The Year of the Goat for break-bulk shipping?

Dry bulk shipping has had a difficult run over the last twelve months and the outlook for the Year of the Goat is looking pretty cantankerous. The Year of the Goat (or sheep) in the Chinese zodiac began on February 19^th and ends February 7^th 2016. Given the circumstances, dry bulk ship operators might well be forgiven if they would prefer skipping ahead to the Year of the Monkey. Dry bulk ship operators must feel like they are the “Goat” dogged by some very bad luck in this part of the celestial cycle. And the tea leaves for 2015 are not forecasting much in the way of prosperity, at least through the first half and likely all the way into early 2016. Because of a weak demand in China for ocean borne commodities, particularly in steel making, freight rates are at near historical lows. The BDI [Baltic Dry Index] was at 553 (March 4) down from a 52-week high of 1,621. However, back in 2008 the BDI was nearly 12,000. Most freight pundits feel that the break-even point for dry bulk operators is a BDI of around 3,000 but there are a host of variables that determine profit and loss. Right now most economists are forecasting only a moderate growth in ocean borne commodities while the dry bulk fleet is expected to grow 6.7% in 2015, very near the same levels as 2014. Over the last five years of robust ordering, ship deliveries have expanded the bulk carrier fleet by 60% [now at an estimated 761 million dwt]. There are a number of reasons behind the boom in ship orders over the last few years. Shipyards, especially in China, have offered favorable pricing which in combination with available capital has spurred newbuildings. Another factor is that in an effort to catch the rebound in the cycle, shipowners may have simply missed their guess. Two years ago there was a strong belief that China, which buys nearly half of the world’s coal and ore, would increase their imports of coal and iron ore, but this surge never materialized. China sought to prop up domestic coal pricing rather than buy imported coal. While coal wasn’t the only issue, there was a cascading effect throughout ocean borne commodities as demand softened. However, shipowners were placing newbuilding orders for an anticipated economy two years in the future and the ships came, but the demand didn’t. Now the combination of slowing demand and rising deliveries has created a situation of too many ships chasing too few cargos through each vessel sector of the dry bulk market. Overall, maritime pundits put the surplus for the dry cargo sector at 20 million dwt. It has gotten to the point where vessel layups are occurring as an alternative to operating at low freight rates or remaining idle.

Fleeting Moment Loosely speaking, the dry bulk fleet falls into four main size categories and a number of specialized sizes. Capesize vessels are generally over 100,000 dwt but some vessels like Vales ships [Valemax] are over 400,000 dwt. The main purpose of these ships is to carry iron ore and coal. Because of the vessel size and need for specialized loaders/unloaders the number of routes and ports to handle the ships is limited. Panamax size ships range between 60,000 dwt-100,000 dwt. Panamax vessels, named because they are able to pass through the Panama Canal, are designed to carry coal, grain, bauxite and other bulk commodities. Most of these ships, like Capesize vessels, require specialized loading/unloading facilities. The Handymax vessels range between 40,000-dwt-60,000 dwt and carry just about anything that can be booked. They are the workhorses of the dry bulk fleet, generally equipped with their own handling gear. Handysize is generally very similar to the aforementioned Handymax, both in handling gear and freight. However, they are generally smaller and are often part of what is described as the “Multi-Purpose” fleet. There is a cascading effect between sizes: Panamax encroaches on Capesize freights and vice versa. Equally, Handymax will poach freight from Panamax with the reverse being also true; while the smaller versatile Handysize vessels can handle just about any freight from a variety of market sectors.

New Purpose Behind Expansion of the Multi-Purpose Fleet The Handysize market has been the most resilient in the dry bulk sector simply because it overlaps with so many other ship types. A multi-purpose Handysized bulker can be a log carrier or handle containers, bags of commodities such as sugar or rice, traditional bulks cargoes like grain, coal or ore. Depending on the handling gear, the multi-purpose carrier also occupies a place in the heavy lift and project cargo sector. Although the dry bulk market is mostly a spot market business, in some cases multi-purpose carriers were deployed in liner shipping fashion (Rickmers notably employed this approach) with regular vessel rotations. This put these services into direct competition with containerships and the ro-ro operators. The Handysize/Handymax sector is undergoing a real sea change as specialization has become the mantra. UK-based Drewry Consultants pointed out in a presentation that there has been a “decline of the simple multipurpose fleet” as multipurpose operators increase their share of the “project cargo” segment faster than traditional breakbulk cargo. According to Drewry’s, 47% of the multipurpose vessels on order (as of January 1, 2015) have heavy lift capability. The reason for this high level of investment in the multipurpose fleet with heavy lift capability is the belief that developing economies will grow faster and support movements better than movements in traditional bulk and break bulk segments, such as China. A Charterer Party: Everybody in the Pool In a move that could be a game-changer for the dry bulk industry, five of the largest dry bulk operators specializing in “Capesize” vessel operations formed an alliance or pool called Capesize Chartering. The new alliance consists of Bocimar International NV, C Transport Maritime, Golden Ocean Group, Golden Union Shipping Company, and Star Bulk Carriers Corp. In total the group will command 80 vessels, making Capesize Chartering one of the largest players in the Capesize market segment. Significantly, the joint venture between the five major operators is the first in thirteen years and arguably the largest ever of its kind. The strategy behind the JV is to cut costs and improve efficiencies by the better positioning of ships, reducing voyages in ballast, cutting wait times and associated costs such as bunkers. The announcement noted “Our business vision and model will be to offer the market, irrespective of ownership, the best suitable vessel taking into account the respective vessels’ characteristics, position and availability.” The companies will still operate as separate entities without any overall fleet manager. However, there will be a shared information platform and coordinated market strategy. Finally, the massive scale of the pool immediately makes Capesize Chartering a market changer. But in the bigger picture, will Capesize Chartering signal a trend towards alliances and joint ventures throughout the dry bulk carrier spectrum? In the Capesize segment with relatively few players, it’s easier assembling a manageable pool. However, in the other dry bulk sectors this might be a challenge. Still, containership operators, who are a similarly fragmented industry, have made alliances work. Business in the Year of the Monkey While there is little to be optimistic about in 2015, there are some positive trends in the dry bulk market that could take hold by 2016. Delays, cancellations and outright aversion to adding to the surplus has checked the total orderbook for new dry bulk tonnage. It is reasonable to believe over the next ten months that there will be an increase in demand for ocean borne commodities, and as result supply and demand should come into a closer balance. Analysts are predicting dry bulk utilization will remain low at around 73% in 2015 and 2016 – hardly enough to remove the 20 million in surplus tonnage. Still some analysts feel that the market could shift in the second half of 2016 into 2017 with utilizations figures of nearly 90%. But the real question as always is China. China is the key driver for the dry bulk business and Chinese economy is, at this juncture, a very large question mark. One of the most closely watched indices is China’s purchasing managers’ index (PMI), published by the China Federation of Logistics and Purchasing. In simple terms, a PMI above 50 indicates expansion while lower than 50, represents economic contraction. In February, the PMI was at 49.9 up slightly over January but the second successive month under 50. Beijing has established a 7% GDP growth target for 2015 but it should be noted that the IMF is forecasting a 6.8% growth in 2015 and only 6.3% in 2016. The economic rocket that was to be China in the new decade has in the first five years, really been more fizzle than sizzle. Still there have been enough positives, starting with the United States, India, Southeast Asia and even in Latin America, to offset some of the global economic question marks. Finally, it is worth considering, that China, which for the last two years tripped up dry bulk forecasts, could like the mischievous monkey of the Chinese zodiac, almost overnight, reverse the trend.