The dry bulk market exploded in the first part of November. The Baltic Dry Index jumped 50% in less than three weeks up to 19 November.

This comes as a big surprise and is hard to understand from watching the market fundamentals. Market psychology, wishful thinking, the exaggeration of positive market signals and speculative market operations may have contributed. Whereas China's raw material imports have been running at very high levels in recent months, iron ore imports are reported to have decreased by almost 20 million tonnes from September to October, and coal imports to China also reportedly decreased somewhat in October. It will be most interesting to see the country's import figures for the next couple of months.

Dry bulk freight rates fluctuated at surprisingly good levels in the months leading up to the end of October. On 19 November, the average Capesize spot rate was about USD 87,000 per day and 1-year timecharter rates for Capesize stood at USD 40,000 per day. In comparison, the break-even rate for a five year-old Capesize vessel with an assumed lifetime of 25 years was estimated to be USD 22,500. Much slower deliveries of new vessels than originally scheduled have provided a cushion for the dry bulk market. Industrial countries are still struggling to recover from serious setbacks. In sharp contrast, Chinas steel industry, supported by substantial infrastructure stimulation, an enormous stockpiling of iron ore and a mega-lift in coal imports to China, is a key element supporting the dry bulk market. Operational elements, like port congestion and the use of storage vessels, also play a part. Despite the extremely good rate levels obtained at present, it must be very unpleasant for ship owners to observe that delayed deliveries have now increased the volume of scheduled deliveries of bulk carriers in 2010 to more than 26% of the existing fleet, although a lot of this is likely to be delayed.

Global economic prospects have improved considerably. The estimated fall in GDP in 2009 has been slowed for several countries and fairly modest forecasts for 2010 have been revised upwards along with already strong growth forecasts for China, India and a few other Asian countries. The latest reported figures for 12-month changes in industrial production show considerably less dramatic declines for industrialised countries: Japan down 18.4%, the Euro area down 14.0%, and the USA down 7.1%. China has reported impressive growth of 16.1%, and other countries doing well are India and Vietnam which are up 9.1% and 7.0% respectively. The steel industry, which accounts for about half of the total dry bulk carrier demand, is showing clear signs of improvement after the dramatic decline last autumn. Thus, world steel production in September was just 0.6% lower than in the corresponding month last year and world pig iron production, which requires iron ore and coking coal, was up 4.8%. Countrywise, pig iron production in September was as follows: China +27.7%, Japan –17.0% and the EU –25.5%. Figures for October show that pig iron production in China was up 44.4% compared to the same month last year, whereas it was down 9.3% in Japan. Here, it should be observed that comparisons are now being made against the severe slump late last year.

Imports of key raw materials to China have risen remarkably. Over the first ten months of the year, coal imports to China rose by 172%, from 35.6 million tonnes to 96.9 mt, and iron ore imports rose by 37 %, from 376.5 mt to 514.8 mt. This means that coal imports were up 61.3 mt and iron ore imports up 138.3 mt, a total of 199.6 mt, equal to about 240 mt on an annual basis. In comparison, the total world dry bulk trade last year is estimated to be 3,110 mt. The previous report once again pointed to the strong upside potential for coal imports to China. Chinese companies have invested heavily in Australian coal mines. During the first nine months of 2009, imports from Australia rose from just 2.4 mt to 33.0 mt, while imports from Vietnam were up from 14.3 mt to 17.4 mt, from Indonesia up from 9.3 mt to 14.9 mt, and from Russia up strongly from 0.5 mt to 9.0 mt. Most other countries have seen substantial decreases in their coal imports, and Japan experienced a 19.2% fall in the first nine months of the year.

