Dry bulk market rebound may take longer than expected
Although 2013 is expected to fare better than 2012, in terms of
dry bulk freight rates, it will still take the market a while, before it gains
some solid ground under its feet, said BIMCO’s Chief Shipping Analyst, Peter
Sand, in an exclusive interview with Hellenic Shipping News Worldwide. He cited
the heavy overhang of tonnage as the main reason for this, despite the fact that
as BIMCO recently forecasted, a total of 30 million dwt is expected to leave the
dry bulk fleet during 2013, versus 33.7 million dwt which was scrapped last
year. So far in the year, a total of 8.7 million dwt has been recycled.
According to Sand, ship owners will still have to resort to any kind of
measures they can apply, in order to affect the supply side of the equation.
That is, “keep slow steaming around also when rates start to pick up, ax
commercially unviable tonnage as soon as possible and seek to expand capacity in
second hand market if possible to avoid more new tonnage coming into the
market”, Sand noted.
When do you expect to see an easing of the pressures caused to the freight markets, especially in the dry bulk segment, from the current imbalance of the supply/demand scale?
The “million dollar” questions for starters… In our annual BIMCO Reflection, which is published at the start of the year we said that 2013 will be the turning point on the macroeconomic scene. This is still the case, despite the recent downward adjustment form the IMF. Overall this means that the shipping market will not get firm ground under its feet as soon as previously forecasted – this spill into the dry bulk shipping market as well. We still believe 2013 will turn out to be a better year than 2012 overall, but for a significant improvement of the fundamental balance between supply and demand we have to wait as the overhang of tonnage is still heavy.
Do you believe that 2013 will prove more positive for shipping companies’ earnings?
Operating earnings at EBITDA-level should improve as rates are seen up from 2012. As for the bottom line the depreciations and financing costs could still become higher for many owners weighting down on the final line. OPEX is seen to increase a bit – leaving bunker prices as the dark horse in the equation. Recent drop in bunker fuel cost to the extent of USD 70-80 per mt is certainly a move in the right direction.
Do you share the view of most analysts, that 2014 will mark the end of the present downward cycle of the dry bulk shipping markets?
I think it’s fair to say that we are beginning to see the end of the present downward cycle.
BIMCO base that upon the fact that the supply growth is coming down from the very high numbers in recent years – whereas the demand situation is maintained at a solid level. I don’t spend much time on setting an exact date for the end of current doldrums. Rather I focus on the elements that should bring around better earning in dry bulk industry: keep slow steaming around also when rates start to pick up, ax commercially unviable tonnage as soon as possible and seek to expand capacity in second hand market if possible to avoid more new tonnage coming into the market. In short, focus on the elements where you (as an owner) can affect the market situation (ie the supply side).
In particular, it is vital to keep applying slow steaming to your business as a return to full throttle means supply will easily outstrip most demand improvements.
During the first quarter of the year, we've seen a substantial increase of newbuilding investments in the dry bulk carrier segment, compared to the same period of last year? Why was that? Is it a sign that ship owners are more confident in the market's rebound, or was it simply a matter of attractive pricing?
The return of higher contracting activity is not welcomed for the overall market as such – but for some owners it can make perfectly good sense to go out and order a newbuilding. Prices are low in a historic perspective – but it’s more important what kind of future earnings potential you put into your business case. The run for more fuel efficient tonnage is certainly a driver behind some of the newly placed orders. BIMCO does not expect a massive rebound in short time but for a ship to trade from 2015 until 2035 current sentiment may mean little to the investment decision if the money to spend is there (or made available to you).
Do you thinks that ships' values in the second hand market, where things are also rather active this year, are close to bottoming-out, or is there still room for lower prices?
The second hand prices have taken some serious beating in recent years. Last year the quoted price for a 5-year old Panamax dropped from USD 26.5 mill to USD 18 mill, a slide in value of 32%. And the year before that the price dropped from USD 36 mill (-26%). It seems as if we are about to establish some kind of market trough and slowly moving up from there. Newbuilding prices already seem as if they have bottomed out, now time appears to have come to the S/H market. Is there still room for lower prices in dry bulk S/H market? Well, for older tonnage indeed, but also for some Capesize tonnage, as supply is significantly abundant in that segment, but the availability and higher activity as such in the market for newer tonnage prices is seen slightly up for near term future.
Our eyes in the medium-term future mostly focus on the asset-price development of the Panamax segment which is seen to receive the lion’s share of new dry bulk tonnage in 2013.
Which dry bulk ship types do you believe offer the best potential in today's market?
