There has not been much summer quietness in the dry bulk market this year and the autumn has shown record increases in rates. After rather modest fluctuations at high levels over the summer, September and especially October have seen amazingly strong developments.

During September and the first three weeks of October alone, the Baltic Dry Index almost doubled and was up 98%, ending 3.3 times higher than one year ago. Compared with one year ago, the Capesize index was 3.9 times higher, the Panamax index 3.2 times higher, and the Handymax index 2.3 times higher.
A confluence of factors has brought about this unexpectedly strong development, coinciding with a nice window offered through a modest influx of new tonnage as a convenient setting. Strong economies in Asia are a must for a decent dry bulk market, as Asia accounts for as much as 60% of dry bulk import demand, followed by Europe with 30%. In addition to China, several other Asian economies are also doing quite well, even pulling sluggish Japan to much stronger growth than expected just a few months ago. The USA and Europe have not yet escaped from their economic double-dips and the economic indicators are so far not very convincing.
The Chinese steel industry is by far the key driver in the dry bulk market, with crude steel output up 26% in September compared with last year and iron ore imports up 34% over the first eight months of the year. The trade in thermal coal has been boosted by the shut-down of nuclear plants in Japan and drought in Europe,
with lack of water for cooling nuclear plants, the start-up of new coal-fired power plants in several countries, the never ending problems in the Middle East and comparatively high oil prices. Drought in Europe has also given a considerable lift to long-haul grain shipments. Besides, trades in most minor bulk commodities show quite positive developments, largely thanks to the strong Asian economies. Fluctuating volumes of congestion in exporting as well as importing ports have also added to tonnage demand, but this element is hard to quantify in detail. Altogether, Fearnresearch estimates a growth in dry bulk tonne-miles of around 6% in 2003 and close to 3% in 2004, whereas the growth in 2002 is estimated at only 1.2%.
The graph illustrates a fairly strong link between freight rate levels and order for bulk carrier newbuildings and a clear countercyclical volume development in demolition sales. Fortunately for owners of bulk carriers, in the past few years more newbuilding interest has been focused on tankers and container vessels, thus taking
away some steam in bulk carrier ordering even when dry bulk rates have been rather strong. The annual deliveries of new bulk carriers will thus be comparatively small for some years. After bulk carrier deliveries of
21.0 million dwt in 2001, the volume dropped to 14.0 mdwt in 2002 and is estimated to be just 11.7 mdwt in 2003. Next year, we expect deliveries of some 17.3 mdwt and in 2005 about 15.5 mdwt. Significant rate corrections must be expected as the high spot and time charter rates may simply make some existing longhaul trades impossible and delay the start up of new ones. Here, one must also expect some profit taking among shipowners. Some side effects of the present bulk market are that combined carriers have switched to dry bulk trading and we also see more bulk cargoes shipped in containers. This is particularly true for comparatively
high-value commodities and in container back-haul trades, such as forest products from West Coast North America to the Far East instead of returning empty containers. This will in itself not increase the demand
for container vessels, but it will increase their earnings. In general, however, high bulk rates will enhance the containerisation of bulk cargoes in front-haul trades too.
The present order book for bulk carriers corresponds to 14.2% of the dwt of the existing fleet and Fearnleys now forecasts a fleet growth of 2.7% this year, 4.3% next year, and 2.6% in 2005. At the beginning
of October, the existing bulk carrier fleet totalled 5,634 vessels of 301.6 mdwt and 592 vessels of 42.9 mdwt were on order. Smaller vessels dominate among the older vintages and as many as 911 vessels of 27.0 mdwt
were built before 1979 and a further 922 vessels of 41.9 mdwt were built in 1979-83.
When it comes to building bulk carriers, it appears that just six countries in the Far East held as much as 97% of the order book for such vessels at mid-year, measured in compensated gross tons, which is a reference
of labour and capital input. Japan was predominant with as much as 61% of the world total, followed by China 20%, S.Korea 9%, Taiwan 4%, and the Philippines 3%. S.Korea has a much larger total order book
than Japan, but only a remarkably small share of its order book, some 3.5%, relates to bulk carriers, as against bulk carrier shares of 35% in Japan and 31% in China.
New contracts will mainly have to be delivered from 2006 onwards. Recently, a Capesize newbuilding resale with short delivery obtained a price that was 20% higher than the contracting price. From the buyer's point of view, this price differential appears quite attractive in today's exceptionally good market and in
view of the apparent momentum on the demand side, with seemingly limited downside risk - even if late October spot rates are reduced by 50%.
Jarle Hammer, 21 Oct 2003

Date: 13 February 2008