Sweet memories of a most fantastic dry bulk market in the recent past have been brutally overshadowed by the strongest market fall ever seen in the dry bulk market. The dry bulk market suddenly almost disappeared. Since its peak in late May, the Baltic Dry Index had by 14 November fallen back 93 per cent.

Since the beginning of September alone, the BDI had been reduced by 87 per cent. The indices for different vessel sizes had dropped as follows from their peak levels: Capesize down 96 per cent, Panamax down 92 per cent, Supramax down 92 per cent, and Handysize down 91 per cent. The one-year timecharter rate for modern Capesize has dropped from USD 170,000 to an estimated USD 18,000 per day and there is a lot of confusion and extreme uncertainty around.

It seems fair to observe that dry bulk shipping had, on its own, navigated into highly troubled waters ahead of the present global financial collapse through very high ordering of new tonnage. Now, the turmoil in the financial markets has in addition made tonnage demand gloomier for a period of unknown length. In the meantime, dramatically reduced voyage rates and timecharter rates will soon have an effect on ship prices which is hard to assess in the present market situation. Several contracts, including time charter parties, will be cancelled or renegotiated.

The ordering of dry bulk carrier newbuildings continued at still quite high volumes into the first part of October, but vanished almost totally in the middle of the month. At the beginning of October, the bulk carrier order book had increased to as much as 66 per cent of the existing fleet, whereas by November, this figure had gone down to 64 per cent after several deliveries took place and some contracts were cancelled. In comparison, the order book share was 27 per cent at the beginning of last year. The existing bulk carrier fleet totalled 415.2 mdwt by November, which was up 6.6 per cent from the beginning of the year. Scheduled deliveries stood at 4.1 per cent for the remainder of 2008, 14.4 per cent in 2009, 24.1 per cent in 2010, and 15.0 per cent in 2011.

A closer look at size ranges shows very large differences with regard to order book shares.
Thus, at the beginning of November, 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, 37 per cent for 25–40,000 dwt, and three 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 34 per cent of the existing fleet. Only two per cent of that fleet was less than five years old 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 125 per cent of the existing fleet, whereas the share for Panamax/Kamsarmax of 60–100,000 dwt was 48 per cent. Among larger vessels, small Capesize of 100–150,000 dwt had an order book share of 49 per cent, whereas large Capesize of 150–200,000 dwt had a share of 92 per cent, and for Very Large Bulk Carriers over 200,000 dwt, the order book share was as high as 163 per cent. For all vessels above 100,000 dwt, the order book share stood at 99 per cent of the existing fleet of such vessels.

The steel industry, which accounts for roughly half the total dry bulk tonnage demand, has recently experienced slower global production growth and is now turning into decline. According to the Inter­national Iron and Steel Institute, recently renamed the World Steel Association, world crude steel output was down 3.2 per cent in September compared to same month last year, while the year-to-date growth stood at 4.6 per cent. In comparison, in early October the World Steel Association predicted a global steel demand growth of 6.7 per cent for this year and 5.2 per cent for next year. Last year, world steel demand rose by 7.1 per cent. The association states that these forecasts will have to be trimmed, as they were based on input delivered ahead of the recent financial collapse. World production of pig iron, which is more interesting for shipping because of the required iron ore and coking coal, was in September 3.3 per cent lower than one year before, with China down 6.1 per cent and Rest-of-world down 0.4 per cent. In the first nine months of the year, world pig iron production was up 3.8 per cent, with China up 5.1 per cent and Rest-of-world up 2.5 per cent.

The melt-down in financial markets has severely worsened the short- and medium-term economic prospects, and the construction business is particularly vulnerable. Several projects will be delayed or shelved. China’s steel exports are expected to be halved in the next few months and the four largest state-owned Chinese steel producers have announced production cuts of as much as 20 per cent. The world’s top steelmaker, Arcelor Mittal, has announced a 15 per cent cutback in an attempt to maintain prices. At the same time, large stocks of raw materials and reduced port congestion are increasing the pool of dry bulk tonnage seeking cargo.
China’s low production in August reflected some temporary steel mill closures in connection with the Olympic Games and should under normal conditions provide an upside potential in subsequent months. However, iron ore imports have been running high and raw materials have piled up in ports. The latest developments in China’s steel production represent a huge contrast to the twelve-monthly increase of as much as 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 nine months of 2008 were up 22 per cent to 346 million tonnes. The latest figures from China are quite discouraging, as iron ore imports in October plunged 22 per cent from the preceding month to 30.6 million tonnes, still almost three per cent higher than in October last year, but way below the record of 42.9 million tonnes seen in April. China’s crude steel and pig iron production in October are both reported to have decreased about 17 per cent from the same month last year.

On 14 November, the Capesize timecharter equivalent of average spot rates stood at USD 3,800 (against the fabulous USD 234,000 in early June), whereas IMAREX future Capesize quotations stood at USD 19,400 for calendar 2009 and at USD 23,000 for 2010. For several weeks some leading shipbrokers did not set second-hand values for bulk carriers in their market reports. Over the past weeks, buying interest has started to pick up for second-hand vessels at strongly reduced prices. A handful of Capesize vessels and more than twice as many Panamaxes have lately been sold for scrap. Apart from cuts in the fleet supply through scrapping and lay-up, one important silver lining for dry bulk shipping is speed reduction, which could require much more tonnage to handle the shrinking trade volumes.

On the comforting side, it should be remembered how quickly and strongly Asia recovered from the deep financial crisis in 1997/98. The real economy, with its multi-faceted demands, is something quite different from the financial world but it is totally dependent on a well functioning financial system. Large-scale national stimulation packages and inter­national cooperation at an unprecedented scale in order to save the world economy will hopefully help to restore market confidence at some time in the not too distant future.

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