At the beginning of November, the world bulk carrier fleet stood at 448.4 mdwt and the order book at 258.3 mdwt, corresponding to 57.8% of the existing fleet. A summary of dry bulk fleet developments this year shows fairly moderate growth of 6.9% over the first ten months. At the beginning of this year, scheduled deliveries in 2009 at 75.5 mdwt corresponded to 18.0% of the existing fleet. At the beginning of November, 32.9 mdwt had been delivered, 22.9 mdwt were still registered for 2009 delivery and 19.7 mdwt had apparently been transferred to 2010 delivery. Scheduled deliveries now amount to 5.1% of the present fleet for the last two months of 2009, an incredible 26.2% for 2010, and 17.2% for 2011. During the first ten months of 2009, new orders totalled about 17 mdwt, with a strong focus on the largest sizes, while demolition sales reached 4.5 mdwt.

A closer look at size ranges shows very large differences in order book shares.

Thus, at the beginning of November, the order book for 10–50,000 dwt ships corresponded to 18% of the existing fleet (with 4% for 10–25,000dwt, 36% for 25–40,000dwt and just 2% 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 101%, while the share for Panamax/Kamsarmax of 60–100,000 dwt was 44%. Among larger vessels, small Capesize of 100–150,000 dwt had an order book share of 46%, while large Capesize of 150–200,000 dwt saw a share of 83% and the order book share for Very Large Bulk Carriers over 200,000 dwt was as high as 116%. For all vessels above 100,000 dwt, the order book stood at 85% of the existing fleet for such vessels.

Looking ahead, it seems impossible that the enormous overhang of tonnage to be delivered will – despite probable further delays and cancellations of late deliveries – be balanced by tonnage demand growth, and most people will agree that the tonnage balance is bound to deteriorate significantly over the next couple of years. On 19 November, the Capesize spot rates averaged about USD 87,000 per day, whereas Imarex future quotations were at about USD 35,000 per day for calendar 2010 and USD 27,000 per day for calendar 2011. Panamax spot rates stood at about USD 36,000, with future quotations at USD 21,000 for 2010 and USD 16,000 for 2011. Supramax spot rates were about USD 26,000, with future quotations at USD 18,000 for 2010 and USD 14,000 for 2011. Handymax spot rates stood at USD 15,500, with future quotations at USD 12,000 for 2010 and USD 11,000 for 2011.

These future quotations all show quite decent levels, but they could well turn out to be too optimistic, especially for the largest sizes. In general, again, there still seems to be a limited medium-term market upside. Admittedly, the dry bulk market has in recent months been considerably better than expected. This is due to China's strong economy and enormous appetite for raw materials. That could, however, become a two-edged sword for the freight market if and when they start to draw on stocks. Comparing China's iron ore imports and domestic iron ore production with the countries pig iron output, there seems to have been an apparent stockpiling of about 160 mt iron ore of import quality over the past couple of years. On the positive side, the world economy seems to be recovering faster than expected, but there is still much uncertainty in the financial markets, as evidenced by the recent collapse of another large US bank.

Regarding the dry bulk market, it was amazing to observe the strong changes in the latest Short Range Outlook from the World Steel Association published in October versus the one published in April. The world apparent steel demand was in April estimated to decrease by 14.9% in 2009, after a reduction of 1.4% in 2008. In October, the decrease in 2009 was estimated to be 8.6%, with 9.2% growth foreseen in 2010. Chinas apparent steel demand rose by a modest 2.9% in 2008 and forecasts for 2009 have been revised upwards from –5.0% to as much as +18.8%, with a following growth of 5.0% in 2010. For the rest of the world, there was a decline of 3.7% in 2008, and 2009 forecasts have been adjusted downwards from –20.4% to –24.4%, with a following growth of 13.1% in 2010.

An expected global steel demand in 2010 that is below the 2007 level, together with the substantial iron ore stocks in China, seems to be a poor match for the overwhelming bulk carrier delivery schedule. The present second-hand market is lively, with many transactions at strongly adjusted prices for vessels that are right now fetching very good rates. With this new freight rate bonanza, the demolition market is dead. It could, however, well be revived fairly soon. The present dry bulk party may not necessarily be a long-lasting one.

Text: Jarle Hammer, HM Strategies