Dry Bulk Shipping:
A Miserable Start to a New Year, Where the Market Struggles to Grow at All
Demand
The global production
of steel dropped in 2015 compared to 2014, to a larger extent outside China, as
China exported its surplus of steel to destinations across the globe; it is too
complex to single out whether this is positive or negative for the seaborne dry
bulk transport demand. Going forward, the Chinese steel industry is set to grow
its global market share, currently at 50%. Depending on domestic steel
consumption in China, use of domestically mined iron ore and profitability in
the steel industry, the dry bulk market will be impacted. Chinese steel prices
have risen since mid-December and currently, sit at the highest level since
October 2015. International iron ore prices could slide further during 2016 as
supply exceeds demand.
Since August 2015,
dry bulk freight rates have continuously been eroded by deteriorating market
conditions. As of 11 January 2016, daily freight rates ranged from USD 3,361
per day for a panamax ship to USD 4,416 per day for a supramax.
The brief lift in
capesize rates at the end of November may be explained by the record-high
import of relatively cheap iron ore into China. More shipments from Brazil
contributed to this lift, squeezing out more domestically produced ore. No less
than 96.3 million tons of iron ore were discharged in China in December 2015.
This brought the full year total up to 952.7 million tons, 2.2% more than in
2014.
Whereas total
transported volumes in 2015 are estimated to have stayed unchanged from 2014,
some commodities set new records, while others dropped in significant volume.
One of the highlights was soybeans, which also saw a new record high of imports
into China in 2015. While soybean import into any other country hasn’t grown
for two decades, Chinese imports went from barely anything to 81.7 million
tons. China took 9.1 million in December alone, primarily for animal feed.
Despite these
record numbers of imported commodities, dry bulk freight rates remain very low.
This demonstrates the serious problem of the current market conditions for dry
bulk shipping.
Supply
The prices offered
to owners who wanted to sell their ship for demolition in the past year were
very disappointing. All of the shipbreaking nations have been offered cheap new
Chinese steel and accepted the offers. This floored the prices for scrap steel
in nations that used to rely on it for around 80% of their steel demand.
Nevertheless, the
freight market remains the most significant factor behind the decision to scrap
a ship or continue trading. During 2016, BIMCO forecasts that dry bulk shipping
capacity of 40 million DWT will be sold for demolition, making 2016 the busiest
year on record for shipbreaking.
Despite devastating
market conditions in 2015, “only” 30 million DWT were demolished. Considering
the factors mentioned above, this illustrates that the pool of ready-to-break
ships is not vast, but even a modest improvement in the freight rates causes
demolition to halt.
Limiting the inflow
of new capacity into the market going forward also requires a low level of new
orders to be placed. In that sense, 1.4 million DWT of new capacity ordered
during Q4-2015 is just what is needed. For 2015 as a whole, 17.7 million DWT
was ordered. The lowest amount since 2001. Hopefully, 2016 will see even lower
dry bulk tonnage being ordered.
Outlook
If the CISA (China
Iron & Steel Assoc.) forecast for a drop in steel production from 806
million tons to 783 million tons in China becomes reality, less iron ore is
needed. Depending on the required mix of domestic/imported ore, shipping will
be affected. China remains the key driver of the dry bulk market, for better or
worse. Volumes are still huge but growth rates are likely to be very low and
probably negative for some commodities.
BIMCO forecasts
coal imports into both India and China will go down in 2016, following the
trend of 2015.Volume losses into India in 2015 were not originally predicted.
This went against a multiyear growth trend over the previous years. But, the
domestic coal production rose on the back of some political decisions, which
seem to work against dry bulk imports.
2016 is also likely
to see a return of India to the iron ore export market – something that will be
a positive for seaborne demand if market share is taken from Australian
exporters, but a negative if it limits Brazilian Asia-bound exports.
For the coming
months: January-April, BIMCO expects transported volumes to diminish as they
traditionally do from the fourth quarter to the first. This increases a
fundamental imbalance as the delivery of new ships in recent years has followed
the opposite pattern. That is more new ships are being delivered early in a new
year rather than late in the year just about to end, achieving the newest “year
of built” for the record. As we move into the second quarter the downward
pressure should ease somewhat.
BIMCO remains
worried about the sustainability of freight rates in 2016. The demand side
seems unable to buoy profits as both Chinese and Indian growth cools off and
the rest of the world is still importing smaller volumes than before the
financial crisis of 2008.
A new record of
shipbreaking volumes in 2016 could limit fleet growth to just 10 million DWT,
so in fact “all we need” is an increase in transported volumes to around 60
million tons to balance out the inflow. As little as this may seem, growing
from a base of 4,700 million tons – it can prove to be a high bar to jump
before we start eating into the significant oversupply of ships.
Source: g captain. 22
January 2016
http://gcaptain.com/2016/01/22/bimco-a-miserable-start-to-a-new-year/#.Vqos5Pl97IU
