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Weak bulk market could persist

By William DiBenedetto, CBN Feature Editor

The story about bulk and breakbulk cargo handling this year is more about the market’s stubborn downturn than the ability of ports to move the goods.

So before looking into what bulk ports and terminals are up to, a look at the condition of the market sheds some perspective: in short, conditions are not so good.

According to a Maritime Executive report this month from Athens by John Nikolaou, a financial analyst with Coca Cola HBC, "The shipping industry is experiencing its largest dry bulk market recession since the 1980s. The uncertain global economic outlook and the increased imbalance between supply and demand have led to historical low freight rates."

This situation could continue until 2017, he says. Nikolaou explained that lower tonnage in key trades so far this year have meant that average bulk carrier day rates have declined to around $6,500.

Drewry agrees that the dry bulk shipping market "is not expected to return to profitability until 2017, despite a modest recovery in earnings anticipated over the next two years," according to the latest edition of the Dry Bulk Forecaster. The dry bulk market has always been sensitive to demand fluctuations, Drewry reports, noting that "seven years ago a demand-driven peak in the market made many owners cash-rich, helping them survive the weak market that has persisted since."

"Anemic demand growth is here to stay, especially as the trade development in coal and iron ore into China is expected to decline further," commented Rahul Sharan, Drewry’s dry bulk shipping lead analyst.

Iron ore and coal form almost two-thirds of the global dry bulk market and China is traditionally the largest player. But recently China’s deteriorating air quality has moved the Chinese government to shift its focus from polluting, coal-fired power plants to renewables and cleaner sources of energy. "This is casting a shadow over the thermal coal market, which will have a detrimental effect on bulk shipping demand," Sharan said.

So far this year there have been a record number of dry bulk demolitions, and at a younger age. Thus, Sharan adds, "We do not expect any noticeable recovery in bulk shipping freight rates this year as the market remains severely over-tonnaged. While we expect some improvement in earnings through

2016, this is unlikely to be sufficient for freight rates to reach breakeven. However, we anticipate that the sector will return to profitability by 2017, provided current rates of demolitions persist and ship owners refrain from placing new orders."

The investment bank Goldman Sachs’ outlook is even gloomier. Overcapacity and low fuel prices will keep low dry bulk shipping freight rates for the rest of the decade or even longer, it says.

The bank predicted that the average utilization rate of the dry bulk shipping fleet will decline to 70 percent over the 2015 to 2019 period from the previously reported 90 per cent during the previous five years.

"Faced with the risk of leaving vessels idle over long periods, we believe that ship owners will continue to charge low charter rates. This compounds the impact of lower fuel prices, resulting in a period of cheap freight that should last until older vessels have been scrapped in sufficient numbers to balance the market. We expect low freight rates to persist at least until the end of the decade," the bank was quoted by Reuters as saying.

The bank said that the beneficiaries of low freight rates would benefit large iron ore and coal producers as they can access new markets, while high cost producers would suffer from greater competition and a declining share of their regional markets.

A mild recovery seemed to be occurring in late June/early July; however shipowners remain somewhat pessimistic about the short-term outlook.

"The industry will have to do the work needed to rebalance the market by adjusting the supply of tonnage, because there won't be any help to get from demand this time around," said Western Bulk CEO Jens Ismar in a ShippingWatch interview.

In the chemical tanker market, Stolt-Nielsen Limited’s Jens F. Grüner-Hegge, vice president corporate finance, says it won’t be until 2018 before "real improvement" in that market occurs.

Next: The view from bulk ports.