Dry bulk freight rates have recovered significantly from the shocking bottom levels seen in early December. The Baltic Dry Index in early March was more than three times higher than three months before – and still 82% below the extreme peak seen last spring.

Second-hand values were quick to adjust to new market realities and interesting opportunities are seemingly again available for vessel purchase against mid-term time charter levels.
There are, however, reasons to question the sustainability of the recent dry bulk market recovery. The newbuilding market has dried up completely, whereas formal lay-up is still very limited and scrapping has not really taken off. Many charter parties fixed before the market collapse have been cancelled or renegotiated and resettled at much lower levels.

Orderbooks
Scheduled dry bulk vessel deliveries of 74 million dwt through the full year 2009 correspond to nearly 18% of the fleet of almost 419 mdwt at the beginning of this year and scheduled 2010 deliveries of 101 mdwt correspond to 24%. In comparison, reported scrap sales totalled only 1.2 mdwt in the first two months of the year. Slippages have increased strongly and delayed deliveries are expected to be significant, but cancellations are not expected to have much impact before the latter part of 2010. Hence, the fleet growth will accelerate considerably in the short to medium term.

A closer look at size ranges shows very large differences with regard to order book shares.
Thus, at the beginning of March, the order book for 10-50,000 dwt corresponded to 20% of the existing fleet (with 5% for 10-25,000dwt, 40% for 25-40,000dwt, and just 3% for 40-50,000 dwt). Whereas very few orders have recently been 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 remarkable to observe the continued interest in multipurpose vessels, with an order book now corresponding to 33% of the existing fleet. Two years ago, only 2% of that fleet was younger than 5 years. 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 8.5 mdwt. Rates for multipurpose vessels seem to be clearly more robust than for container vessels and small handysize bulk carriers in the present market downturn.

Going up in sizes, it appears that the order book share for Supramax of 50-60,000 dwt was as high as 118% of the existing fleet, whereas the share for Panamax/Kamsarmax of 60-100,000 dwt was 47%. 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 92% and the order book share for Very Large Bulk Carriers over 200,000 dwt was as high as 146%. For all vessels above 100,000 dwt, the order book share stood at 97% of the existing fleet for such vessels.

Economic forecasts
Against this unpleasant fleet scenario, economic forecasts have in the past few months been revised continuously downwards. Apart from China, few countries are now experiencing growth in their industrial production. China’s industrial production growth has fallen back from a 15% level not too long ago to below 6%. The latest reported industrial production figures in important countries show the following declines on a yearly basis: Japan -31%, S.Korea -26%, Euro area -12%, USA -10%, Brazil -15%, and Russia -16%. The two dominant dry bulk importers, China and Japan, saw their export values in January decrease by 17% and 45%, respectively, compared with one year before.

Freight rates
The recent market upturn drove Capesize spot rates up from a bottom level of USD 2,300 per day to close to USD 40,000, before they dropped back to USD 28,400. At the time of writing, Imarex Futures Capesize quotations stood at around USD 24,000 for Calendar 2010 and USD 23,000 for Calendar 2011. Time charter rates for modern Capesize tonnage have recently been set at USD 28,500 for one year and around USD 25,000 for three years. In comparison, Fearnleys’ latest Monthly Report has calculated the break-even rate for a five-year old Capesize to be USD 20,900.

The present market seems to be fairly well balanced with regard to ship values and period rates. For Panamax, the spot level was USD 16,800, against a one-year time charter rate of USD 15,500, versus a break-even rate of USD 14,400 for five-year old ships. For Supramax, the present spot level of USD 17,300 was somewhat higher than for Panamax. Supramax time charter rates stood at USD 13,000 for both one year and three years, versus a break-even rate of USD 12,900.

Improvement in Capesize
The recent surge in Capesize rates is difficult to explain. One possible reason for the recent strong improvement in Capesize rates was at first sight a significant recovery in China’s steel production after the strong cuts last autumn. China’s pig iron production fell from a monthly high of 43.4 million tonnes in June last year to 33.5 mt in November, before bouncing back to 40.6 mt in January this year, which was 6.5% higher than one year before. A closer look at the Chinese steel industry shows, however, that iron ore imports actually decreased in January, remaining at the low average level of the 4th quarter and were down 12% compared to one year before.

Last year, China’s crude steel production rose by a modest 1.7% to 502 million tonnes and the country’s pig iron production was down 0.1% at 471 mt. At the same time, iron ore imports were up 16.0%, or 61 mt, to 444 mt and domestic production of much poorer iron ore was up 15.6%, or 117 mt, to 824 mt. Based on these data, it can be calculated that a stock-build of almost 70 mt of crude steel equivalent took place in China last year. This is likely to dampen tonnage demand for quite some time. On the other hand, a large number of Capesize vessels cannot be presently be discharged, and therefore act as floating storage space of iron ore. Still, there is also a large number of vessels that are now freed up of congestion in other areas, increasing the pool of potential tonnage seeking cargo.

Market outlook
The recent market upturn is probably partly the result of market dynamics following large tonnage volumes in semi-layup and mobilization premiums together with some disturbance from the futures market. At present it seems hard to find any strong fundamental reason for significant rate increases for large bulk carriers. Figures for the full year 2008 show that world crude steel production decreased by 1.5% and global pig iron production was down 2.0%. In January 2009, total world pig iron production was down 16.3%, with Japan down 27.1% and the EU down by as much as 47.5%. Thus, China’s share of world pig iron production rose to a staggering 61%, up from 48% in October.

An inflation adjusted survey of bulk carrier time charter rates since 1970 shows a market cycle of 3 years’ duration in the early 1970’s, followed by a cycle of 7 years up to 1980. This was again followed by a cycle of about 9 years up to 1989, before a rather dull and softening period of 13 years up to 2002. After that, there was a fantastic upturn, lasting well into 2008, before the most dramatic collapse ever seen in the dry bulk spot market which also had a strong impact on the time charter rates. Last year, Capesize spot rates varied between the peak at USD 234,000 per day down to just USD 2,300 per day. Capesize time charter rates for 1 year varied between USD 170,000 and USD 18,000. With the general rate recovery seen in the first part of 2009, we can observe that present time charter rates are not particularly bad in a historical context.

Long way to go
Looking at supply and demand fundamentals, it seems clear that the road back to a a well balanced and healthy dry bulk market has to be a rather long one, and there is at present little reason to rush into vessel purchases or to charter vessels on long contracts. On the positive side, raw material and energy prices have fallen significantly. Inflation has almost evaporated in most countries. Interest rates are low, although loans are so far hard to get despite unprecedented stimulation packages. Never have we needed top level international economic cooperation more and a return to greater protectionism would be bad for the growth and prosperity of international trade and shipping.

Text: Jarle Hammer, HM strategies