Dry Bulk Shipping Recovery?

MIRAL SHIPPING DRY BULK FREIGHT REPORT

October 10, 2011

After a difficult summer, is dry bulk shipping on the road to recovery?

Mr. Alexander J. Miral, founder of Miral Shipping Company, is an independent shipbroker and consultant to commodity traders. Mr. Miral has been contributing to our expert blog, Wall Street Greek, as a Senior Analyst and Shipping Columnist since 2009.

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Dry Bulk Shipping Recovery?

2011 has been a difficult year for many in the shipping industry. The dry bulk market has fared better than most sectors of shipping but much of the year has seen low rates, capesize tonnage being hit particularly hard. However, to the surprise of most of us, the dry bulk market has experienced a substantial recovery beginning in the second half of August and rates continue to climb.

As of October 10, 2011 the BDI is at 2032, having crossed the key psychological barrier of 2000 this past Friday. Gains have occurred in all vessel classes, but capsizes have led the way increasing to $28,483 timecharter average per day, a three fold increase from where rates were early this summer. Panamaxes and supramaxes were at $15,561 and $16,150 timecharter average, respectively, representing approximately a $4,000 per day increase since early this summer. Handys have lagged but have still recovered to close to $11,000 tc average daily. It is surprising that these gains have come in the face of the debt crisis in Europe, and a slow economy in the United States.

The key to the freight recovery has been in the iron ore and coal trades, usually the two biggest drivers of dry bulk freight. Thermal coal demand has increased in advance of the northern hemisphere winter. Japan has increased its thermal coal imports as more coal plants have begun operating after the country’s loss in the tsunami disaster. China also imported a record amount of coal in August, some 10.1 million metric tons, representing an over 40% year-on-year increase. Part of this increase has been due to severe flooding in China, curtailing domestic production and necessitating replacement by imports. The global iron ore trade has also remained strong, with Chinese imports having increased over 10% since last year.

As I reported in previous columns, the export restrictions in India have meant increased shipments from more distant sources, meaning increased ton miles and an environment supportive of higher freight rates. Furthermore, the seasonal increase in grain shipments from the USA is underway, also contributing to a stronger Atlantic market. These trades have benefited all vessel classes, including handys since Indonesian coal volume that uses such vessels is way up.

Does this recovery have legs?

There are many reasons to think not. The global economy is at great risk, and if there is a global slowdown, freight will surely be impacted negatively. China has been the main steady driver of dry bulk freight, but even China is expected to slow down some, and eventually the iron ore trade could be impacted. The increase in thermal coal is seasonal to an extent and China’s great increase in coal imports should not last more than six months before falling back to more normal levels. The dry bulk order book is still high through the end of 2012, which is highly negative for freight rates. In fact, it has been reported that ship ordering activity is now quite low, indicating that owners are not confident of the freight rates holding up. One of the few sustained positives I could find is in the reconstruction in Japan, and later possibly Libya. However, taking into account the overall picture, I would not count on dry bulk freight to remain high past the short term.

Editor's Note: This article should interest investors in Teekay Corp. (NYSE: TK), Navios Maritime Holdings (NYSE: NM), Navios Maritime Acquisition (NYSE: NNA), Navios Maritime Partners L.P. (NYSE: NMM), Tsakos Energy Navigation Ltd. (NYSE: TNP), Overseas Shipholding Group (NYSE: OSG), International Shipholding (NYSE: ISH), Excel Maritime Carriers (NYSE: EXM), Safe Bulkers (NYSE: SB), Claymore/Delta Global Shipping ETF (NYSE: SEA), Genco Shipping & Trading (NYSE: GNK), Diana Shipping (NYSE: DSX), Danaos (NYSE: DAC), Tsakos Energy Navigation (NYSE: TNP), Ship Finance Int'l (NYSE: SFL), Nordic American Tanker (NYSE: NAT), Seaspan (NYSE: SSW), General Maritime (NYSE: GMR), DHT Maritime (NYSE: DHT), Brunswick (NYSE: BC), Marine Products Corp. (NYSE: MPX), DryShips (Nasdaq: DRYS), Top Ships (Nasdaq: TOPS), Eagle Bulk Shipping (Nasdaq: EGLE), Sino-Global Shipping (Nasdaq: SINO), Paragon Shipping (Nasdaq: PRGN), K-SEA Transportation Partners (NYSE: KSP), Euroseas (Nasdaq: ESEA), Star Bulk Carriers (Nasdaq: SBLK), Omega Navigation (Nasdaq: ONAV), Knightsbridge Tankers Ltd. (Nasdaq: VLCCF), TBS Int'l (Nasdaq: TBSI), Golar LNG (Nasdaq: GLNG), Claymore/Delta Global Shipping (Nasdaq: XSEAX), American Commercial Lines (Nasdaq: ACLI), National Bank of Greece (NYSE: NBG), Hellenic Telecommunications (NYSE: OTE), Coca-Cola HBC (NYSE: CCH).

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Turbulent Seas Have Arrived

MIRAL SHIPPING DRY BULK FREIGHT REPORT

In his latest Dry Bulk Shipping Market Report, Wall Street Greek Shipping Columnist Alex Miral discusses the current state of the Dry Bulk Market, and navigates its turbulent seas for us.