I believe the flexible geared Handymax/Supramax holds the best potential for being deployed across the globe. They cater for many trades and many ports and at a time when demand is widespread and where the main importers slowing a bit down the smaller trades and small importing nations give the upside to the flexible tonnage.
How has the demolition activity been progressing so far this year both in the tanker and dry bulk segments?
As regards Bulker demolitions, BIMCO forecast 30 million DWT to leave the fleet in 2013 – this is a tad down from the 33.7 m DWT that was recycled last year. So far we have seen 8.7 million DWT which is in line with our expectations. Either way you look at it, the dry bulk fleet holds a significant potential for scrapping of older vessels in primarily the smaller segments, but the likelihood of unleashing that is little. Older doesn’t equal unviable. A lot of elderly vessels are debt-free and represent an important part of many owners fleet-mix. Costumer for tonnage like that is around in many places – leaving owners with no individual reason to sell the tonnage for demolition.
But for the overall fleet as such, be it dry bulk, crude oil or product tankers higher demolition activity is improving the supply side of the fundamental market balance and thus improving for the market condition. As regards demolitions, BIMCO forecast 10 million DWT to leave the crude oil tanker fleet in 2013 – and 2.2 million to leave the product tanker fleet. With the improved supply situation in product tankers, BIMCO focus mostly on the demolitions of crude oil tanker, primarily VLCCs this year. As you know we have analysed the demolition potential in VLCC segment from several points of view during the past quarters in our search for trigger to kick-off extensive tonnage that will level off the oversupply. Will the fact that asset values equal that of demolition value kick it off – “no” seems to be the answer to that. Will the fact that 60 VLCC must go through a costly special survey/intermediate survey spur some owner to sell for demolition rather than invest in on-going trading of the vessel? – “the jury is still out on this”. But what we can see right now is that outright demolition is only happening to a very limited extent (2 so far in 2013). However we have seen that the current offshore oil exploration boom has created a need VLCC conversion into FPSO in addition to some VLCC’s sold to be used as FSU by some bunker traders.
Do you believe that the latest trend of the so-called "Eco Carriers", i.e. ships which promise lower fuel consumption will become dominant in the future, despite the premium prices they command?
BIMCO believes that fuel efficiency is a vital part of the future. We see the vessels becoming more and more fuel efficient over time, but the most recent ECO-design seems to promise a leapfrog giving owners an edge. Lower fuel consumption is something we all seek – so call it what you like, if it provides you will a smaller bunker bill then the business case is straight forward if the purchase price is right.
In today’s market ECO-tonnage is not standard; this mean a premium can be available as compared to the earnings that are achievable by “standard” tonnage. As more and more tonnage become “ECO” that premium will diminish and a new normal is to be developed. That is a normal where ECO-tonnage is the norm and “standard” tonnage will trade and earn at a discount to the norm.
When do you expect to see an easing of the pressures caused to the freight markets, especially in the dry bulk segment, from the current imbalance of the supply/demand scale?
The “million dollar” questions for starters… In our annual BIMCO Reflection, which is published at the start of the year we said that 2013 will be the turning point on the macroeconomic scene. This is still the case, despite the recent downward adjustment form the IMF. Overall this means that the shipping market will not get firm ground under its feet as soon as previously forecasted – this spill into the dry bulk shipping market as well. We still believe 2013 will turn out to be a better year than 2012 overall, but for a significant improvement of the fundamental balance between supply and demand we have to wait as the overhang of tonnage is still heavy.
Do you believe that 2013 will prove more positive for shipping companies’ earnings?
Operating earnings at EBITDA-level should improve as rates are seen up from 2012. As for the bottom line the depreciations and financing costs could still become higher for many owners weighting down on the final line. OPEX is seen to increase a bit – leaving bunker prices as the dark horse in the equation. Recent drop in bunker fuel cost to the extent of USD 70-80 per mt is certainly a move in the right direction.
Do you share the view of most analysts, that 2014 will mark the end of the present downward cycle of the dry bulk shipping markets?
I think it’s fair to say that we are beginning to see the end of the present downward cycle.
BIMCO base that upon the fact that the supply growth is coming down from the very high numbers in recent years – whereas the demand situation is maintained at a solid level. I don’t spend much time on setting an exact date for the end of current doldrums. Rather I focus on the elements that should bring around better earning in dry bulk industry: keep slow steaming around also when rates start to pick up, ax commercially unviable tonnage as soon as possible and seek to expand capacity in second hand market if possible to avoid more new tonnage coming into the market. In short, focus on the elements where you (as an owner) can affect the market situation (ie the supply side).
