Large Vessel Markets Recover

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MIRAL SHIPPING MARKET REPORT

Authored October 8, 2009

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Large Vessel Markets Recover

Due to a month long trip to Europe and the Middle East, I have not been able to write my report recently. However, the trip provided me the opportunity to reflect on the momentous changes that have occurred in the last year, and consider various views and opinions from a different part of the world on the state of the global economy and the future of dry bulk shipping.

As we stand now in early October, 2009, those in dry bulk shipping can look back on a year that has seen rates and vessel values drop significantly from record levels achieved last year. Though the drop in rates was considerable, the dry bulk sector has still fared better than other areas of shipping including most tankers and container vessels. Most owners can operate their ships well above their operating costs, whereas owners of other vessel types have seen freight rates at or below OPEX during several months of this year.

The BRIC countries, led by China, have experienced a strong economic recovery, which has supported the dry bulk sector more than most could have thought possible. Many reputable economists believe that China and the rest of Asia plus Brazil, and possibly Russia, will continue to lead global growth while the U.S.A. and Europe will grow only slowly at best. There is evidence that the credit crisis and global recession has started China on the path of rebalancing their economy by stimulating domestic consumption and continuing to rapidly develop their infrastructure. Trade with other Asian countries is also increasing.

All this is positive for the demand side of the dry bulk sector. China will continue to increase production, and of course, its inputs such as iron ore. The supply side, however, is problematic with a still huge order-book of new dry bulk vessels, of which, a large percentage is over 40,000 tons dead weight, particularly Capesize. It is hard to say at this moment whether the demand from the developing countries will absorb so much tonnage into the large vessel markets. From here, we have to look at shorter-term trends.

Last week, the Capesize market had a strong recovery after bottoming out approximately two weeks ago. The index stands today at 3990, and has room to move higher by 15 – 20 percent or so before it should hit some resistance. The Panamax market, which lagged, has moved up sharply today and will most likely break nearby resistance and also potentially move higher by another 15% or so. The Baltic Supramax and Handysize sectors have been softening the last few days, but their day rates did not fall during August - September as Capesize and Panamax tonnage have. I expect the recent firming in dry bulk freight rates to continue over the next month or two, as the North American grain export season is in full swing; thermal coal shipments increase in advance of winter in the Northern Hemisphere; and the iron ore trade stays firm.


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