Plymouth University International Shipping and Logistics Group MAR 316 International Shipping

Dry Bulk Market Review and Outlook

Student name: Vladislavs Batalovs Student number: 10295089 Deadline: February 12th, 2013 Set by: Jonathan Challacombe Word Count: 3,033

Table of Contents
1

1. Introduction

3 4

2. Bulk Shipping Market Supply Side

3. Bulk Shipping Market Demand Side 7

3.1 Iron Ore Demand 8 3.2 Coal Demand 3.3 Grain Demand
4. 5. 6. 7. 9 10

Conclusion Bibliography

12

Reference List 13
15

Tables and Figures 16

1.

Introduction

It is no secret that the dry bulk shipping is the oldest type of the shipping business, which takes its roots hunders of years ago. Obviously since then a lot has changed, however the essence stayed the same - to transport the commodity in the cheapest and quickest way, while staying safe and efficient. The principle commodities which form the modern dry bulk shipping market are iron ore, coal and grain cargoes. There are also minor bulk commodities such as agribulks, metals and minerals as well as steel products, which also contribute to the overall tonnage of shipped cargo. It is estimated that dry bulk cargoes make up the the largest proportion of the seaborne trade, which by the end of 2012 was roughly 3,500 mmt. Technological developments of the last 50 years have led to more sophisticated and larger ship designs, aiming not only to accomplish the economies of scale , but also to match the cargo and trading route requirements. The industrial production processes, global consumption and change in trade route patterns have also had a noticeable impact on the development of this industry. Alizadeh (2011) asserts that, within the dry bulk sector different sub-markets with distinctive characteristics in terms of supply and demand features, operational characteristics, risk and profitability have developed, along with construction of specialised vessels of various sizes, which can be employed for transportation of certain commodities over particular trading routes. Therefore there is a particular segmentation within the dry bulk shipping market, namely vessels of different sizes have their principle cargoes and routes. The fleet is built up from Handy, Handymax, Panamax, Supramax and Capesize vessels, each employed for carriage of different dry bulk commodities, although sharing similarity in their design, it is more common for smaller vessels to be geared, while larger ones lack this feature. The dry bulk shipping market has been constantly growing during the past decades, while having its ups and downs it is fair to say that this particular branch of shipping has enjoyed a relatively calm ride. Nevertheless the picture has changed dramatically during the last few years, as the global consumption and production patterns started to 3

change coupled by the global economic crisis and its consequecnces the dry bulk shipping market finds itself in a very difficult situation now. The year 2012 was arguably the most difficult year for the dry bulk market spurring a lot of questions and uncertainties about the further growth and development of this business. This contribution will describe and illustrate the changes and events that led to present condition of the market with help of academic and statistical information and try to predict the future developments in the dry bulk shipping market by interpreting and synthesising information from various academic articles, reports and media sources. 2. Bulk Shipping Market Supply Side The year 2012 was the worst year for the dry bulk shipping market in decades. While the overall dry bulk cargo volumes are ever-increasing the earnings from this business have hit their lowest point in 30 years. The slower economic development has been difficult for shipowners who, with a severe overcapacity of tonnage, have struggled with a depressed freight market since the start of the financial crisis back in 2008 (BIMCO, 2012). The extreme imbalance of the supply and demand of the tonnage capacity has resulted in a number of bankruptcies of small and medium companies servicing this market. The newbuildings that have been ordered at an exceptional level back in 2008 are hitting the shipowners very hard, as the their predictions of the continued high growth rates in the world trade before the collapse of the financial markets very utterly wrong. It is observable that slow-steaming, idiling and recycling of the vessels are the only options left for the shipowners who are trying their best to manage the overcapacity of tonnage. The situation was worsened by the extreme expansion of the dry bulk fleet in 2012, which grew by 70 million DWT. The continuous decline in the freight rates and earnings in 2012, shows us that it will take time before the supply and demand balance ratio will be back on track. Although the Capesize vessels were offering a very high cargo capacity, they were the ones hit the most, with 4

