Economic forecasts for different parts of the world have recently been improved slightly despite high oil prices, geopolitical concern and more tension in some conflict areas. Well into the second part of March, Morgan Stanley’s world stock market index had increased by about 6% since the beginning of the year.

Looking at key parameters in world shipping, it appears that world oil consumption in the first two months of this year was just 1.0% higher than in the same period last year, according to IEA figures. In this agency’s latest forecasts, growth rates for world oil consumption were reduced to 1.2% for 2005 and 1.8% for 2006. It seems that high oil prices will continue to provide good support to the trade in thermal coal.
As the steel industry alone accounts for about half of the total demand for dry bulk tonnage, figures from the International Iron and Steel Institute are more satisfactory seen from a dry bulk shipowner’s point or view. During the first two months of the year, world crude steel production was up 4.2% and world pig iron production, which is more relevant from a shipping point of view because of this industry’s need for iron ore and coking coal, was up 5.8% compared to the same period last year. World steel consumption is estimated to have increased by 4.5% last year and some forecasts now point to close to 7% growth this year. Recently, steel prices have been firming after a slump since last spring. During the first two months of this year, China’s pig iron production increased to around 57 million tonnes, about 20% more than in the same period last year, whereas the rest of the world saw a decline of 3% to 74 million tonnes.
Dry bulk spot freight rates have lately fluctuated at levels way below recent peaks, but they have still been healthy and well above break-even rates for all sizes. As at 23 March, the Baltic Dry Index was up 6% since the beginning of the year, the Capesize index was up 16%, Panamax was up 1%, and Supramax was down 7%. Present average spot rates stood at about USD 36,000 for Capesize, USD 17,900 for Panamax, and USD 17,700 for Supramax, whereas 12-month time-charter rates for modern vessels were at USD 34,000 for Capesize, USD 17,000 for Panamax, and USD 17,500 for Supramax. By comparison, the latest monthly report from Fearnresearch, the research arm of Norwegian shipbrokers Fearnleys, shows break-even rates (based on a lifetime of 25 years and 10% interest on total capital) for 5-year old vessels of USD 23,500 for Capesize, USD 14,300 for Panamax and USD 12,400 for Handymax. This reveals solid current rate margins across the board.
One interesting observation is that the Panamax rates are similar to or slightly lower than those for Supramax vessels. It has been commented that the Panamax size is now under double pressure from the rapidly growing fleet of smaller Supramaxes, which are more flexible for combination trades, and from the larger Kamsarmax vessels, because of their economy of scale advantage.
During the first two months of this year, new bulk carrier orders totalled 1.7 million dwt, whereas demolition sales were less than 0.4 mdwt. Deliveries of new vessels amounted to 4.6 mdwt and deletions were at just 0.1 mdwt. The bulk carrier fleet increased from 343.7 mdwt to 348.1 mdwt, but the order book decreased from 57.6 mdwt to 54.7 mdwt. This corresponded to 15.7% of the existing fleet. By comparison, the order books for oil tankers stood at 26% of the existing fleet, for container vessels at 51%, and for LNG vessels at as much as 79%.
A closer look at the bulk carrier order book in early March shows huge variations for different size groups. The order book for vessels of 10-50,000 dwt was only about 4% of the existing fleet and this size group will diminish somewhat over the next couple of years. The Supramax order book stood at 41% of the existing fleet, Panamax at a modest 10%, and Capesize above 80,000 dwt at 26%. Within the Capesize range, there was a strong concentration around Kamsarmax, which had an order book of 89% of the existing fleet, and vessels over 200,000 dwt, which had an order book of 78% of the existing fleet, whereas the order book for standard Capesize vessels of 120-200,000 dwt was only 13% of the existing fleet.
The rather modest order book for bulk carriers could well open a new window of opportunity in the dry bulk market late this year/early next year. According to forecasts from Fearnresearch, the bulk carrier fleet will increase by 4.9% this year, 2.8% next year, and only 2.5% in 2008, after an increase of as much as 7.2% last year. By comparison, dry bulk tonne-miles are estimated to have increased by 5.1% last year, with foreseen growth rates of 4.4% this year and 4.7% next year.
Against this background, present quoted future rates for Capesize, Panamax and Supramax, all down some 32-40% from present spot levels for the 2007 and 2008 calendar years, should appear quite interesting from a cargo owner’s point of view. In general, players in the dry bulk market should watch out for tonnage positioning opportunities as the year drags on.

Jarle Hammer, April 2006

Date: 07 February 2008