Archives for posts with tag: dry bulk market

By the late 1800s, the shipping industry had been transformed by the introduction of steam power and iron ships. Coal and grain were two of the most important cargoes, alongside timber, sugar, cotton and tea. While technology, the sheer scale of the business, and the global cargo mix, have of course all changed since then, dry bulk cargoes have retained a position at the heart of global seaborne trade.

For the full version of this article, please go to Shipping Intelligence Network.

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“When the going gets tough, the tough get going” – at least that’s what Billy Ocean’s number one hit told us in 1986. Well, there’s no escaping that the dry bulk markets are in a tough place at the moment. Owners have responded by selling more, and younger, vessels for demolition, but just how tough have they been so far, and how tough might they get?

…The Tough Get Going

The first 3 months of 2016 are shaping up to be the biggest quarter on record for bulkcarrier demolition. In the first 9 weeks of the year, 120 bulkcarriers of 10.1m dwt have been reported sold, a pace that, if continued, will see the current record of 10.9m dwt set in Q2 2015 surpassed. Such high levels of demolition clearly reflect the depressed state of the bulkcarrier market in 2016 so far. This week’s graph highlights previous occasions when low freight rates have led bulkcarrier owners to get tough with older vessels.

When The Going Gets Rough…

The first period of sustained high demolition was in the mid-1980s, with activity peaking at 12.3m dwt in 1986 – equivalent to 6.2% of the total start-year fleet. In the same year average scrapping ages plummeted to 18.8 years – that was tough! The second major phase of demolition occurred through the second half of the 1990s and into the first half of the 2000s. Peak demolition levels were similar to those seen in the mid-1980s, with 12.3m dwt leaving the fleet in 1998. But fleet growth in the intervening period meant that this accounted for just 4.6% of the fleet at the start of the year. Average scrapping ages dipped slightly, but remained above 25 years.

So how tough are things now? In terms of tonnage leaving the fleet, the current phase is by far the most extensive. 2012 was the biggest year on record for bulker demolition with 33.4m dwt heading to the breakers. However, rapid fleet expansion over the past decade means that this accounted for 5.4% of the start-year fleet, slightly below the level seen when Billy Ocean was having hit records 30 years ago. The first half of 2015 and the start of 2016 have been very active periods, but these high volumes will need to be maintained in order for the annual demolition-to-fleet ratio highlighted in the graph to return to the levels of the mid-1980s.

…The Tough Get Rough

How much tougher can owners get? The average scrapping age for bulkcarriers has fallen from 33 years in 2007 to 24 years so far this year, and market conditions are such that vessels built in the 2000s are now candidates for recycling (a total of 10 such Capesizes and Panamaxes have been sold since the start of last year). So it’s clear that owners are getting tougher, even if there might still be some way to go.

There are still 57.8 dwt of bulkcarriers in the fleet aged 20 years or over, including 108 Capesizes and 166 Panamaxes. So despite a predominantly young age profile (see SIW 1209), there are plenty of potential demolition candidates in the fleet. The dry bulk market has bounced back from tough times in the past. For those prepared to “tough it out”, further demolition could help the market return to better times. Have a nice day!

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Bulkcarrier owners could be forgiven for feeling just a little bit dizzy at the moment. The unprecedented growth in China’s steel industry over the last decade has for years provided an adrenaline-infused experience in dry bulk trade. But with both Chinese steel production and iron ore imports registering a decline in the first half of 2015, is the playtime over?

Down To Earth With A Bump

It’s no surprise that the recent wobbles in China’s economy have been leaving dry bulk’s thrill-seekers with a nasty headache. Construction activity has slowed, and total steel use dropped by 5% y-o-y in the first five months of the year. Steel production has declined by a less severe 1% y-o-y, but this is still an unpleasant change of direction for those accustomed to average output growth of more than 10% per annum over the last ten years.

Round The Roundabout Again

Yet these worries over China’s steel industry are not new. According to China’s annual estimates, steel output growth in 2014 slowed to 1%, from 14% in 2013. However, iron ore imports increased in 2014 by a massive 15% to 914mt. Almost heroic growth in Australian iron ore production flooded the global iron ore market with cheap ore, displacing some higher-cost domestic Chinese ore production. Ambitious production expansion in Australia is still underway, and exports from the country are up 9% so far this year, but total Chinese seaborne imports are down 1%. So what has changed?

