What started off as unrest in the US capital markets earlier this year has over the past few months escalated into a global financial crisis and meltdown of the world economy.
The dry bulk sector has been hit worse than anyone could have predicted – with freight rates dropping by more than 95 per cent and prices for second-hand vessels dropping by up to 70 per cent in the space of a few months. This has certainly been a brutal wake-up to changed conditions!
Global trade has slowed down significantly due to the credit markets no longer functioning and reduced consumption. Demand for ship transportation has declined accordingly. That, combined with a supply side which is growing at unprecedented speed – with the dry bulk order book standing at more than 65 per cent of the existing fleet – has caused significant unrest in the dry bulk sector. On top of that, the inability of companies to obtain letters of credit has brought the bulk market to a virtual standstill and has caused charter rates to collapse to record lows.
It is difficult to navigate and set a course under such stormy conditions, but what seems obvious is that the first and essential catalyst for the dry bulk rates to recover is a renewed willingness by banks to issue letters of credit. Secondly, the whole sector needs to re-establish confidence in a balanced demand-supply situation in the future. It seems likely that the low freight rates will speed up the level of scrapping over the next few years – over 60 per cent of the Handysize fleet is more than 20 years old. That, combined with predicted delays and cancellations of some of the order book, will reduce the supply side. Still, it seems inevitable that some vessels will also head for lay-up for some period of time.
So, what role can a Class society play in such times? First of all, DNV naturally is monitoring the changed conditions carefully. We also have safety procedures and rules in place for ship lay-ups. More importantly, though, we will maintain our strong focus on the quality and safety of those vessels that are in operation and those which are going to be built over the next few years. At ship yards DNV will be there to check, sample and verify that the vessels are designed and built according to high quality standards. At newer yards we will be there to support and assist them in competence building as well as ensure that correct working procedures are followed. For example, DNV has set up a series of training academies at Chinese yards and a Technology Institute in Shanghai as a joint venture with China Classification Society (CCS).
Are there any positive signs on the horizon? Slow-steaming has been introduced as a potential silver lining to the oversupply situation, helping the freight rates to recover and at the same time lowering the operating cost. Reducing speed from 14 knots to 10–12 knots may help to absorb the new supply of vessels from 2009 to 2011. Also, economies of scale and specialised operations may provide a competitive advantage to some segments, such as the ore carrier and open hatch ones. Still, a recovery in charter rates to the record highs seen earlier this year is not very likely in the short to medium term, although many believe we may see a gradual recovery to more sound levels as from the second half of 2009.
Following up on a topic introduced in the previous issue of DNV Bulk Carrier Update – the logistics chain for coal and iron ore transportation and transformation – I wanted to share with you this time some of DNV’s experience and knowledge of dedicated ore carriers. Over the past few years, we have seen a renaissance for this type of ships, which are characterised as large transporters of huge cargo volumes on one keel. Although ore carriers are widely considered to be sturdy work horses, their safe construction and efficient operation provide challenges which should not be ignored. I hope you will enjoy reading about how the world’s largest ore carriers, the 400k dwt VLOCs ordered by VALE in August, are being designed and analysed.
An increasing number of German owners have placed orders for bulk carriers over the past few years. More than 50 per cent of the orders they placed in 2008 were to DNV class, a really clear recognition of DNV’s strong position in the German market in general and in the bulk carrier market in particular. It was therefore only natural to feature the services offered from DNV’s Hamburg office in our magazine this time.
As usual, the last pages in our magazine are reserved for market analyst Jarle Hammer, who describes how the changed conditions will impact the dry bulk sector.
One last note – times of crisis are usually good stimuli for innovation. Designers and yards should use the coming years to plan and prepare for the next generation of more environmentally friendly ships. DNV is prepared to team up to support this effort!
Happy reading!