At least, this was the heading of the dry bulk market section in Fearnley’s latest monthly market report. In the short term, this seems to be the case.

We have now experienced continuous upward surprises in the dry bulk market, with extremely strong rate improvements for quite some time and also solid forward expectations, reflected in future quotations. At the same time, however, we have also seen a dramatic surge in new bulk carrier orders, and almost 30 VLCCs will reportedly be converted to dry bulk carriers. Somewhere down the road this will be felt in the marketplace and it will definitely be hard to absorb all that new tonnage in two to three years’ time.

The strong freight market is primarily supported by continued high activity in the Chinese steel industry, with record high steel export volumes. In addition, several other industries are doing well and congestion is tying up substantial tonnage volumes, as ports are often not able to develop their infrastructure in pace with the rising trade volumes.

China is now producing much more steel than what is needed to cover its own demand. China’s steel exports almost doubled from about 20 million tonnes in first half last year to about 38 million tonnes in first half this year. In July, world pig iron production, requiring iron ore and coal, was 7.2 per cent higher than in the same month last year. Over the first seven months of 2007, world pig iron production was 8.6 per cent higher than in the corresponding period last year. China’s pig iron production was 13.5 per cent higher in July than one year ago, whereas the rest of the world saw an increase of 3.2 per cent. For the first seven months of this year, China’s pig iron production was up 16.5 per cent, whereas the rest of the world experienced a modest increase of 1.9 per cent.

Looking at rate developments, it appears that average Capesize spot rates dropped strongly from a peak of almost USD 115,000 per day in mid-May to just USD 72,000 in mid-June. At end-August, they had reached USD 127,000, with Imarex forward quotations as high as USD 103,300 for calendar 2008 and USD 74,500 for calendar 2009. At the end of August, average Panamax spot rates stood at USD 61,500, with calendar 2008 at USD 54,400 and calendar 2009 at USD 39,200. Supramax spot rates averaged USD 52,200, with 2008 quotations at USD 45,000 and 2009 quotations at USD 32,500. Handymax spot rates at end-August averaged USD 36,200, with 2008 quotations at USD 29,800 and 2009 quotations at USD 21,700 per day.
With such high rates, often two to three times higher than break-even rates for vessels acquired in the present heated market, it would not be surprising to see cargo owners become shipowners to a larger extent, at least temporarily.

Ordering of bulk carrier newbuildings reached almost 74 million dwt over the first eight months of this year, against less than 16 million dwt in the corresponding period last year. For comparison, tanker newbuilding orders dropped from about 48 million dwt to about 20 million dwt. Bulk carrier newbuilding prices have increased much more than tanker newbuilding prices. So far this year bulk carrier demolition sales total less than 0.2 million dwt, with no sales reported over the past four months.

The bulk carrier fleet at the beginning of September 2007 stood at 382.3 million dwt, up 6.4 per cent from 359.2 million dwt one year before. At the same time, the bulk carrier order book increased about 91 per cent from 74.4 million dwt to 141.9 million dwt. This means that the order book share compared to the existing fleet rose from about 21 per cent to 37 per cent over the past twelve months.

A closer look at size ranges shows very large differences with regard to order book shares.

Thus, the order book for 10–50,000 dwt corresponded to just about 10 per cent compared to the existing fleet (with three per cent for 10–25,000 dwt, 17 per cent for 25–40,000 dwt, and four per cent for 40–50,000 dwt).
Whereas very few orders are placed for the smallest size range of bulk carriers, it is amazing to observe the revival of multi-purpose vessels. At the beginning of this year, only two per cent were below five years old. Now, the order book stands at 24 per cent compared to the existing fleet. This vessel type is very flexible in combining voyages with minor bulk cargo lots with various types of project cargo and top end containers in opposite directions.

Going up in sizes, it appears that the order book for supramaxes of 50–60,000 dwt was as high as 82 per cent, whereas the share for panamax/kamsarmax of 60–100,000 dwt was relatively modest at 26 per cent. Among larger vessels, small Capesize of 100–150,000 dwt had an order book share of 21 per cent, whereas large Capesize of 150–200,000 dwt saw a strongly increased share of 59 per cent, and for Very Large Bulk Carriers over 200,000 dwt, the order book had jumped to as much as 109 per cent, primarily signalling a very strong belief in the Chinese steel industry’s need for raw materials. In this context, it is of significant importance that India will gradually need more of its iron ore for domestic steel production.

Jarle Hammer
4 September 2007

Date: 19 October 2007