Shipping Review & Outlook : Dry bulk

 This article is based on the earlier research works of Mr. Daejin Lee to explain the recent trend of the shipping market with a special focus on dry bulk.

Shipping is 'Pigs or Chickens'?

'Shipping is just like the country market. By the time the farmer arrives at market with his pig and finds that all the other farmers have bred pigs, it is too late. Price will fall, and the farmer, who has feed bills to pay must accept the price on offer. But this situation was created a year earlier when prices were high and everyone started breeding pigs. The smart farmers saw what other farmers were doing and switched to chickens. This has nothing to do with what the demand for pigs or chickens. It is a supply-side management. We conclude that, like the farmer, the successful shipping company must know when to steer clear of pigs!' *

The story of 'Chicken and Pigs' is one of the best parts I have read in 'Maritime economics'. Bad investments often flow from inadequate consideration of the facts. Also, many decisions have been made out of sentiments because following the crowd rather than facts gives a blind comports to decision makers. However, if everyone has the same idea, it usually does not work.
The general consensus is that market is at or near the floor and now focus on the shape of the downturn – namely how long will the downturn last and how fast market could recover? For now, there seems no confidence in the freight market.

Did Shipping industry learn from history this time?

'Despite the recession, Shipbuilding launches an all time record. Considering the level of freight rates, the newbuilding boom is difficult to explain. It may have been triggered by anticipation of a market upturn. Shipbuilders trying to maintain their business volume may also have contributed' **

(Shipping market in 1906)
Above comment is describing what happened in 1906, more than 100 years ago! Heavy ordering mega-ships in recent years proves history repeats itself.
Thankfully, there are a few positive signals in dry bulk market. However, there are still too many shipyards with huge orderbook remaining out there. If the freight recovers a little bit, what would investors decide this time? Could Shipowners control their greed ?

The Bigger, the Younger?

There was a notable shift away from some of traditional sectors in recent years, with relatively fewer mini Cape(150k), Panamax(70k) and Handymax(40k) sectors being delivered, in favor of a larger portion of Newcastlemax(200k), Kamsarmax(80k) and Ultramax(60k) delivery.

Interestingly, it looks like a battleship :) 
The shape of the cannon (VLOC, Size 200-300k/ Built 1985-1995) is likely disappeared over the course of the next four years by the implementation of IMO Ballast Water Management Convention. The bridge shape (Valemaxes and Newcastlemaxes) can replace them anyway, but large enough?

Scrapping age 

The trend of reduction in the scrapping age has continued, with total 10.8 Mdwt(53%) of the tonnage leaving the fleet aged less than 20 years. The average demolition age usually follows the state of market, and unsurprisingly it dropped to 23.5 years in 2016, almost two years younger than last year.

Coal prices got the moment, then how about the freight market?

According to updated coal trade data, recent dramatic rises in coal prices have indeed raised the prospect of increased longer haul shipment from American continents such US, Canada, or Colombia, which could well support Cape and Panamax freight market in coming months.

It is true that coal demand will drop as China shifts towards cleaner energy in the long term, However, in the short term, even though the NDRC allowed some mines to ramp up output last month, partially reversing efforts to close mines and curb pollution and overcapacity, coal's price is still strong. Maybe the current soaring coal price has no fundamental foundation and is not sustainable, but we should remember sentiments and speculation is also a kind of market

Spot rate improves a lot but FFA indicates that the current strength would be temporary. 

The Baltic Exchange Dry Index climbed by 5% over the course of the month (Oct 2016) in spite of a sharp drop in Capesize earnings during the latter part of the month. 

While the other two smaller vessel sizes were almost unchanged from a month ago, Panamax has been the strongest performer of the four main Baltic index classes, with the average earning rising by $1,166/day to $6,596/day: increased coal related chartering activity have supported Panamax freight rate. 

Interestingly seasonal strength in US grain season, together with strong commodity prices, have raised physical earnings but still failed to translate into the paper market. Even though nearby prices improves driven by short-term seasonal trend, the prices for deferred contracts (Cal 2017-19) have not changed much from a month ago. It seems that market judges the current strength would be temporary. 
Do you agree with the FFA consensus? It is true that if the spot market is really reflecting a supply-demand balance, then it is future prices which will have to catch up.

Freight Model forecasts a slow recovery over the next 2-3 years

Recent forecast in BDI by the freight forecasting model for 2016 was 666p on 27th Jan 2016, and 629p on 28th Jun 2016. Its expected accuracy in 2016 is more than 95% considering figures of FFA Q4 2016 so far. Also, it forecasts slow recovery over the next 2-3 years, with upside potential remaining in 2nd half of 2017.***

Despite surprising rebound in Chinese coal imports, the demand side is not that hopeful in coming years. Therefore, the supply side management seems the only practical and proven solution.
The End.
* Martin Stopford, Maritime Economics (2009)
** Gould, Angier & Co. (1920)
*** The econometric excel model gives valuable ideas of what statistics indicates. Of course, as many of the variables in the model are highly unpredictable, it can not be always accurate, so the forecasting model should be seen as a tool to clarify risks rather than take a gamble.


My main focus is dry bulk commodities and freight, but I also cover tankers and oil/energy. Below is the link of my recent research works. If you would have any feedback or questions about them, I would like to learn from your expert views. Please feel free to comment and contact me anytime.

Daejin Lee



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