Wednesday, October 30, 2013

Dry bulk newbuilding deliveries to fall way short of expectations, favorable fundamentals to prevail in 2014

One of the major dry bulk ship owners, Pacific Basin, declared in its latest results' announcement that newbuilding newbuilding deliveries in the full-year 2013 to fall significantly short of the planned deliveries as scheduled at the start of 2013, and R.S. Platou forecast 7.9% overall dry bulk net fleet growth for the full year – marginally below their forecast of 8.1% demand growth. Pacific Basin also anticipates more favourable fundamentals to prevail starting in 2014 when dry bulk supply is forecast to grow at below 5% in the context of around 7% growth in demand.

The company noted that the pace of newbuilding deliveries in all four dry bulk segments has continued to slow, as has the rate of dry bulk capacity growth despite a slow-down in scrapping from record highs in 2012. The global fleet of 25,000-40,000 dwt Handysize vessels registered zero net growth during the third quarter while dry bulk capacity overall expanded by 1% net.

Demand-wise, Pacific Basin said that dry bulk transportation demand in the first and second quarters of 2013 is estimated by R.S. Platou to have increased by 5.0% and 5.5% respectively year on year. Chinese imports of iron ore set new all-time highs in July and September and, in the first nine months of the year, were 9% greater than in the same period in 2012. "We observed continued solid imports of key dry bulk commodities overall despite reduced Chinese GDP growth forecasts at the start of the quarter which resulted in less optimistic sentiment surrounding China’s market-driving appetite for dry bulk commodity imports.
Chinese imports of seven key minor bulks increased 19% year on year in the first eight months of 2013, or a still healthy 10% if we exclude bauxite which registered particularly strong growth from an unusually low base last year. Chinese log imports continue to expand and, in the first nine months, increased 16% compared to the same period last year", the company said.

As a result, "Handysize and Handymax spot market rates averaged US$7,500 and US$9,300 per day net respectively in the third quarter of 2013, reflecting a gradual upward trend in Handy rates since the fourth quarter low in 2012. Rates for these smaller bulk carriers in which we specialise traded within a narrow band in the third quarter and have improved since August to reach their highest levels since mid-2012.
Overall dry bulk freight market developments were dominated by a strong increase in Capesize spot rates from US$5,000 per day just four months ago to over US$40,000 at the end of September –levels last seen in late 2010 – despite significant expansion of Capesize capacity over the past three years. While pre-winter stock building for key commodities often leads to a seasonal improvement towards the fourth quarter, this increase in Capesize earnings has come sooner and stronger than expected due to the combined effect of iron ore restocking in China, increased exports from expanding mining capacity and significantly lower net fleet growth in the Capesize segment, which has led to improved dry bulk market sentiment overall. The sharp rise in Capesize rates – which is most likely a short-term seasonal improvement to be followed by a softer first quarter in the new year – highlights the much greater volatility in the market for large bulk carriers and demonstrates that freight market conditions can change quickly even in dry bulk market segments widely perceived to be oversupplied" it said.

The surprising level of new ship ordering activity in the first half of the year continued through the third quarter with a particular focus since mid-year on Capesize and large Handymax vessels. New orders in the year to date (relating mainly to 2015 and increasingly 2016 deliveries) are up 110% year on year (source: Clarkson) albeit from restrained levels in 2011-2012. The scheduled orderbook for 2015 and 2016 deliveries as a percentage of the overall fleet remains relatively small by historical standards, but continued ordering at this pace would be a cause for concern. As at 1 October, the published orderbook for Handysize vessels stood at 18% as compared to 20% a year ago. The orderbook for dry bulk vessels overall has also reduced to 18%.

Ship Values
Clarksons’ valuation of their benchmark five year old 32,000 dwt Handysize bulk carrier stands at US$18.5 million – up 3% since mid-year and 19% since the nine-year low point at the start of the year. The recent increase reflects improved sentiment and a general lack of good quality sales candidates. Traditional bank financing is showing renewed interest in the dry bulk sector on a selective basis. Investment capital has increased via public market fundraising and private equity funds seeking increased exposure to dry bulk shipping.

Market Outlook
"We expect seasonally stronger demand combined with reduced newbuilding deliveries late in the year to support a stronger Handysize and Handymax spot market in the fourth quarter of 2013 before the typical January rush of new ship deliveries and Chinese holiday and weather-related disruptions cause rates to soften early in the new year.
With the minor bulk segments less volatile than large vessel types, we expect the Handysize and Handymax spot markets to continue to demonstrate gradual recovery in the medium term.
While dry cargo demand is likely to remain similarly healthy as in the past year, and notwithstanding the current seasonally high Capesize rates, it will take some time for the market to absorb the over-supply of larger dry bulk ships and for a sustained recovery to take hold. We believe the positive long-term demand fundamentals for dry bulk remain intact", the company concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide

Publish date: 30/10/13

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