24% increase in bulker tonnage bought and sold suggests a lot of owners agreed. Indeed, 44m dwt represents another all time record for bulker S&P, with prices increasing marginally after the first quarter and brokers regularly reporting numerous parties willing to inspect vessels coming for sale. Tanker investors were much more circumspect and volumes and prices both fell by a third. Greeks again topped the buyer charts, followed by the Chinese. Demo eased in 2H but (incl. containers) total volumes were up 14% (44m dwt).

Order Drought….

Depending on your perspective, an overall 71% drop in ordering (total orders also hit a 35 year record low) is either cause for optimism or for further gloom! In fact, only 113 yards took orders (for vessels 1,000+ GT) in the year, compared to 345 in 2013, with tanker orders down 83% and bulkers down 46%. There was little ordering in any sector, except Cruise (a record 2.5m GT and $15.6bn), Ferry and Ro-Ro (all niche business however and of little help to volume yards).

Final Record….

Finally a couple more records – global fleet growth of 3% to 1.8bn dwt (up 50% since the financial crisis with tankers at 555m dwt and bulkers at 794m dwt) and trade growth of 2.6% to 11.1bn tonnes (up 3bn tonnes since the financial crisis) mean we still finish with the largest fleet and trade volumes of all time! Plenty of challenges again in 2017 but let’s hope we aren’t reporting as many gloomy records next year.
Have a nice New Year!

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It has been a grim start to 2016 for the bulkcarrier market, with the Baltic Dry Index sliding to new record lows on almost every day of the year so far. With a nearly constant stream of negative news continuing to emerge across each of the key dry bulk cargo sectors, it is almost as if Poseidon, the Greek god of the sea, has with his powerful trident launched a three-pronged attack.

Down To The Ocean Depths

The current depression is indeed severe. The Baltic Dry Index, a daily indicator of bulkcarrier rates, fell to its 19th consecutive record low of 317 points on 29th January. This is far below the average of 718 points in 2015, which itself was the second lowest annual average on record, and represented a year in which bulker earnings averaged around $7,000/day, little over estimated operating costs.

Surprise Attack

Of course, difficult market conditions are nothing new. Bulker earnings have been under pressure since 2011, when more than 100m dwt of deliveries kept fleet growth in double-digits. Whilst fleet growth eased to 2.4% in 2015, the slowest pace in 16 years, new demand-side pressures emerged, with dry bulk trade remaining flat last year. In Greek mythology, Poseidon’s trident had the power to cause earthquakes on earth, and there has certainly been evidence of a shake up recently. But where have each of the three prongs hit, and how sharply?

Strikes To The Core

The first earthquake is being felt in the iron ore trade, which accounts for around a third of dry bulk trade. Following rapid growth of 15% in 2014, Chinese imports eased in 2015, and expansion in iron ore trade slowed during the year (see graph). Overall, global iron ore trade is estimated to have grown by only 2% in 2015, and continued weak Chinese steel demand and the temporary closure of several major iron ore ports in January has done little to reverse this trend into 2016 so far.
The second shake up has hit trade in coal, which accounts for a quarter of dry bulk trade, very hard. Volumes declined by an estimated 5% in 2015, and the decline in volumes on the top 100 coal trade flows neared 10% y-o-y in Q3 2015, as Chinese and Indian imports fell. With several countries looking to increase reliance on clean energy sources, a major improvement in volumes seems unlikely.

Shifting The Currents

Finally, whilst the third earthquake has perhaps been less obvious than the first two, it has still had a significant impact. Growth in minor bulk trade, a diverse cargo grouping that accounts for more than a third of dry bulk trade volumes, was limited to 1% last year, owing in part to lower Chinese demand for imports of forest products, steel products, nickel ore, and various other smaller cargoes.

Stem The Tide?

So, the seas have been exceedingly stormy in the dry bulk sector. The impact from China’s economic transition is still resonating, and as yet there are few signs of an imminent improvement. As distressed conditions take their toll, hopes will be that the power of Poseidon’s trident will eventually start to ebb.

Bulkcarrier investors are generally an optimistic lot, with little time for pessimistic analysts. They know that however gloomy the forecasts, some time they will make a nice profit. After all, the ships last 30 years, especially small bulkers and a lot can happen in that time. But occasionally even they get gloomy and that seems to have happened today.

Bottom Fishing For A Bonus

It’s easy to see why. The Baltic Dry Index has hit all-time lows and Capesizes, which were supposed to be gold-plated investments in a world dominated by China, are looking decidedly tarnished. Nearly new ships have been chartering for well under $10,000/day and it’s been going on for a long time. These moments of deep negative sentiment are often a good time to invest, especially if finance is in short supply. It happened in 1986 when a new Panamax bulker cost $13.5m and a 5 year old ship cost $6m, and again in 1999 when new Panamax prices slumped below $20m and a 5 year old ship was sold for $13.5m. 10 years later these ships became profitable beyond the dreams of even the most optimistic investors, grossing over $100m in earnings and capital gains. Could this be another magic moment?

Gut-Based Gambling

Deep negative sentiment generally occurs when everything goes wrong at the same time. In the 1980s the world economy went into deep recession after the second oil crisis. Surplus bulker capacity was topped up by heavy deliveries, which the closure of shipyards did little to neutralise. Banks were too preoccupied with defaulting clients to consider new loans. In 1997-99 the Asia crisis, which coincided with a surge of deliveries after the brief 1995 bulker boom, left investors wondering if they would ever see light at the end of the tunnel. China was not even on the radar.

Today’s bulker outlook is also gloomy. The global steel industry is under immense pressure, and an increasing focus on clean energy is souring the outlook for coal consumption. Chinese dry bulk imports have dropped, and prospects for Indian coal imports have also worsened. So after a decade when seaborne dry bulk grew at nearly 200mt a year, in 2015 trade is set to decline. Meanwhile the surplus is being topped up by deliveries.

Searching For Silver

But there are a few positives. Cheap oil at $40/bbl is putting money in everyone’s pocket. Bulker ordering has slumped to 13m dwt this year; demolition is up 70%; fleet growth is down to 3%; and China seems keen on its ‘One Belt, One Road’ strategy, which could add to trade.

The Magic Number?

So there you have it. But there is one other interesting factor to consider. Somehow the tanker sector is generating very impressive earnings in a market which, on the basis of fundamental analysis, is also carrying surplus capacity. Slow steaming can help, and maybe that’s good advice. This may not be a magic moment like 1999, but, take it easy, keep your eyes open and maybe there’s a silver lining somewhere out there for the right ship. Have a nice day.

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