Strong demand improves in Dry Bulk Shipping market as it exceeds high fleet growth : BIMCO

Posted by Daily Shipping Times on 30-08-2017        Tweet

LONDON: Since early July, the capesize rates have gone up and up. By mid-August, they had reached a breakeven level to become profitable. BIMCO estimates that a capesize ship on average fleet financing and operational cost levels, turns profitable when rates are above $15,300 per day.

But the improvements are unfortunately not seen in any of the other segments. This reflects the development in cargo demand, and highlights the fact that overcapacity remains a challenge.

Iron ore and coal volume growth have both been very high, driven by China. Domestic steel mill margins have risen throughout the first half of the year, ensuring that steel mills are keen to keep up production, and higher steel production means a healthy demand for coking coal too. This happens even with lower steel exports out of China, which is hampered by trade restrictions set up by importers.

For thermal coal imports into China, it is important to watch hydropower electricity production. Hydropower electricity production has been falling on a year-on-year basis every month since December 2016, due to lower levels of rainfall.

Beyond coal and iron ore, demand growth has been seen across the board. Soybeans set a quarterly all-time high for Q2 and grains are expected to have a strong Q3.

Supply

With improving shipping markets comes faster deliveries of ships from global shipyards. BIMCO sees this in all the main shipping segments.

This is to put it simply, how participants in the shipping industry and associated industries react, and is the reason why BIMCO reiterates the view that market recovery will be slower than many would hope.  This is because improved demand is always followed by reduced focus on handling the supply side challenges.

The supply side is made up of three elements: deliveries, demolition and newbuild orders. Thus, with faster deliveries and slower demolitions, it is worrying to note that, what we expected to happen in relation to new orders is now taking place too.

The growth of the dry bulk fleet differs significantly in level and pace from handysize to capesize. Handysize fleet growth over the past year has been fairly steady at 2.1%. It has remained constant for handymax/supramax too but at a level of 5.3%. In between, both the panamax and capesize segments have grown at an increasing pace and to higher levels since their recent low-points in 2016.

The monthly year-on-year fleet growth rate for panamax went from -0.4% in October 2016 to 3.1% in July 2017. From January 2015 to January 2016, the capesize fleet became marginally smaller. The first fleet size contraction since 1998/99. Since then 59 capesizes have been delivered, lifting year-on-year growth rates in July 2017 to 3.9%.

Outlook

In addition to the Chinese import ban on coal from North Korea - established earlier in the year in accordance with UN sanctions on North Korea in response to its nuclear and missile activities - China has also banned imports of iron ore. Seaborne shipping has seen no effect from the earlier ban, as China has not bought anthracite coal from any other suppliers. As the amount of iron ore imported from North Korea is only a fraction of coal imports, this will not be felt in the market either.

It is comforting that the demand growth this year has been broad, in terms of commodities and importing nations. Nevertheless, China is still the importer that matters but China is changing. Difficult to see if you only watch the dry bulk market, but several macroeconomic indicators point towards developments that may result in lower investments. Amongst them are Fixed Asset Investments (FAI), such as machinery, infrastructure and housing projects, which are huge drivers of dry bulk imports. Data points to lower and lower growth rates for both public and private investments.

It remains to be seen to what extent the Belt and Road Initiative will counter this development positively.

For decades China has been an all-out growth story. But could China stall again, with potentially severe consequences for the dry bulk industry? Not long ago, China cut its import levels compared to a year earlier, for four quarters in a row, from Q3-2014 to Q2-2015. The result was a drop in BDI from 1,500 to 500 from early November to late February. Going forward, we must be aware that it could happen again, says a BIMCO report.