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Dry bulk vanishing act

Missing dry bulkers continue to puzzle analysts

At the beginning of 2010, it looked as though optimism was gradually returning to the dry bulk market, with reviving ore and grain trades again pushing prices upwards in late 2008. Port congestion, responsible for at least some of the astonishing leaps in the market back in early 2008, again played a role in briefly pushing the BCI to above 8,000 in mid-November. According to Arctic Securities, nearly one in five of the world capesize fleet, equivalent to 4 million dwt, was caught in delays off Australia and Brazil in early January. By February, rates in all sectors had been in a continuous slide since the beginning of the year, indicating that market recovery will continue to be a long and slow process. Capesize rates in particular looked to be entering a new slump, with the Baltic Cape Index (BCI) closing on 12 February at 3259 points, posing a loss of -215 points or -6.19% below the previous week’s closing at 3474 points. With the Chinese New Year responsible for a quiet couple of weeks at the beginning of the month, however, it was hoped that activity – and rates – would pick up towards the end of February.

Bargain hunting?

Against this background, some owners are cautiously beginning to return to placing orders. Brokers have long predicted that there would be a move by established shipowners to take advantage of the drop in both second-hand and newbuilding prices, and that move now seems to be underway. Angelicoussis is said to be in talks to add a further two capesizes to its existing order book, which comprises at least 12 further capesizes. The rate of fall of newbuild prices has been slowing, and may now be stabilising, prompting more owners to return to the market.

While this is scarcely a surge of orders, according to Platou orders were placed for three capesizes, four panamax and post-panamax bulkers and 36 handysizes during January, a total of 2.3 million tonnes, but it shows that the revival of interest in ordering towards the end of last year is continuing. Other owners are looking to acquire resale newbuldings – Navios recently acquired a capesize newbuilding on resale, its seventh in the past year.

How much to come?

What no-one is sure of, however, is the extent to which the current dry bulk order book has been delayed or cancelled. According to estimates from Platou, 40% of the dry bulk order book due for delivery in 2009 was not delivered according to schedule (similar delays were seen in the container market). In Korea, 25% of vessels due for delivery in 2009 were not, in fact, delivered. Further uncertainty is caused by no-one being quite sure whether these are attributable to yard delay, negotiated postponement – in which case the dry bulk market faces the prospect of an unexpected peak at some point in the future – or cancellations.

Of its own dry bulk order book, Platou says some 16 million dwt – 27% – was unaccounted for and “a major share of this was most likely cancelled”. Platou further estimates that at least 10% of the dry bulk tonnage due for delivery in January 2010 was not handed over, and only about half of that was confirmed as cancelled. “We have unsuccessfully strived to document this phenomenon further, but are confident that the actual number of contracts that has been or will be cancelled is significantly higher,” said Platou analyst Jorn Bakkelund, writing in Platou’s monthly report.

Piraeus-based broker N Cotzias Shipping took a more cautious view, estimating that, despite the high degree of delay, only about 10% of the overall dry bulk order book has actually been cancelled. He puts the total cancelled tonnage at 434 vessels, or 27 million tonnes, and says that private resale deals account for much of the rest of the tonnage. According to Cotzias, the pain will be felt mostly in the supramax market, which faces the prospect of up to 116% surplus tonnage by 2015. Despite this, however, Cotzias points out increased second-hand prices in the supramax market, with an almost 7% increase in prices for similar vessels in just two months time. The capesize fleet is expected to peak at 90% surplus.

Cautious outlook for dry bulk

Taking the long view, Martin Stopford of Clarksons Research points out that much of the problem was caused by the dry bulk ordering boom occurring relatively late in the recent shipping cycle, coinciding with the market peaks of 2007 and 2008, rather than earlier strong rates in 2003-4. As a result, the first major deliveries occurred just as the market was crashing. He, too, emphasises the uncertainty of how much of the order book will actually be delivered.

Arctic Securities took a particularly gloomy view of the situation, announcing in January – at the same time that it highlighted the effects of port congestion on the cape fleet – that it was downgrading stock across the entire dry bulk sector to “sell” ahead of what it described as a “tsunami” of newbuildings. “Current market momentum can continue boosting dry bulk equities in the short run. In our view, however, even the most optimistic longer-term market scenario is reflected in the share prices,” said Arctic analyst Martin Sommerseth Jaer, quoted in Lloyd’s List. “We consider the risk as being on the downside and hence downgrade the entire sector to sell.”

Whether this degree of pessimism is warranted is unclear, but 2010 will still be a year where the dry bulk sector will step very carefully.

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