Dry bulk freight rates have continued the upturn over the last two-three months. On 27 May, the Baltic Dry Index was almost 60% higher than at the end of February. Capesize spot rates had increased from a bottom level of just USD 2,300 per day in early December to almost USD 57,000. Other sizes have also seen considerable rate increases before some setbacks or flat developments in the last few days.
On this date, spot rates stood at about USD 21,000 for Panamax, USD 19,000 for Supramax and USD 12,500 for Handymax. Such rate levels might appear rather strange seen against the continued very bleak economic conditions in most countries and the fact that world steel production during the first four months of the year was 22.7% lower than in the corresponding period last year, with April down 23.6%. World pig iron production, requiring iron ore and coking coal, was down 18.5% in April compared with one year before. The latest reported figures for 12-month changes in industrial production show dramatic declines: Japan down 34.2%, the Euro area down 20.2%, and the USA down 12.5%, compared with same month one year ago. China is one of the very few countries showing growth, with a reported increase of 7.3% in its industrial production.
The dry bulk freight market has clearly benefitted from very modest deliveries of newbuildings so far this year and a fleet growth of only 1.0% over the first four months of the year. Besides, operational conditions such as slow-steaming, semi-layup, port congestion in some areas, substantial floating iron ore storage in China and choice of longer routes in order to avoid pirates and canal tariffs, all contribute to a firmer tonnage balance. The overriding factor however, is the very strong growth in iron ore imports to China, up almost 23% in the first four months, whereas the country’s pig iron output was up just about 3% and the crude steel production was at about same level as in the same period last year. A closer analysis of the Chinese steel industry is shown below. The extreme build-up of Chinese iron ore stocks does not bode well for the subsequent freight market, neither does the enormous order book for bulk carriers.
Scheduled dry bulk vessel deliveries through full year 2009 now at 71.7 million dwt correspond to about 17% of the fleet of almost 419 mdwt at the beginning of this year and scheduled 2010 deliveries at 102 mdwt correspond to 24%. Slippages have continued to accumulate and Fearnleys has registered deliveries of only 8.7 mdwt in the first four months of the year, with 63 mdwt on the paper due to be delivered in the remainder of the year. It remains to be seen how much will actually come in the course of the year. Cancellations are still not expected to have much impact before the latter part of 2010. New bulk carrier orders are negligible so far this year at just 0.4 mdwt and only 1.2 mdwt has been ordered since September last year. Full year new orders last year reached about 69 mdwt and almost 156 mdwt in 2007.
A closer look at size ranges shows very large differences with regard to order book shares.
Thus, at the beginning of May, the order book for 10–50,000 dwt corresponded to 20% of the existing fleet (with 4% for 10–25,000dwt, 40% for 25–40,000dwt, and just 3% for 40–50,000 dwt). Going up in sizes, it appears that the order book share for Supramax of 50–60,000 dwt was as high as 112%, whereas the share for Panamax/Kamsarmax of 60–100,000 dwt was 46%. Among larger vessels, small Capesize of 100–150,000 dwt had an order book share of 50%, whereas large Capesize of 150–200,000 dwt saw a share of 88% and for Very Large Bulk Carriers over 200,000 dwt, the order book still reached as much as 130%. For all vessels above 100,000 dwt, the order book share stood at 92% compared to the existing fleet for such vessels.
The present strength in the dry bulk freight market seems unsubstantiated for several reasons. Most of the 2009–2010 scheduled newbuilding deliveries will gradually flood into the market. The likelihood of further increases in China’s iron ore stocks seems questionable, but cannot be ruled out. A closer look at the country’s iron ore supply situation shows the following key figures: In 2008, Chinas pig iron production decreased marginally, down 0.1%, whereas the country’s high-grade iron ore imports rose as much as 16.0% to 444.0 mt and domestic production of low-grade iron ore rose 15.9% to 824.1 mt.
This implies that the apparent stock building of iron ore last year corresponded to almost 70 mt of crude steel equivalent. During the first four months of 2009, China’s pig iron production at 163.8mt was up 3.2%, whereas iron ore imports were up as much as 22.9% to 188.5 mt and domestic iron ore production fell back 3.5% to 228.4 mt. This can be translated into a further stock building of some 20 million tonnes of crude steel equivalent. Adding this together, since the beginning of last year there has been a stock building of iron ore in China corresponding to about 143 million tonnes, based on imported ore quality. Against this it can be observed that China’s steel exports have been cut dramatically, with a projected decrease of some 40 mt from last year’s volume of 60 mt. Adding to this, World Steel Association in its latest short range outlook, presented in April, estimated a decrease in China’s apparent steel use in 2009 of 5%, or just above 20 mt.
One remarkably positive development on the tonnage demand side, was the big jump in coal imports to China in April, with a new monthly record of 9.2 mt, against the sliding coal exports amounting to just below 2.0 mt. Last year, China’s coal exports reached 45.4 mt, against an import volume of 40.4 mt. During the first four months this year, however, coal imports at 22.8 mt were more than twice as large as coal exports at 9.3 mt. Hammer Maritime Strategies has for a couple of years maintained that coal imports to China probably represent one of the largest upsides in dry bulk seaborne trade.
The recent substantial downward adjustments in bulk carrier prices combined with the strengthened freight market has opened for interesting investment opportunities and the activity in the second-hand market has been quite high. Using Capesize as a reference, the present break-even rate for a five-year-old vessel, bought in the market now, with an assumed total life-time of 25 years, and requiring 10% return on the total capital, was set at USD 21,300 per day in Fearnleys’ latest Monthly market report. Over the last week, the one-year timecharter rate for Capesize jumped from USD 30,000 to USD 40,000. Whereas the present spot market for Capesize had surged to almost USD 57,000, Imarex futures were quoted at around USD 26,000 for both Calendar 2010 and Calendar 2011.
In my view, it should come as no big surprise if these levels turn out to be far too high, bearing in mind the big tonnage overhang, the enormous Chinese iron ore stocks and the sad state of the world economy with a seemingly long way to go to get back to conditions before the financial collapse last year. A good piece of advice is to watch the fundamentals continuously and try to look behind the market to get an idea about the sustainability of current market developments.
Date: 18 June 2009