freight rates falling lower then all other segments. Towards the end of 2012, demand for iron ore in particular picked up again, as China introduced another large stimulus package with focus on infrastructural developments. Even though this positively impacted the rates, the unsustainable low freight rate levels during most of 2012 proved only sufficient to cover operating expenses, but hardly any capital cost (BIMCO, 2012). It has to mentioned that the problem of this extreme overcapacity may not have been avoided, however the shipowners and shipyards had the opportunity to postpone and delay the deliveries of the new vessels by that securing employment for workers for a longer period of time until it was absolutely unavoidable (BIMCO, 2013). While the demolition rates were peaking at 3 million DWT a month the delivery rate was hitting dangerous 10 million DWT a month. BIMCO (2013) report suggests that the high delivery rate is the consequence of the intense lack of cash-flow that the shipyards are suffering. The payment strucuture of the more recent contracts is that the biggest chunk of money released to the yards is closer to the completion and delivery of the ship, rather then the previous contracts that were frontheavy from signing to delivery, or at least equally distributed. The global dry bulk fleet is now pushing 9,500 vessels of over 675m dwt and, although the number of ships sold for demolition has increased almost 50% on 2011 figures to more than 30m dwt, this has made no major impact on correcting overcapacity. The capesize fleet alone, for vessels over 100,000 dwt, has increased more than 90% in deadweight terms since the start of 2009 to reach 277m dwt. (McCarthy, 2012). It is estimated that fleet has grown by 8.8% since the turn of the year, as 964 new ships have now been delivered into a fleet that already stood at 8,901 dry bulk carriers at the start of the year. Fortunately, the pressure of 80 million DWT of brand new capacity being poured into the market has been eased to some extent by 375 over aged vessels being demolished. This is the only reasonable move from the shipowners in order to improve the bad market conditions. 25 million DWT has now been demolished during 2012 with more to come, assuming that ship 5

owners continue to be tempted by the recycling price level (BIMCO, 2013).

Source: RS PLATOU. Commodity shipping markets; Status and Outlook.

Although, the actions are being taken as the concern has hit its peak the annual orderbook for dry bulk carriers is still there and it is expected that Panamax sector will see the highest rise in 2013 of 9.8%, while the Supramax sector is estimated to be added by relatively low 4.5% in 2013. Overall the dry bulk carrier fleet in 2013 is expected to rise by 6

6.8% over 2012, as suggested by Maritime Exchange Information Centre (2012). We can speculate that we will still be seeing the oversupply in 2013, especially in the Capesize and Panamax sector, while the queues for demolition will be increasing dramatically. The key for recovery lies in cutting back on tonnage supply by delaying or cancelling newbuilding orders. Another important aspect of the supply side that is worth mentioning is the shifting interest of shipowners towards eco-friendly vessels, which are claimed to offer large fuel savings compared with the standard vessels operating in the market. Although the deciding factor will be the fuel costs, which are not expected to decline, the emphasis has still to be put on the current challenge of optimising the efficiency of present fleet (BIMCO, 2013).

Source: UNCTAD Review of Maritime Transport 2012 3. Bulk Market Side As it was already mentioned above the year 2012 was the worst for dry bulk market, in quarter of a century with Baltic Dry Index averaging at a three digit number at 945 points, second worst since 1986 when it averaged at 906 points. Dry bulk carrier earnings were compromised this year by huge overcapacity in the chartering markets, due to record newbuilding deliveries over the past few years. Liz McCarthy (2012) of Lloyds List reports that the global timecharter rate for capsize vessels has averaged out at $7,680 per day, in contrast the capesize timecharter rate in 1999 averaged $10,921 per day, peaking at $116,049 in 2007. Similarly, for the panamax bulk carrier sector timecharter rate averaged just $7,684 per day this year the lowest figure reported since 1999, when it averaged $7,412 per day. Supramax bulk carriers achieved the highest average rate, though still in four figures, at $9,452 per day. The handysize global timecharter rate averaged $7,626 this year (McCarthy, 2012). The figure below illustrates the volatility of the daily tripcharter rates from Februrary 2012 untill February 2013. Shipping Demand

Source: Julian Associates Analysis

It is observable from the figures above that the freight rates for all sgements of the dry bulk market are in a slump, and have been quite the volatile throughout

year. The capsize vessels have seen a rise and fall in the third quarter of the year motivated by the Chinese stimulus package aimed Source: RS PLATOU DRY BULK FIXTURE REPORT at the of The by development infrastructure. presented

figure on the left, Braemar Seascope, encorporates global port investment and development plans in the next few years. We can observe a colossal growth with capacity more than doubling from 2012 to 2018. This is due to the huge amount of propesd expansion for both iron ore and coal facilities, to help feed emerging national demand in countries like China, Inda and others. This significant additional capacity will surely materialise, however some delays and cancellations are expected, due to unstable current market state.

