‘Over the Peak’ was the heading of the previous market report. The way down on the other side, once again, turned out to be an extremely steep one.

Since the all-time-high registered in early June, the general Baltic Dry Index has dropped by as much as 59 per cent in the space of about three months.
By 12 September, the Capesize index had fallen by 67 per cent and the Panamax index was down 52 per cent. Since late May, the Supramax and Handysize indices are down 54 per cent and 49 per cent respectively. Here, it must be stressed that rates are still good, albeit in no way as glorious as in the recent past.

In the past few months, financial markets have suffered from the US sub-prime crisis, banks have tumbled, and rising raw material prices have pushed up inflation and interest rates. Economic forecasts have been adjusted somewhat downwards in several countries. Against this bleaker macro-economic background and the already very high order book for dry bulk tonnage, the bulk carrier contracting volume remained remarkably high in recent months. In June–August, registered new bulk carrier orders totalled about 19 million dwt, against 21 million dwt in the preceding three months.

At the beginning of September, the bulk carrier order book had increased to as much as 65 per cent of the existing fleet. In comparison, the order book share was 27 per cent at the beginning of last year. The existing bulk carrier fleet totalled 407.3 mdwt, which was up 4.5 per cent from the beginning of the year. The order book stood at 265.9 mdwt. Compared to the existing fleet, scheduled deliveries were as follows: 5.2 per cent in the remainder of 2008, as much as 15.1 per cent in 2009, and an almost incredible 24.3 per cent in 2010.
A closer look at size ranges shows very large differences in order book shares.

Thus, at the beginning of September, the order book for 10–50,000 dwt corresponded to 20 per cent of the existing fleet (with five per cent for 10–25,000 dwt, 39 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 – and for that matter also for the smallest size range of container feeder vessels, it is again remarkable to observe the continued rush for multipurpose vessels, with an order book now corresponding to 35 per cent of the existing fleet.
Only two per cent of that fleet was younger than five years at the beginning of last year. It is interesting to observe that the order book for plain bulk carriers of 10–25,000 dwt amounted to only 1.0 mdwt, whereas the order book for multipurpose vessels totalled 8.7 mdwt. Going up in size, it appears that the order book share for Supramax of 50–60,000 dwt was as high as 132 per cent, whereas the share for Panamax/Kamsarmax of 60–100,000 dwt was 48 per cent. Among larger vessels, small Capesizes of 100–150,000 dwt had an order book share of 48 per cent, whereas large Capesizes of 150–200,000 dwt saw a share of 95 per cent, and for Very Large Bulk Carriers over 200,000 dwt, the order book share was as much as 172 per cent. For all vessels above 100,000 dwt, the order book share stood at 102 per cent compared to the existing fleet of such vessels.


The steel industry, which accounts for roughly half of the total dry bulk tonnage demand, has shown a steady global production growth in recent months. According to the International Iron and Steel Institute, the year-to-date growth in global crude steel production in July stood at 6.1 per cent. In comparison, the International Iron and Steel Institute this spring predicted a global steel demand growth of 6.7 per cent for this year and 6.3 per cent for next year. Last year, world steel demand rose by 6.6 per cent. World production of pig iron, which is more interesting for shipping because of the required iron ore and coking coal, was in July 4.7 per cent higher than one year before, with China up a rather modest 4.9 per cent and the Rest-of-the-world up 4.4 per cent. In the first seven months of the year, world pig iron production was up 5.4 per cent, with China up 7.6 per cent and the Rest-of-the-world up 3.2 per cent.

Preliminary data show that China’s crude steel production in August was only 1.3 per cent higher than one year before, whereas the country’s pig iron production actually saw a decline of 1.5 per cent. This may partly reflect some temporary steel mill closures in connection with the Olympic Games and provide an upside potential in subsequent months. Anyway, the latest developments in China’s steel production represent a very big contrast to the huge twelve-monthly increase of 42 per cent seen in the middle of 2005.

Looking more closely at the Chinese steel industry, it appears that the country’s iron ore imports during the first eight months of 2008 were up 23 per cent to 307 million tonnes. Imports in August at 37.4 million tonnes were up 28 per cent compared to August 2007. Some market sources predicted that iron ore imports in August would decline due to the Beijing Olympic Games, but actual imports increased significantly, as unabated as ever. However, imports in August were the lowest since the peak level of 42.9 million tonnes in April. Steel exports from China have been rising in recent months and reached about 8.2 million tonnes in August, including 0.6 million tonnes of semi-finished steel products, while imports remained low at 1.3 million tonnes. Domestic demand has been slack and local steelmakers have been eager to promote export sales due to higher prices in export markets than at home. There seems to be a possibility that the Chinese Government will study whether to raise export duties on various steel products in enhanced export restrictions.

The break-even timecharter rate for a five-year-old Capesize vessel acquired in the present market, with a calculated ten per cent return on total investment over a lifetime of 25 years, was at the end of August USD 54,600 per day, according to Fearnleys’ latest monthly market report. On 12 September, the Baltic spot average for Capesize vessels stood at about USD 66,000 per day, whereas timecharter rates were reported at USD 112,500 for one year and USD 88,750 for three years. In comparison, IMAREX futures quotations stood at USD 91,300 for the 4th quarter of this year, at USD 81,500 for calendar year 2009, and at USD 56,500 for calendar year 2010. If we look back at when the Capesize market peaked at USD 234,000 per day in the first week of June, then the futures quotations for 3Q 2008 stood at about USD 178,000, whereas quotations for calendar year 2009 were about USD 127,000 and for calendar 2010 about USD 81,000.

Dry bulk timecharter rates have recently followed the spot market quite closely on its way up, but they now show much more resistance than spot rates in a falling market. Vessel prices so far do not seem to have been very influenced by the deteriorating freight markets. Future quotations for the short term are pointing upwards from present spot market levels and over the past couple of days future quotations for the next couple of years stopped falling and were adjusted slightly upwards, although spot rates continued to fall. Falling oil prices and raw material prices in general provide a welcome stimulus for economic activity.

OPEC’s recent production cuts to maintain the price of oil and the extreme hurricane season in the Gulf of Mexico are now adding to the market uncertainty. We should always expect to see market fluctuations and periods of ups and downs in rates. However, the general bulk market climate has deteriorated over the past few months, with reduced economic forecasts and prospects of an even larger fleet growth than that foreseen this spring. Downward corrections in timecharter rates and vessel prices should come as no big surprise after the recent ordering boom and subsequent strong acceleration in tonnage delivery volumes.

Prepared for DNV
by Jarle Hammer, HM Strategies
j.hammer@fearnleys.no
September 12, 2008