In particular, it is vital to keep applying slow steaming to your business as a return to full throttle means supply will easily outstrip most demand improvements.
During the first quarter of the year, we've seen a substantial increase of newbuilding investments in the dry bulk carrier segment, compared to the same period of last year? Why was that? Is it a sign that ship owners are more confident in the market's rebound, or was it simply a matter of attractive pricing?
The return of higher contracting activity is not welcomed for the overall market as such – but for some owners it can make perfectly good sense to go out and order a newbuilding. Prices are low in a historic perspective – but it’s more important what kind of future earnings potential you put into your business case. The run for more fuel efficient tonnage is certainly a driver behind some of the newly placed orders. BIMCO does not expect a massive rebound in short time but for a ship to trade from 2015 until 2035 current sentiment may mean little to the investment decision if the money to spend is there (or made available to you).
Do you thinks that ships' values in the second hand market, where things are also rather active this year, are close to bottoming-out, or is there still room for lower prices?
The second hand prices have taken some serious beating in recent years. Last year the quoted price for a 5-year old Panamax dropped from USD 26.5 mill to USD 18 mill, a slide in value of 32%. And the year before that the price dropped from USD 36 mill (-26%). It seems as if we are about to establish some kind of market trough and slowly moving up from there. Newbuilding prices already seem as if they have bottomed out, now time appears to have come to the S/H market. Is there still room for lower prices in dry bulk S/H market? Well, for older tonnage indeed, but also for some Capesize tonnage, as supply is significantly abundant in that segment, but the availability and higher activity as such in the market for newer tonnage prices is seen slightly up for near term future.
Our eyes in the medium-term future mostly focus on the asset-price development of the Panamax segment which is seen to receive the lion’s share of new dry bulk tonnage in 2013.
Which dry bulk ship types do you believe offer the best potential in today's market?
I believe the flexible geared Handymax/Supramax holds the best potential for being deployed across the globe. They cater for many trades and many ports and at a time when demand is widespread and where the main importers slowing a bit down the smaller trades and small importing nations give the upside to the flexible tonnage.
How has the demolition activity been progressing so far this year both in the tanker and dry bulk segments?
As regards Bulker demolitions, BIMCO forecast 30 million DWT to leave the fleet in 2013 – this is a tad down from the 33.7 m DWT that was recycled last year. So far we have seen 8.7 million DWT which is in line with our expectations. Either way you look at it, the dry bulk fleet holds a significant potential for scrapping of older vessels in primarily the smaller segments, but the likelihood of unleashing that is little. Older doesn’t equal unviable. A lot of elderly vessels are debt-free and represent an important part of many owners fleet-mix. Costumer for tonnage like that is around in many places – leaving owners with no individual reason to sell the tonnage for demolition.
But for the overall fleet as such, be it dry bulk, crude oil or product tankers higher demolition activity is improving the supply side of the fundamental market balance and thus improving for the market condition. As regards demolitions, BIMCO forecast 10 million DWT to leave the crude oil tanker fleet in 2013 – and 2.2 million to leave the product tanker fleet. With the improved supply situation in product tankers, BIMCO focus mostly on the demolitions of crude oil tanker, primarily VLCCs this year. As you know we have analysed the demolition potential in VLCC segment from several points of view during the past quarters in our search for trigger to kick-off extensive tonnage that will level off the oversupply. Will the fact that asset values equal that of demolition value kick it off – “no” seems to be the answer to that. Will the fact that 60 VLCC must go through a costly special survey/intermediate survey spur some owner to sell for demolition rather than invest in on-going trading of the vessel? – “the jury is still out on this”. But what we can see right now is that outright demolition is only happening to a very limited extent (2 so far in 2013). However we have seen that the current offshore oil exploration boom has created a need VLCC conversion into FPSO in addition to some VLCC’s sold to be used as FSU by some bunker traders.
Do you believe that the latest trend of the so-called "Eco Carriers", i.e. ships which promise lower fuel consumption will become dominant in the future, despite the premium prices they command?
BIMCO believes that fuel efficiency is a vital part of the future. We see the vessels becoming more and more fuel efficient over time, but the most recent ECO-design seems to promise a leapfrog giving owners an edge. Lower fuel consumption is something we all seek – so call it what you like, if it provides you will a smaller bunker bill then the business case is straight forward if the purchase price is right.
In today’s market ECO-tonnage is not standard; this mean a premium can be available as compared to the earnings that are achievable by “standard” tonnage. As more and more tonnage become “ECO” that premium will diminish and a new normal is to be developed. That is a normal where ECO-tonnage is the norm and “standard” tonnage will trade and earn at a discount to the norm.