3.1 Iron Ore Demand

The current state of things in the iron ore market,as

in dry bulk

market in general is quite depressed. Throught the year the prices for iron ore were highly volatile, however China had shown a strong demand for imported ore thus stimulating the market. Although, the demand was slightly weaker then in previous years, the Chinese stimulus plan introduced in September immediately affected iron ore prices and Chinese imports positively. Although Indian Supreme Court ban on iron ore movement in Goa (India's second-biggest iron ore producing state), affected the Indias exports to China, there was a strong demand for Brazillian and Australian ore. Strong Brazilian exports demonstrated a solid upside in the dry bulk market from this surge in demand. While China was increasing their iron ore inventory in ports the demand for Capesize vessels was high and the markets demonstrated a surge in the freight rates hitting the annual high in November 2012. In December 2012 China Iron and Steel Association (2012) stated: "Weaker steel demand in winter, high steel output and the unwillingness of steel traders to restock due to tight capital will keep China's steel market under pressure." Maersk Broker claims that In 2013, the global steel demand is expected to expand by 3.2%. According to JP Morgan, the Chinese iron ore fell by 10% sequentially and 18% Y-o-Y in November due to the above mentioned stockpiling in the Chinese ports. Mr. Yannis Pachoulis, President of the Hellenic Shipbrokers' Association states that the downturn in the middle of 2012 was expected, as more and more newbuilding vessels were to hitting the water, on the back of a huge orderbook. He adds that with global dry bulk trade expected to increase exponentially during the 2014/2015, the current oversupply of dry bulk tonnage will be gradually absorbed, thus helping to bring freight rates back to more sustainable levels (Hellenic Shipping, 2012). RS Platou Economic Research says that prospects for a cyclical upswing in 2014/2015 are cautiously optimistic as supply side side fundamentals are improving markedly and if trend stays the same and the overall global economy will be positive we will clearly see more balance in the supply and demand ratio in the iron ore market. 10

3.2 Coal Demand Coal is the second largest dry bulk trade, which is highly affected by the iron ore market and two distinct markets of thermal coal and coking coal. The demand for coking coal is somewhat dependant on the iron ore market as it is used to produce steel, thermal coal on the other hand is used for fuel the power stations. In the recent years the coal market was largerlay affected by Chinese demand for power generation, due to rapid economic development, thus shifting China from being a large exporter to one of the biggest importers of coal.Clarkson Research (2012) expects thermal coal imports to be 138 million tons this year and with an increase of 12% y-o-y. India has also experienced a high demand growth, and is expected to be the second-largest importer of thermal coal in 2013 with imports of 128.5 million tons, second only to China. This gives place to speculations that it might be the be coal rather than iron ore that will lead the dry bulk sector out of the slump. Clarkson (2013) predicts that the world thermal coal shipment will reach 811 MT in 2013, which means a 5% increase from the 2012 levels. Shipments to Australia and Indonesia are also expected to grow in the 2013/2014 period. On the other hand, the coal shipments to Europe are expected to decline after the coal-fueled plants are expected to be closed during 2013 as part of Europe's Large Combustion Plant Directive. Pareto Securities (2012) expect to see a surge in demand for coking coal, which is used in the steelmaking process, rising to 40m tonnes in 2013. Chinas steam coal imports, used for electricity production, will continue to grow to meet surging power demand. At present, China relies on steam coal for 80% of its power usage and its imports have topped 220m tonnes in 2012 and these numbers are expected to grow. There are two observable positive demand factors in the Chinese coal demand. Firstly, the growing gap between Chinese domestic and imported coal price, which is more than 11

$20 per tonne, means that China will be more reliant on the imported coal. Secondly, the cancellation of some nuclear power projects in China means that the demand for coal is going to rise in the 2013/2014 period, although Chinese government does try to use alternatives such as hydropower and geothermal power (MEIC, 2012).

