The Baltic Dry Bulk Index rose by as much as 43 per cent from the beginning of September to late October, when some minor corrections were seen. In early November, this index was over twice as high as in mid-June.

Second-hand prices have increased strongly and prices for modern vessels are way above newbuilding prices. Even 15-year-old vessels have obtained prices similar to newbuilding prices. The ordering frenzy for bulk carrier newbuildings continues, with a focus on VLOC, Capesize and Supramax tonnage. In addition, several conversion orders have been reported. Compared to the existing fleet, scheduled deliveries now amount to 1.8 per cent for the rest of 2007, a fairly moderate 6.8 per cent in 2007, 11.0 per cent in 2009 and as much as 15.7 per cent in 2010. Where are the alarm bells?
The strong freight market is primarily supported by continued high activity in the Chinese steel industry, strong coal trade developments supported by the high oil price, and still significant congestion in several ports, tying up substantial tonnage volumes.
These days, big really is beautiful in the dry bulk market. Over the past twelve months, the Capesize newbuilding price has gone up from USD 65 million to USD 92 million, and the price of a five-year-old Capesize has increased from USD 79 million to USD 139 million. The one-year timecharter rate has increased from USD 59,300 per day to USD 152,000, with a peak of USD 157,000 in late October. Recently, a three-year timecharter for a Capesize was fixed at USD 115,000 and a five-year timecharter was entered into for USD 80,000.
The Capesize spot rate dropped strongly from a peak of almost USD 115,000 per day in mid-May to just USD 72,000 in mid-June. A new peak of USD 185,000 was seen in mid-October and, about one week into November, the rate stood at USD 176,000, with forward quotations at USD 139,000 for the calendar year 2008 and USD 93,000 for the calendar year 2009.
By comparison, Fearnleys’ latest monthly market report shows break-even rates of just about USD 34,000 for a Capesize newbuilding ordered today and USD 51,000 for a five-year-old Capesize.
The ordering of bulk carrier newbuildings has continued at still very high, albeit slightly reduced, levels in recent months and reached almost 17 million dwt in September-October, as against only 1.4 mdwt for oil tankers in the same period. Over the first ten months of the year, new bulk carrier orders amounted to as much as 100 mdwt, compared to 24 mdwt for oil tankers.
The bulk carrier fleet at the beginning of November 2007 stood at 385.8 million dwt, up 6.1 per cent from 363.6 million dwt one year before. At the same time, the bulk carrier order book increased by about 114 per cent from 77.9 million dwt to 166.7 million dwt. This means that the order book share compared to the existing fleet has risen from about 21 per cent to 43 per cent over the past twelve months.
A closer look at the size ranges shows very large differences with regard to order book shares.
Thus, the order book for 10–50,000 dwt corresponded to just twelve per cent of the existing fleet (with two per cent for 10-25,000 dwt, 22 per cent for 25–40,000 dwt, and three per cent for 40–50,000 dwt).
Whereas very few orders have been placed for the smallest size range of bulk carriers, it is amazing to observe the revival of multipurpose vessels, with an order book now corresponding to 27 per cent of the existing fleet, whereas only two per cent of that fleet was younger than five years at the beginning of the year. Going up in sizes, it appears that the order book for Supramaxes of 50–60,000 dwt was as high as 95 per cent, whereas the share for Panamax/Kamsarmax vessels of 60–100,000 dwt was relatively modest at 32 per cent. Among larger vessels, small Capesize vessels of 100–150,000 dwt had an order book share of 22 per cent, whereas large Capesize vessels of 150– 200,000 dwt had a strongly increased share of 64 per cent and the order book for Very Large Bulk Carriers over 200,000 dwt was as much as 139 per cent compared to the existing fleet.
China continues to produce much more steel than the amounts needed to meet its own demand. China’s steel exports during the first nine months were up 60 per cent to 55.4 million tonnes, whereas imports decreased by nine per cent to 13.3 mt. It is worth observing that China’s steel exports dropped from about 8.0 mt in April to 4.8 mt in September, which was somewhat lower than one year before. China’s pig iron production was 15.5 per cent higher in September than one year ago, whereas the rest of the world saw a modest increase of 1.8 per cent. For the first nine months of this year, China’s pig iron production was up 16.4 per cent, whereas the rest of the world experienced an increase of just 1.7 per cent.
In September, China accounted for almost 38 per cent of world steel production and as much as 51 per cent of world pig iron production. The country’s iron ore imports during the first nine months of 2007 were up almost 15 per cent, corresponding to an annual import growth of almost 50 million tonnes to 375 mt. Domestic production of iron ore of inferior quality, however, rose by as much as 23 per cent.
Longer import distances for iron ore imports to China will have an upward leverage on the demand for the largest bulk carriers. During the first nine months of 2007, iron ore imports from Brazil rose by about 27 per cent, whereas imports were up 15 per cent from Australia, and only five per cent from India and three per cent from South Africa.
Looking ahead, the short- and mid-term dry bulk demand prospects appear quite solid. In October, the International Iron and Steel Institute presented a new forecast for world steel demand with significant upward revisions for this year and next. It now assesses the global steel demand to have increased by 8.8 per cent in 2006 and to be followed by 6.8 per cent growth in both 2007 and 2008.
In sharp contrast to the general scenarios for the energy and tanker markets, global warming and extreme weather conditions are likely to have a considerable upward impact on dry bulk tonnage demand. More construction materials, such as steel and cement, will be needed to repair and prevent damage from flooding and strong winds. Climate changes, with wet areas becoming wetter and dry areas becoming dryer, will increase the demand for food imports in general. More grain will be called for from suitable areas, such as the prairies and the pampas, where again more fertiliser will be required.

Jarle Hammer

Date: 30 January 2008