In the world of dry bulk shipping, supply and demand shapes the market. During some periods the market is up, as the demand to move commodities out paces the ships that carry the freight. While in other periods the market is down, like the present. There are far too many ships looking for freight to carry. It’s a cycle, or at least it once seemed to be. Now it is questioned, is down the new norm? What Goes Down There’s an old adage, ‘what goes up, must come down.’ The maxim seems in keeping with the run up to historical highs in the dry bulk markets in the early 2000s, before the equally historic global crash in 2008/2009. Is there a corollary? If the market is down, must it go up? Many are optimistic and bet on the cyclical nature of the industry, an ‘it can’t get any worse’ approach to the market. But it’s difficult not to be concerned. The Baltic Dry Index (BDI) started the year optimistically at 771 points, but by February was at a new historical low of 509 points. Currently (at this writing) on the back of the Greek deal, the opening of Cuba and the possible Iran nuclear deal, the BDI moved up to over 915 points after spending most of the year bumping around 600. This is still a far cry from last November’s near 1,500 but moving in the right direction. But as giddy as dry bulk ship owners were in November, it is worth putting these numbers into context. In the period leading up to the 2008/2009 global collapse, the BDI posted a record high of 11,793 on May 20, 2008 before collapsing to 663 on December 5th 2008, the onset of recession. Since the collapse there have been a few spikes with the BDI moving over 2,000, but over the last five years the BDI has failed to break the 3,000 mark. Chinese Finger Trap There is a push and pull to the business, which has hamstrung recovery. There has been a tendency to add ships to a market already over tonnaged. Ship owners then react by pulling back on new ship orders and just as the market seems ready to swing upward, re-order ships only to see the squeeze on profits begin again. Because of high freight rates, heightened cargo volumes (especially from China), and favorable financing, a dry cargo bulk carrier ordering-boom ensued, lasting even beyond the plunge in 2009. There were ordering sprees again in 2010 and 2013 accompanying each slight upward bump in trade. Adding these newly built ships after this historic market meltdown (during the period 81 million dwt/year were added to the dry bulk fleet) is part of the reason why no lasting recovery in freight rates occurred. The market was being pulled in two directions: more ships being ordered and less cargo being generated with the global slump. As a result, industry growth was constricted. Times have changed, but not the result. Right now the dry bulk fleet is in a period of no-growth or possible contraction as shipbuilding orders are cancelled, converted from dry bulkers to tankers and demolished (demolitions of dry bulkers are hitting record levels.) Preliminary data from BIMCO says 20 million dwt of bulkers were demolished in the first half of 2015, compared to 18 million in the first half of 2014. It might be the first time in decades that a segment of the global fleet actually contracts. While diminished dry bulk fleet growth is a positive step toward improving returns, the demand side has also fallen, squeezing dollars out of the freight and charter rates. A flat demand for commodities is the chief culprit robbing demand, starting with a slowing of growth in China. During the boom years, China’s dry bulk imports were increasing at nearly 30% per annum powering the export engine. In recent years, as GDP growth has slowed to around 7%, the demand for commodities has also weakened. In China, steel making commodities and steel products are the principal drivers for dry bulk shipments. Roughly half the demand for dry bulk shipments (in terms of ton/miles) is related to steel production. In June, Chinese coal imports were down 34% year-on-year to 16.6 million tons. 2015 first half imports for coal were down around 60 million tons to 99.9 million tons. However, ore imports rose slightly year-on-year to 75.0 million tons with total imports for the first half down 1% on the same period in 2014 at 453.1 million tons. Despite, the import slowdown, China’s steel exports have boomed, rising 26% year-on-year to 8.9 million tons, with first half exports at 52.4 million tons, 28% higher than they were during the same period in 2014. While most of the dry bulk sector is in the doldrums, some other commodities, especially on the agricultural front, are rising. For example, Chinese soybean imports rose 27% to a six-month high of 8.1 million tons in June. Ordering Boom? In July, the IMF (International Monetary Fund) in its latest WEO (World Economic Outlook) report lowered its forecast by 0.2% to a growth rate of 3.3% for 2015. The downward revision was based mostly on a weakening in the US, as the economy contracted in the first quarter. However, a “resurgent dollar”, the heavy snowfalls and the disruptions in the West Coast ports all played a role in the analysis. Still, most of these events are in the rear view mirror with the exception of the dollar. The dollar is dampening US exports (but helping imports), many of which are commodity based. Next year the IMF is still forecasting 3.8% growth. For dry bulk ship owners the IMF forecast looks favorable for an increase in demand and better returns on investment. At the moment, the lull in dry bulk orders, coupled with renewed interest in tankships (partly due to ending the Iranian ban) are setting the stage for a surge in the BDI. But will it happen? In the past, when conditions turned favorable, dry bulk ship orders cascaded into Asian shipyards. This could be the case again, as extremely low, newbuilding prices could spark a run despite the battered state of the dry bulk sector.