The supply/demand imbalance that drove dry bulk markets down to 2009 levels during the first half of the year is set for adjustment, with Newport Shipping Group predicting an improved tonnage balance over the next couple of years, resulting in a freight rate peak in the 2016/2017 period.
“The dry bulk markets during the first half of 2014, especially Panamax, Supramax and Handysize, have not been at these low levels since the financial crisis in early 2009, ” said Harald Lone, Chairman of Newport Shipping Group.
“Strong supply growth combined with a decline in most of the major coal trades pushed spot earnings for Panamaxes to just above US$3000 per day in Q1 2014, well below operating costs. The markets are still soft, with average spot earnings in 2014 down by 10% on 2013, with Panamax rates down as much as 22%.”
Healthy demand and moderate supply growth, however, should result in an improved tonnage balance during the next couple of years. And although a spate of newbuild orders in the 2013/2014 period could prevent a near term rebound, “freight rates and ship values are likely to rise slowly then peak during the 2016/2017 period”.
“A fundamental and sustainable dry bulk market recovery is expected in the second half of 2015 and throughout 2016, when the total dry bulk market balance could peak at 88%, with peaks during the fourth quarter close to 92%, ” Lone said. “Improved tonnage balance in 2015/2016 should drive up bulk freight rates.”
Referring to Newport Shipping Group’s latest Dry Bulk Market Outlook report, Lone said that less ordering combined with an increase in scrapping is expected to result in a significant shift in the pace of fleet expansion as scrapping eats into new deliveries.
He said that dry bulk supply expansion has gone from 15% in 2011 and 14% in 2012 to 7.4% in 2013 and 5.3% in 2014. It is expected to be about 4.9% in 2015, although this in itself will not be sufficient to initiate a major dry bulk recovery during the next twelve months.
Scrapping could eat further into the supply/demand balance, given that 28% of all vessels in the Handy segment, the main contender for demolition, will be twenty years old or more by 2017. Deliveries of new Handy vessels between 2015 and 2016 period will add 13Mdwt per quarter to the fleet, of which 80-90% will be in the larger 30-40, 000dwt segment.
“Demand is expected to increase by more than 5% year-on-year and, supported by an improved tonnage balance, is likely to spur a rise in freight rates for all Handy segments over the course of the next two years. There is potential for a freight rate hike in the 2014/2015 winter window before thawing in the first half of the New Year should demand for nickel ore and bauxite fail to recover, ” forecast Lone.
Key drivers remain the steel industry and Chinese imports of iron ore and steam coal. Iron ore imports to China are expected to increase from the 824Mt registered in 2013 to 1080Mt in 2016, which correlates to an annual growth rate of about 9.5%. This, supported by increases in iron ore to the EU, Japan and other parts of Asia, is forecast to result in an 8% increase in the seaborne trade of iron ore during the 2013-2016 period, of which 89% will be imports to China, mainly from Australia and Brazil.
Besides iron ore, steam coal imports to China will be drive future dry bulk demand. However, this year global trade was down by almost 40Mt and Chinese imports were more than 100Mt shy of projections due to falling coal prices, low demand and increased hydro power production – fundamentals that are attributed to the first half weakness of the Panamax, Supramax and Handysize segments.
Despite the slow start, a 150Mt increase in coal imports to China is forecast due to lower levels of domestic production. Newport Shipping Group expects total seaborne trade to increase to 7% in 2014 and 2015, and then continue with an annual growth rate of 6.5% in 2016.
“Synchronised world economic growth is going to initiate higher demand for dry bulk carriers driven by strong import demand to China, especially for iron and coal. But in the short term, lower coal import demand and a substantial decline in nickel ore and bauxite trades, due to the Indonesian export ban, will continue to put pressure on the markets.
“Whilst the dry bulk markets are still soft, struggling through the worst slump on record, shipowners do need to change the status quo of competing against each other, which is driving freight rates to unsustainable levels, ” Lone said.