Balance Shifts On The See-Saw

This year seems to have proved a tipping point in the iron ore market. Weak Chinese demand is contributing to record low iron ore prices (dipping below $50/tonne in April). In 2014, the rapid drop in prices boosted China’s overall import demand, but no such positive effect is visible this year. Instead, the extent of the price drop has squeezed out a number of small iron ore miners across the world, and Chinese imports from many smaller suppliers have been depressed this year. And while Chinese miners have clearly reduced domestic production, there are questions over how much more capacity (particularly state-owned) will be cut.

Swings In Need Of A Push?

The unsettling thought for the dry bulk market is that the excitement of the Chinese ride could be coming to an end. Despite the price drop, most major ore miners are forging ahead with expansion plans. If China’s steel usage has peaked, miners will be fighting for market share in a shrinking demand arena. And if Chinese ore output proves resilient to price pressures, this could leave those expecting a resumption of firm iron ore trade growth with only a severe case of vertigo.

While global growth in low-cost ore production could still boost imports later this year, there is certainly no longer a consensus that China’s steel industry has considerable long-term growth potential. Faced with this ominous scenario, bulker owners will be hoping that the current weakness in China’s iron ore imports is only a temporary downward swing. Time will tell, but for some the playground which once spurred great excitement might be starting to lose its appeal.

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We may be in a recession, but some segments of the shipping market are doing better than others. In the last few months the dry bulk market has been plumbing the depths of despair, whilst large tanker owners appear to have hit the jackpot, with rates surging to over $60,000/day. Why is it that tankers are doing so well this year?

It’s All About Dynamics

Back in September VLCC tankers were earning less than $15,000/day, but over the winter the tanker market “slot machine” lined itself up with the four cherries needed to hit the jackpot. The first cherry was the seasonal cycle. Oil demand is generally higher in the final quarter of the year and in 2014 major importer demand was 2.2m bpd higher in Q4 than in Q2. The second cherry was the oil price, which collapsed just as the seasonal cycle got started. By the year end Brent at $50/bbl encouraged traders punting on physical oil, and where better place to put it than in a tanker? Cherry number three was slow steaming which meant that ships were at sea, not hanging around the loading zone. In December 2014 there was only one VLCC sitting spot in the Gulf on average, down from 12 in September 2014.

Fruity Number Four?

The fourth cherry was more subtle, but equally important; tanker owners seem to be better at “finding the floor” when the market tightens. In weaker periods, the theory runs, tanker owners are less likely to counter strongly in a tight market, for fear that charterers would turn the tables when the market slackens. When the supply-demand balance is more robust, as it appears to be today, they manage things more confidently. This sounds plausible, but is it true? To check, we analysed VLCC spot earnings since 1991, using the monthly average of VLCCs spot in the Gulf to indicate available supply. Splitting the data at 2000, we calculated the average earnings for each number of VLCCs sitting spot in the Gulf.

From A Position Of Strength

The results are shown in the graph. The blue line shows the spot/earnings relationship 1991-99 and the red line shows the same 2000-15. The lines suggest that with 7-20 VLCCs sitting spot in the Gulf, earnings were much the same in both the ‘weaker’ period (average earnings of $26,000/day 1991-99) and the ‘stronger’ period (average earnings post-2000 of $46,000/day). But with 6 or fewer spot ships, the earnings since 2000 have been 68% higher, suggesting that owners can  take greater advantage of a tight supply situation when the overall supply-demand balance is more positive.

How To Win The Jackpot

So there you have it – two conclusions. Firstly the number of ships in the loading zone is what matters, not any “theoretical surplus”. If ships are slow steaming, such a surplus only matters if they speed up. Secondly the analysis suggests that when the supply of spot ships is tight, the wider ‘strength’ of the market impacts how owners negotiate matters a great deal. Relative to spot supply, VLCC earnings in the stronger post-2000 period increased significantly compared with the weaker 1990s. As a result, the conclusion for owners could be “stay slow and be brave”. Have a nice day.

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