3.3 Grain Demand Although grain is grouped with iron ore and coal as of the major bulk commodities, it is different in both economic and shipping terms. Stopford (2009) asserts that whereas iron ore and coal forma poart of a carefully planned industrial operation (steelmaking, energy production), grain is an agricultural commodity and is seasonal in its trade as well as irregular in both volume and route. These qualities of grain shipping, where yet again demonstrated by the market in the last few years. USA being the principle global exporter of grain has shown poor results in 2012 along with Argentina, Australia, Ukraine and Russia due to the negative impact of the weather conditions. This resulted in a total grain exports seeing a drop by 20 MT in Autumn 2012, equal to y-o-y decline of 8% (BIMCO, 2012). The same tendency was observable in Russia, when in December 2012 Russias Agriculture Ministry reported that total grain exports were down by 17% compared to previuous season. The shortfall in seaborne grain exports from both the US and Russia has further and negatively impacted the shipping markets. As the grain cargoes are usually transported by Supramax and Handyamx vessels the BSI and BHI indices have also demonstrated that the market struggles with the oversupply of tonnage, however this segment has been dealing with it much better than Capesize and Panamax vessels. The United States Department of Agriculture estimated that the global grain production in 2013 would be around 283 MT, lowering the previous forecast made earlier in the 2012 by 5 MT (SeekingAlpha, 2012). According to Clarkson 12

the grain shipments for 2013 are expected to decline by 14% on a YoY basis. The largest drop in grain export is expected to come from Australia. Clarkson state, the grain shipments from Australia are expected to drop by 12% YoY to 26.5 MT in the first quarter of 2013. Also, the USDA predicts that Australia's wheat harvest for 2013 would total only 23 MT, meaning a decline of 22% YoY. Overall, Maritime Exchange Information Centre (2012) says that grain demand has a positive outlook, although slowdown of the cargo increase will be the trend of 2013/2014.

Source: NYK Research Group 2012

4.

Conclusion To conclude this report it is fair to say that currently dry bulk

shipping is living through one of its worst years in the recent history, however there is ray of hope. In his interview to Hellenic Shipping News 13

(2013), Mr. Yannis Olziersky of Intermodal Shipbrokers said: "Although much of the fundamentals point towards another difficult year, there is a small glimpse of hope in the horizon that we may be surprised and see things turn out much better then we initially expected. It is expected that dry bulk volumes are going to grow around 6% per annum over the next four years, increasing from total global volumes of 4.2bn tonnes in 2012 to 5.4bn tonnes in 2016. The earnings for capsize vessels is forecast to rise from around $12,000 per in 2012 to $28,000 per day in 2015, which truly is a ray of good hope for the shipping. Panamax earnings are estimated to rise from $9,000 per day to $20,0000 during this period, although this will still be below the $25,000 per day 20002011 average. Although the charter market will remain challenging in the short term, dry bulk vessel demand in deadweight terms is expected to grow 7.7% in 2013 (McCarthy, 2012). Overall, the market will still be suffering of the oversupply of the tonnage during 2013/2014 period before demand and supply ratiobalance will start to come back in place. The trade patterns are most likely to stay the same with Asian countries being the principle importers of iron ore and coal, while Australia nad Brazil will further strengthen their position in the iron ore and coal markets. The grain supply outlook is still murky as the principle exporters like US and Russia are dealing with consequences of the poor weather conditions, which have affected the crops of 2012. It is considered that grain supply will pick up during 2013/2014 period, however US announced that their although their exports will grow they will not be more than in the previous years. To sum up the report, it has to be said that although the current state of the market is not very encouraging, the experts agree that there are prospects for improvement of the market and the forecasts for the future are quite optimistic as the current shipping cycle is coming closer to its end.

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5.

Reference List

Alizadeh, A.H., Nomikos, N.K. (2010) An Overview of the Dry Bulk Shipping Industry. In: Grammenos, C. (ed). The Handbook of Maritime Economics and Business. Second Edition. London: Lloyds List. BIMCO (2012) DRY BULK SHIPPING - FLEET GROWTH REMAINS HIGHER THAN DEMAND GROWTH, BUT FREIGHT RATES MAY GO UP [online] Available at: https://www.bimco.org/Reports/Market_Analysis/2012/1015_DryBulkSMO O2012-5.aspx [Accessed 12/02/2012] BIMCO (2012) DRY BULK SHIPPING - WILL COAL MAKE UP FOR THE DISSAPOINTMENT IN WHEAT EXPORTS? [online] Available at: https://www.bimco.org/Reports/Market_Analysis/2012/1211_DryBulkSMO O2012-6.aspx [Accessed 12/02/2012] BIMCO (2013) THE SHIPPING MARKET IN 2012 AND LOOKING FORWARD [online] Available at: https://www.bimco.org/Reports/Market_Analysis/2013/0104_Reflections.a spx [Accessed 12/02/2012] China Iron & Steel Association (2012) Market Outlook. FORWARD [online] Available at: http://www.chinaesteel.com/mmi_en/au.htm [Accessed 12/02/2012] Clarksons (2012) State of the Dry Bulk Shipping Market and its Prospects. [online] Available at: http://www.icsuae.ae/icsuae/Frontend/pdf/DryBulkShippingMarketanditsPr ospects.pdf [Accessed 12/02/2012]

