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China as the driving force

A familiar scenario as port congestion drives rates up — but only temporarily

Over the last couple of years, players in the dry market have become accustomed to China as the driving force behind the success — and the struggles — of the dry bulk market. As capesizes staged a surprising recovery over the late spring and early summer, due mainly to increased iron ore demand as China sought to build up stockpiles again, it looked as if the China effect was again set to pull the market out of the doldrums. Orders soon dried up, however, with the BCI falling heavily throughout July, at one point experiencing the steepest fall in rates since last October.

Markets rise - and fall

Even at the time, many players were sceptical of the duration of the rise in freight rates. In early June, a statement from Precious Shipping said that prices were being driven up as a result of congestion outside Chinese ports, and would fall sharply as vessels returned to service. “We think that congestion should clear up once this binge buying of iron ore abates or more new capes are delivered from the shipyards than the demand can absorb. Once one or both of these events take place, congestion will vanish very quickly with the BDI crashing down as quickly as it has advanced. The fundamentals still overwhelmingly point to a world economic recession with tremendous job losses and we suspect that will put a real dampener on the current burning hot BDI,” the company said.

Deliveries pause - for the moment

Precious, like many commentators, highlights the likely effect of a delivery surge on rates. It is, however, hard to predict the true effect on the fleet, as the situation with deliveries and cancellations is unclear. Icap Hyde, for example, estimates that so far, cancellations and increased scrapping have kept pace with deliveries during the first part of 2009, while Platou estimates that deliveries have in fact been twice the level of removals from the fleet. While the bulk of deliveries is yet to come, Icap Hyde remains cautiously optimistic, even after rates had started to fall in July stating: “That the market could have risen as high as it has done on the basis of activity in one commodity and one country, shows that there is still a potential upside despite the imminent increase in deliveries over the coming six months. Timing will be everything.”

In the longer term, Icap Hyde believes that the commissioning of coal-fired power stations in India could be a major driver of the dry bulk market, and could reshape capesize trade patterns, as the Indian subcontinent becomes a major importer, rather than an exporter, of bulk commodities. Coal deliveries could ultimately increase by up to 150 million tonnes per annum, although initial growth will be more in the region of 20 million tonnes per annum.

Ordering resumes

There are increasing signs of a return to ordering new ships, which could indicate cautious optimism about the long-term development of the market. Platou reports that Grand China Logistics placed orders for 18 capesizes and 14 kamsarmaxes with Jinhaiwan in June this year, while four VLOCs were ordered at Rongsheng. Other deals are reported to be under negotiation at Korean shipyards, although details were not available at the time of writing. At the end of July, some 216 dry bulk carriers have been ordered since the beginning of the year, totalling 14 million dwt. Of these, the great majority – 171 – are handymax, reflecting the relatively high age of the existing handymax fleet. Twenty-five of these vessels are capesizes, despite the already high capesize orderbook. The market is still very quiet, but is certainly picking up from the beginning of the year, when no new orders were placed at all.

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