The investors in the dry bulk industry are desperately waiting for the time when the industry will finally display a turnaround. For once, they felt that the miseries of this industry were over when the Baltic Dry Bulk Index (BDI) rallied for continuous 27 days (from 27th September to 23rd October) and showed a gain of 45% in such a short span of time. However, unfortunately, that was not the bottom in the dry bulk industry. Most of the investors tend to forget that China, always, accumulates stocks of iron ore and coal before the start of the Chinese New Year. They do this because:
- The freezing temperatures disrupt the activity at the ports for the next three months (December, January and February) and therefore, very few ships arrive in this span of time.
- Chinese markets close for 15 days in the beginning of February and therefore the companies have to fulfill their supply requirements prior to the closing.
Following graph shows the daily trip charter for the bulk carriers:
Source: RS Platou
BDI rose by 5% week over week basis for the week ended 29th November. The higher rates in other vessel segments more than offset the soft rates in the Capesize segment. The Baltic Capesize Index (BCI) has been on a decline since the 22nd of November. It has fallen by almost 5.5% from 16809 points level registered on the 21st of November. The main reason for the decline has been a weak demand in Chinese and European markets. In the week ended 29th November, China drove 67% of the overall Capesizes chartered in the world. 69% carried iron ore, 25% carried coal and the rest 6% miscellaneous items.
The Capesizes, as I have already mentioned in my previous article on the dry bulk industry, are mainly used to transport iron ore across the waters. The iron ore demand is dependent on different drivers:
- World Steel Production: Maersk Broker claims that the global steel consumption is expected to grow by 2.1% in 2012. However, this is less than the growth figure of 3.6%, forecasted in April this year. In 2013, the steel demand is expected to expand by 3.2%.
- China's iron ore stock piles: According to JP Morgan, the Chinese iron ore fell by 10% sequentially and 18% Y-o-Y in November. The current level of stock is 79.66 million metric tons (MT) and there is room for another 25 MT. However, China Iron and Steel Association claims the following:
"Weaker steel demand in winter, high steel output and the unwillingness of steel traders to restock due to tight capital will keep China's steel market under pressure."
Therefore, it may not be correct to assume that the iron ore demand will go up in the near future (given that there is room for another 25 MT). In fact, a report published by Steelguru states that the iron ore prices declined by 1% in the week ended 29th November, showing the lack of steel demand.
The Coal and The Baltic Panamax Index (BPI)
The tightness in the spot tonnage persisted in the week ended November 29th. However, there is growing sentiment among the charterers that the rise in the BPI is only temporary, driven by the temporary stockpiling of coal at the Chinese coal-fired plants. Barry Rogliano Salles Dry bulk newsletter claims that:
"The market appears heavily reliant on short trips ex Indonesia as North Pacific volumes become relatively thin."
Following are the factors that will help in formulating a future outlook for BPI:
- Thermal coal demand in the emerging economies: China and India are considered to be the main consumers of coal in the world. Clarkson predicts that the world thermal coal shipment will reach 811 MT by 2013, which means a 5% increase from the 2012 levels.
- The key role of China: China, alone, accounts for 17% of the overall coal demand in the world. Chinese coal demand is expected to reach 138 MT in 2013 (12% increase on a YoY basis). However, there are potential headwinds in the near future. The restocking season in China commences in September-October and lasts for a month. That season has already passed. Currently, most of the coal-fired plants are having stocks of 25 days consumption. The coal demand is closely related to the industrial growth in China. The Purchasing Managers' Index (PMI) is an important proxy for Chinese industrial growth. The PMI for November crossed the 50 points mark (50.6). This has sent bullish signals to the market and people are thinking this might be one of the first signs of a turnaround in the Chinese economy.
- Export demand: Australia and Indonesia seem to be the key players in the list of the developed economies that import coal. A growth in shipments to these regions is expected in the future. On the other hand, the coal shipments are expected to decline in Europe after the coal-fired plants are expected to be closed next year as part of Europe's Large Combustion Plant Directive.
- The demand for metallurgical coal: Australia is the largest exporter of coking coal. Currently, it accounts for almost 65% of world's overall coking coal exports. The country's coking coal exports are expected to grow 7% YoY and reach a total of 153.1 MT in 2013. As far as the worldwide shipments for the coking coal are concerned, Diana Shipping's (NYSE:DSX) management believes that the shipments for met coal are expected to grow to 237 MT for 2013. A growth in the demand is expected from Brazil, India and China.