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Turbulent Seas Have Arrived

Since my last article for WSG, there has been much important news that has implications for the dry bulk shipping market. Global events such as the tragic Japanese earthquake back in March remind us all how fragile life is and how profoundly the lives of so many can be changed in an instant. The uprisings in the Middle-East that began in Egypt during January signaled momentous change for many of its people and also may have wider implications for the global economy including the shipping markets. We witnessed the bankruptcy of one of the largest dry bulk owner-operators, Korea Line and the widespread anticipation that more could very well follow. Currently, we are witnessing the great flood of the Mississippi River that may alter, albeit temporarily, the flow of US grain and other cargoes from the US Gulf. However, in these turbulent times, the Carlisle group’s $5 – 10 billion private equity investment with Chinese partners to build 50-100 ships for Chinese ship-operators shows that at least a few large players are confident in dry bulk and China. As my father often says, there is never a dull moment in shipping.

In recent weeks, the dry bulk freight market has been mixed, but in my opinion, with an overall bearish tone. It has varied with ship size category, dropping to extremely depressed levels for capsizes; higher volatility for panamaxes at low but more bearable levels for owners; or mainly drifting sideways at historically decent freight levels for the handysize to supramax vessel sizes. It has been a period with an inverted curve, where the largest ships have been earning the least freight, a highly unusual occurrence. There has been a strong volume of cargoes during this downturn, which points to the main driver coming from the supply side.

There continues to be a steady flow of bulk carrier deliveries that are depressing freights. In the first quarter of this year, the bulk carrier fleet has reportedly expanded by 74 million deadweight; 4.5 per cent of that from capesize ships. The aggregate supply additions are tempered by demolitions and slippage (an industry term for cancelations), but even so, the numbers are huge. Up to 1300 bulk carriers are projected to be delivered less cancellations, resulting in the global bulk carrier fleet growth outstripping the global trade growth by as much as 5 percent. The growth will not be equal in all ship sizes; the larger ship supply is set to grow more than the relatively smaller sizes. For example, the handymax supply is projected to grow little. These supply dynamics are not set to improve until at after 2012 at the earliest.

As of today, the spot market for capesize has dropped below US $6,000 per day and has hovered in the $6000 - $7000 per day range for over one month, a freight that does not cover OPEX for these vessels. Many capesizes are on long-term charter or contracts at higher rates, but capesize freight numbers are still extremely low and troubling. The smaller vessel classes have fared considerably better.

The Panamax ships had recovered to near $14,000 per day last Friday after dropping to near $11,000 per day. However, as of May 16, rates are starting to decline again. The seasonal South American grain deliveries have helped give these ships a little boost, providing a decent number of cargoes from Argentina and Brazil to Asia and Europe.

The Handymax and Supramax ships have also averaged close to $14,000 per day and this rate has been more or less steady for several months. These ships have benefited from some of the increased grain business and also from a steady supply of 40,000 mt plus mineral cargoes (coal and iron ore) in the Far East. The coal trade to India and China from Indonesia plus transatlantic and outbound scrap has been standout trades that have benefited these ships. The smaller handysize vessels are trading around the $11,000 per day average level, also steady since at least the winter months, and above OPEX for these vessels. Therefore, outside the capes, owners have been doing relatively well if they purchased their vessels reasonably.

What does the future hold? There is pessimism by many analysts in the dry bulk market for the remainder of this year and next year. Judging from the ship order books and an uncertain global economic picture for several years including unrest in the Middle-East, high oil prices, high debt levels in the developed world, I also fear a several year cycle of depressed freight rates. Freights are at current low levels even in the environment of relatively strong economic growth in China, India, Brazil and other emerging markets, with record levels of iron ore still being shipped into China, and increasing coal and grain movements around the world. Can one imagine if China went into recession? However, there is a case to be made that the rebuilding of Japan, and the potential shutdown of additional nuclear plants, would translate to significant amounts of additional iron ore, steel and thermal coal movements, which may be enough to put a floor under freights. If China were to keep growing at present levels, then dry bulk may avoid the worst. However, I feel at best we will experience a bumpy ride for the next few years.

Next report, we will look more in depth at the near term.



Editor's Note: This article should interest investors in Teekay Corp. (NYSE: TK), Navios Maritime Holdings (NYSE: NM), Navios Maritime Acquisition (NYSE: NNA), Navios Maritime Partners L.P. (NYSE: NMM), Tsakos Energy Navigation Ltd. (NYSE: TNP), Overseas Shipholding Group (NYSE: OSG), International Shipholding (NYSE: ISH), Excel Maritime Carriers (NYSE: EXM), Safe Bulkers (NYSE: SB), Claymore/Delta Global Shipping ETF (NYSE: SEA), Genco Shipping & Trading (NYSE: GNK), Diana Shipping (NYSE: DSX), Danaos (NYSE: DAC), Tsakos Energy Navigation (NYSE: TNP), Ship Finance Int'l (NYSE: SFL), Nordic American Tanker (NYSE: NAT), Seaspan (NYSE: SSW), General Maritime (NYSE: GMR), DHT Maritime (NYSE: DHT), Brunswick (NYSE: BC), Marine Products Corp. (NYSE: MPX), DryShips (Nasdaq: DRYS), Top Ships (Nasdaq: TOPS), Eagle Bulk Shipping (Nasdaq: EGLE), Sino-Global Shipping (Nasdaq: SINO), Paragon Shipping (Nasdaq: PRGN), K-SEA Transportation Partners (NYSE: KSP), Euroseas (Nasdaq: ESEA), Star Bulk Carriers (Nasdaq: SBLK), Omega Navigation (Nasdaq: ONAV), Knightsbridge Tankers Ltd. (Nasdaq: VLCCF), TBS Int'l (Nasdaq: TBSI), Golar LNG (Nasdaq: GLNG), Claymore/Delta Global Shipping (Nasdaq: XSEAX), American Commercial Lines (Nasdaq: ACLI), National Bank of Greece (NYSE: NBG), Hellenic Telecommunications (NYSE: OTE), Coca-Cola HBC (NYSE: CCH).

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.