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Hellenic Shipping News (2013) Small room for optimism for the prospects of the dry bulk market as net fleet growth is slowing down [online] Available at: http://www.hellenicshippingnews.com/News.aspx? ElementId=540376f4-a825-49e8-baab-6a3373e623a7 [Accessed 12/02/2012] MarineExchange Information Centre (2012) Drybulk Market Review and Outlook [online] Available at: http://www.marinemoney.com/sites/all/themes/marinemoney/forums/KOR 12/presentations/0930%20Jeong-Ho%20Yeom.pdf McCarthy ,L., (2012) Dry bulk records its worst year in quarter of a century. [online] Available at: http://www.lloydslist.com/ll/sector/drycargo/article414259.ece [Accessed 12/02/2012] McCarthy ,L., (2012) Year of extreme pain. [online] Available at: http://www.lloydslist.com/ll/sector/dry-cargo/article414003.ece [Accessed 12/02/2012] McCarthy ,L., (2013) Dry bulk nears turning point [online] Available at: http://www.lloydslist.com/ll/sector/dry-cargo/article415307.ece [Accessed 12/02/2012] Pareto Securities (2012) Market Overview [online] Available at: https://online.paretosec.com/Market [Accessed 12/02/2012] RS Platou (2012) Commodity shipping markets; Status and Outlook . [online] Available at: http://www.platou.com/dnn_site/LinkClick.aspx? fileticket=%2ftiRMKU1KqQ%3d&tabid=522 [Accessed 12/02/2012] SeekingAlpha (2012) Have We Seen The Bottom In The Dry Bulk Industry? [online] Available at: http://seekingalpha.com/article/1043451-

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have-we-seen-the-bottom-in-the-dry-bulk-industry [Accessed 12/02/2012] Stopford, M. (2009) Maritime Econimics 3rd Ed. UK: Routledge. UNCTAD Secretariat (2011) Developments of international Seaborne Trade. Review of Maritime Transport 2011. UNITED NATIONS PUBLICATION, Switzerland.

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Bibliography Braemar Seascope (2012) The Outlook for the Dry Bulk Market Italian style. [online] Available at: http://www.mareforum.com/MAREFORUM2012PRESENTATIONS/JOHN_ DANCONA.pdf [Accessed 12/02/2012] Drewry Maritime Research (2013) Capesize Difficulties Countered by Smaller Vessel Gains [online] Available at: http://www.drewry.co.uk/news.php?id=166 [Accessed 12/02/2012] Maersk Broker (2013) Dry Bulk Market Outlook Weekly Report 18.01.13-25.01.13. [online] Available at: http://www.soefart.dk/gfx/Dry_Bulk_Market.pdf [Accessed 12/02/2012] Pacific Basin Shipping Limited (2012) Dry Bulk Market Review 1H2012 [online] Available at: http://www.pacificbasin.com/UserFiles/upload/FinancialReporting/07_B USINESS_REVIEW_E.pdf [Accessed 12/02/2012]

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7.

Tables and Figures Jullian Associates (2011) Bulk Commodity Global Overview [online] Available at: http://julianassoc.com/Julian%20ACPA%20Global %20Dry%20Bulk%20-%20August%202011.pdf [Accessed 12/02/2012] NYK (2012) 2012 Factbook [online] Available at: http://www.nyk.com/english/ir/library/fact01/pdf/2012_factboo k01_10.pdf [Accessed 12/02/2012] UNCTAD (2012) Review of Maritime Transport 2012. [online] Available at: http://unctad.org/en/PublicationsLibrary/rmt2012_en.pdf [Accessed 12/02/2012] RS Platou (2013) Bulk Fixtures Report [online] Available at: http://reports.platou.com/FixtureReport/Pages/BulkFixtures.as px [Accessed 12/02/2012]

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RS Platou (2012) Commodity shipping markets; Status and Outlook [online] Available at: http://www.platou.com/dnn_site/LinkClick.aspx?fileticket= %2ftiRMKU1KqQ%3d&tabid=522 [Accessed 12/02/2012]

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