Thursday, October 10, 2013

Dry Bulk and VLCC Markets Provide a Conundrum for Shipping Analysts

To Scrap - or Not to Scrap? Overcapacity Still the Bane of the Industry
Shipping News Feature

UK – WORLDWIDE – If you told the world’s container shipping companies that they would be able to increase the average rates they charged customers by 140% in just a year they would be understandably happy, just as their clients, faced with a rate 240% of what it stood at twelve months previously, would doubtless be less than enthusiastic. The increase however represents the performance last year of the Baltic Dry Index and, in the world of bulk freight rates, neither carrier nor customer seems particularly enamoured of the current situation.

The figures are not some speculative analyst gazing into the future but the actual record of the Index’s performance, on the 10th October 2012 it was trading at 875 and this week at around 2140. Compare this however to the near 12,000 we saw in 2008 before the great descent into the 660’s just weeks later and you have some idea as to just how long rates have been in the doldrums and the potential uncertainty in that particular market.

The problem for the shipowners, as we have pointed out so often, is the continued overcapacity, simply too much available tonnage for the freight available, and recent surveys from the usual analysts take a very different view of the situation as they speculate on a market which, when viewed over time, can be extremely volatile. Bloomberg recently compiled two articles showing differing views when one compared the dry bulk market to the carriage of crude oil.

The data for these pieces came from an assortment of the most respected sources, some of whom indicate that the amount of oil tankers which have been scrapped has materially affected the rates payable, resulting in a four year high for the shipping companies. Unfortunately even scrapping at the intended rate is likely to leave rates below the break-even point, and those same analysts believe that will remain out of reach for the VLCC’s for at least another year, although the predictions for refined products are a little brighter.

Scrapping ships can be often only a short term cashflow solution and no owner wants to see one of their fleet consigned to the heap just as rates begin to rise, but, after such a long depression, reality means many more are biting the bullet. The big money now is heading toward gas transport and LNG carriers are becoming the vehicle of choice for the bigger fleets which assemble a variety of types, from car carriers to ferries with the largest percentage of tonnage split between container ships and bulk carriers of both types and with some extending their specialist energy research and recovery vessels.

The experts which Bloomberg consulted have a different view of the dry bulk market, going as far as to say that the scrappage of this type of vessel is drawing to a halt, prompted by rising iron ore prices. The recent Chinese slow-down in demand is viewed as a blip as the country’s production figures pick up and the thirst for steel recovers. Never forget however those five year BDI figures, the desire of the shipping groups not to get left behind and to profit from the ever rising prices created the biggest shipbuilding programme in a generation and when the market peaked, as it always does, profitable bulk carriers turned instantly into expensive liabilities for their owners.

Now the problems of the last few years are making their way along the supply chain with an effect on shipyards as orders drop away and options are not taken up. Over the next couple of years the average age of the world’s bulk fleet is likely to increase, offset somewhat by the boost in LNG, but VLCC’s certainly are likely to decline in number with only around 6.5% of existing capacity on order with the yards as of today and an estimated 10-15% overcapacity with 588 ships currently in service.

Once again we would point out that, despite all the analysts expertise, these markets are subject to a myriad of influences which, given the amount of investment required to become a serious player in the transport of such commodities, often make them more a gamble than an investment. Just ask Frontline boss John Fredriksen who has seen the industry leading company’s shares drop from 22 kroner last November to just 10 by May of this, with them now bumping along at 14.8 whilst the ‘experts’ predict a further fall back before any recovery takes effect.

Photo: The glut of capacity has resulted in increased profits for those involve in the scrapping of such vessels.

Readers interested in the performance of the Baltic Dry Index over the past five years can use the News Search facility to examine the archives for more articles.