Grains and the Baltic Supramax/Handymax Index (BSI and BHI):
The Supramax and Handymax type of vessels are known for transporting grains. The future for the grain shipments remains bleak. In November, the United States Department of Agriculture (USDA) lowered the 2013 global grain production forecast to 282.7 MT from the previous forecast of 287.6 MT made in October.
The grain shipments for 2013 are expected to decline by 14% on a YoY basis. The largest drop in grain export is expected to come from Australia. According to Clarkson, the grain shipments from Australia are expected to drop by 12% YoY to 26.5 MT in the next quarter. Also, the USDA predicts that Australia's wheat harvest for 2013 would total only 23 MT, meaning a decline of 22% YoY.
The Overcapacity issue
Everyone knows that the shipping industry profits have been plagued by the overcapacity problem. The future supply of tonnage is dependent on different factors like the shipbuilding capacity, the "new-building contracting", the size of the order book, the average age of the Panamax and Capesize fleets and the anticipated scrap rate for year. Following are some of the important facts that will give us a future outlook about the supply of tonnage:
- The new-building contracting for the dry bulk carriers has declined by 56% on a YoY basis.
- The shipyards have declined by 40% YoY in 2012. (from 965 to 538)
- The scrap rate is on a rise. This year, 32.3 million deadweight tons (dwt) of vessels are expected to be scrapped. In case this expectation materializes, the total dwt of vessels scrapped will be 40% higher than the 23.1 million dwt of vessels scrapped last year.
- 79% of all the Capesizes in the world are under 15 years old. The figure for the Panamax fleet is 73%. The average life of a vessel is around 28 years.
- The Capesize fleet is expected to expand by 4.3% to 298 million dwt in 2013. The Panamax fleet is expected to increase by 11.9% to 200.1 dwt.
- An important metric to judge the overcapacity issue is to analyze the following ratio across various fleet types:
Vessels up to 20,000dwt: The charter rates have remained stable in this segment given a 74% demolition rate (in terms of tonnage).
Handysize: The ratio is 55%; the order book is small and the average age of the fleet is high.
Handymax/Supramax: The ratio is 22%; the order book is large and the scrap rate is low. However, the bullish aspect is that the ratio is up from 11% last year.
Panamax: the ratio is 33%; the order book is large.
Capesize: the ratio of 40% is positive but it is not enough to bring an improvement in the Capesize charter rates.
A recent article by Bloomberg stated that the global dry bulk fleet shrank by 0.6 percent in October, its first contraction since November 2008. However, the experts on the dry bulk industry claim that this has been due to the slippage in the deliveries of the bulk ships. Slippage is a term used to name a case when the delivery date of a new build ship is pushed into the next year. Therefore, the net supply of tonnage in the Capesize sector may not be declining after all.
Dry bulk Shipping Stocks
This table shows the composition of fleets across six different dry bulk stocks. We can see that DryShips (NASDAQ:DRYS), Diana Shipping and Navios Maritime (NYSE:NMM) have more Capesize and Panamax vessels (in term of percentages) as compared to other stocks. I believe the rally in the BCI and BPI, over the last month (mentioned above), was temporary. The demand was triggered by temporary rise in demand for iron ore and coal in China for the stockpiling purposes. Therefore, both the BPI and BCI are expected to come down in the near future. This will have a direct impact on the earnings of the dry bulk companies that are running their vessels on spot charters. It is interesting to note that NMM and DSX, both have all their Capesize and Panamax vessels on long-term charters. Therefore, a decline in the BCI and BPI will not have a direct impact on these companies' earnings. However, DRYS has 18 of its 24 Panamax on spot charters and therefore, its earnings will be affected after a decline in the coal shipments.
Genco Shipping and Trading (GNK) and Baltic Trading (NYSE:BALT) also have Capesize vessels in their fleets. Most of GNK's ships operate on an index-based system. Index-based charters are period charters in which the amount charged for vessels is revised twice a month to account for the changes in the BPI, BCI, BSI and BHI. The entire Capesize fleets of GNK and BALT operate on indexed charters and therefore, both companies are expected to be affected from a decline in the BCI.
FreeSeas (NASDAQ:FREED) is a pure-play on the BHI. Therefore, a weak outlook for the grains shipments does not bode well for this company.
It is important to note that a decline in the BDI is harmful for every dry bulk company in the long-run. Therefore, a weak outlook for the dry bulk shipments in the future has sent bearish signals to the market.