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A question of capacity

Uncertainty over deliveries, cancellations and delays make it hard to predict the future size of the fleet

The dry cargo market appeared to rally in mid February, before softening again over the course of March. At the time of writing in mid-May, freight rates have been climbing slowly but steadily over the last month. However, much depends on the willingness of banks to release credit. And even without the added complication of the world economic crisis, 2009 is the year in which overcapacity was always likely to become a serious issue.

Platou points out that deliveries of new ships are so far this year substantially behind schedule, contributing to much lower fleet growth than expected. However, even allowing for cancellations, scrapping, yard delays and what amounts to a moratorium on newbuilding notwithstanding, industry observers agree that 2009 is likely to be a difficult year. Classification society DNV has warned that as many as 10,000 vessels may have to be scrapped or put into lay-up by 2013, although this figure does not differentiate between ship types.

Delivery prospects

According to figures released by Lloyds Register- Fairplay Research, the newbuilding orderbook for dry bulk carriers now comprises 3,359 ships totaling 292 million deadweight tons (dwt), equal to 70% of existing fleet capacity, after expected cancellations and delayed delivery. “Even if deliveries are to be cut by half, bulk supply growth is still expected to outpace demand growth in 2009 and 2010, which will affect freight rate development trends negatively,” said Niklas Bengtsson, project manager and senior consultant, Lloyd’s Register - Fairplay Research. It is unclear, however, exactly what level of cancellation the firm expects – a recent report from HSBC Asia estimates that as many as 65% of the 104.5 million dwt of dry bulk carriers on order for delivery in 2010 will be cancelled or delayed.

In the capesize market, 2009 is not yet the peak of the delivery boom, although some 160 vessels are due for delivery – that follows in 2010, when somewhere in the region of 350 vessels are scheduled to join the fleet, followed by a further 200 in 2011. According to Clarksons, there are currently some 730 capesize vessels on order, with capacity equivalent to 90% of the existing fleet.

The delivery profile is similar in the panamax sector, with substantial deliveries in 2009, peaking in 2010, although the situation here is less acute, with an additional 31% of existing capacity entering the market. The handymax sector, where capacity is currently set to increase by 28%, sees the bulk of deliveries in 2009 and 2010. This sector is probably in considerably better shape to survive the influx of deliveries, as the fleet is significantly older than that in other sectors. Much of it is over 25 years old, suggesting that scrapping may be a more practicable way of controlling capacity.

Steel markets weaken

Prospects for the dry market in the forthcoming year offer little hope of increased demand to meet the increase in tonnage available. Platou estimates that world steel production is down 22.9% over the same period last year, with the greatest falls in the US, Japan and the EU, although Chinese steel production is still up by 2.4%. This, however, is unlikely to last. In its April report, ICAP Shipping says that “Chinese interests have been at pains to state how low steel output is likely to be this year, with an obvious impact on freight market sentiment”.

However, it also points out that: “Steel plant closures in the EU and US mean that in the medium term, when demand in the industriaslied economies recovers, an increasing share of this requirement will come from China,” – driving an increased demand for shipping both ore and the finished steel.

Lloyd’s Register – Fairplay Research is optimistic about the medium to long-term prospects for the market, pointing out that massive government spending on infrastructure improvements is expected to stimulate increased demand for steel in 2009 and 2010. The company also emphasises that, in spite of the current overcapacity and depressed freight rates, the underlying strength of world demand for seaborne deliveries of bulk commodities such as coal, bauxite, iron ore and grain will continue.

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