Dry bulk shipping freight rates – as reflected in the Baltic Dry Index (BDI) – hit a new low on Nov. 20, 2015. The BDI slumped below the 500 mark on shipping’s Black Friday, its lowest point since the original Baltic Freight Index was launched in 1985. By comparison, back in May 2008, prior to the global financial crisis, the BDI was sailing high at 11,793 points. For vessel owners and operators, it has been a horrific few years for revenues and stock prices. For some it has meant pulling out of the business or declaring bankruptcy.
The BDI is compiled by London-based Baltic Exchange and pulls together separate indices covering the Capesize, Panamax, Supramax and Handysize sectors (see chart, page 72) based on regular input by route from shipbrokers from around the world. Because of the structure of the global dry bulk shipping fleet, which in terms of capacity is dominated by the larger vessel classes, the BDI’s performance is heavily loaded to reflect the fortunes of the power and steel sectors which consume the dominant cargoes shipped in larger bulkers – iron ore and coal.
Demand growth for both cargoes has been falling, not least due to the economic slowdown in China where imports of both major bulks has dropped sharply, adding to the general global bearish market for commodities.
Excess vessel supply has also played a major role: orders for bulk carriers were at record levels around the time of the global financial crisis and since then many owners have continued placing orders to take advantage of low shipyard prices in expectation of a market recovery. Although this year newbuilding deliveries have been cut and demolitions have increased, the global bulk fleet still grew some 2.1% in the first nine months of the year, according to figures from shipping organization Bimco.
The upshot has been something of a perfect storm for ship owners, sometimes with dire consequences. For example, Japanese carrier Daiichi Chuo Kisen Kaisha has already filed for protection from creditors, citing four years of losses. And both Global Maritime Investments Cyprus and China’s Winland Ocean Shipping Corp have filed for Chapter 11 bankruptcy protection in the United States in recent months. More bulk carrier companies are expected to follow.
The upside for grain shippers has been lower freight costs. U.S. Gulf to E.U. rates were down to $10 per tonne of heavy grain on Nov. 17, 2015, compared to $17 per tonne a year earlier. U.S. Gulf to Japan prices were also down at $28 per tonne on Nov. 17, compared to $45 a year before.
It is worth noting that low ocean pricing is also a feature for grain moved in containers. The liner business is suffering from much the same pressures as the dry bulk shipping sector – lower than expected demand growth and excess vessel supply – and this has seen liner freight rates and profits tumble. And for both the container and dry bulk shipping businesses, a further complication has been the global overcapacity apparent in the steel sector. This is holding down the price of scrap metal, making ship owners reluctant to demolish older vessels at a rate sufficient to enable either market to find a better balance between supply and demand, especially at a time of disappointing global economic growth.
Where to go from here?
Peter Sand, chief shipping analyst at Bimco, confirmed the dry bulk market was currently under immense pressure with slowing demand continuing to result in overcapacity.
“Next year could see these issues continue as supply is likely to repeat more or less the same growth rate as in 2015, while the demand side is extremely uncertain for now,” he said. “Bimco’s base-case, however, is for the market to improve slightly next year. But it is unlikely to improve significantly.
“What is needed to bring around a strong rebound is a much higher level of scrapping and China to grow its imports more strongly and to buy commodities imported over longer sailing distances, which takes capacity out of the market.”
Sand also said the global commodity boom of the last decade was now over. “China has given us a lot on that account, but the future market will be very different from the last decades,” he said. “China still holds the key to changes, most likely from iron ore imports being substituted for domestically-mined low quality ore, and maybe also higher coal and grains imports including soybean.”
Peter Quirk, director of Affinity Shipbroking Australia, also said he did not expect any recovery in bulk shipping rates until deep into 2016, or possibly 2017.
“Ship owners tend to be quite optimistic, and that influences the reasoning behind buying ships,” he said. “And they have to be optimistic, because if they had to face the reality of their market, they would not be in business.”
Grain movements in bulkers make up a relatively small and stable part of the global dry bulk shipping demand picture, and so the grain business alone has little impact on the BDI or on general freight rates, besides providing a regional, seasonal boost for smaller vessels when major crops are exported.
Even so, Rahul Sharan, lead research analyst at Drewry Maritime Research, said the grain industry was one of the few positives at present for owners, given the extended export season from South America during 2015 and the prospect of more loads out of Canada this winter. Both are trends that take capacity out of the market, given the high tonne-mile demand of trades from the Americas into Asia. However, he, like Quirk and Sand, was bearish in his outlook on bulk carrier freight rates.
“Right now, China has gone down, there is limited demand for coal and iron ore, and the impact this has had on rates for larger vessels has trickled down to smaller ships,” he told World Grain.
“So, apart from a bump in the summer when demand from China briefly improved, rates for all vessels have come down. This has been made worse by slower demand for minor bulk commodities such as clinker, aggregate and sand, which usually move in smaller vessels. But mostly the market has been affected by slower demand from China for all commodities, especially iron ore and coal.”
He said drought in Australia had not helped grain exports in the fourth quarter, although this was offset somewhat by stronger than expected movements out of Latin America due to rainfall in October which produced a good crop and a solid performance from Canada, which was now expected to export winter wheat.
“The large tonne-mile requirements of these trades from Northern America will boost the smaller segments in the coming months, but for the market overall we don’t expect a very good recovery in the near future,” he added.
“2016 will be similar to 2015, but I think we’ve probably now seen worse and I’d expect a slight rebound in the BDI toward the end of the year. We might get good demand for coal from Europe, for example. But a full recovery won’t happen until 2017.
“Demand from China is slow; there’s not much growth in India. And there’s no major fundamental changes in the U.S. or other grain markets that will seriously affect the bulk markets. Grain demand for bulkers will be steady.”
However, Sharan did say the end of the monsoon season in South Asia in the fourth quarter of 2015 could boost demolition rates because scrapping tended to slow during rainy periods. “We expect demolition to be high for next year, even with low steel prices because the demand is for new vessels, not for 15 to 20- year-old vessels,” he added.
Across the bulk carrier sectors, the Supramax vessel class has tended to outperform other segments for most of this year and Sharan said owners in this class had generally recorded better financial results as a result. “They have an economy of scale advantage over Handies; they also have more ports they can call,” he said.
“Many ports don’t take bigger vessels. India imports a lot of coal, for example, and 70% of it comes from Indonesia where the ports can only take up to Panamax size at best. So Supramax vessels have a nice niche, and they’re also flexible about what they can carry, so they’ve benefited from the grain season. And in the future, more grain will move to the Asia which will benefit the Baltic Supramax and Handy indexes.
“We might see less to Turkey this year because it had a good crop, but Indonesia has higher demand. But overall, the grain trade won’t impact the BDI.”