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Oversupply issues to plague dry bulk trade for 2011 as well

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According to John Pachoulis, the President of the Hellenic Shipbrokers Association, current, as well as future oversupply problems will most likely hamper the dry bulk sector’s recovery this year as well,

with freights rates deteriorating again by the second half of 2011. Still, in the short term and at least until May, things could look a bit rosier, as this period of the year is traditionally, the strongest one of each year. As for the latest devastation in Japan, Mr. Pachoulis says that it won’t affect dry bulk trade that much.

Do you see any serious impact to the dry bulk market from the latest catastrophic events in Japan?

First of all, let me say, that our hearts and minds are with our Japanese friends who are tried by this huge devastation and loss of human lives. It’s a disaster of near biblical proportions, which no country in the world should have to face. Regarding, its impact on shipping and dry bulk trade in particular, I believe that there will be some kind of negative effect, but it most likely will be brief and short-lived. On the other hand, tanker trades and more importantly LNG trade will be affected even more, but it could be on the positive side, as Japan is hugely reliant on oil and LNG imports to sustain its huge industry. Therefore, we could see an increase of demand for those types of cargoes in the following days.

The dry bulk market has rebounded these past few days. What was the trigger factor to cause this development?

Traditionally, from the start of February and until May, when there’s the usual peak, the dry bulk market experiences its strongest months of each year. This recovery is fuelled by the beginning of the New Year in China and other Asian nations. It’s the time of year, when earlier contracts for cargoes are being fulfilled and agreements are being materialized. AsΒ  a result, capesizes are always seeing a boost in demand and freight rates are heading upwards. This is what we’ve been witnessing in the market these past few days, with Capesizes loaded with iron ore for China are receiving the lion’s share of this recovery. Panamaxes are also benefiting from China’s “shopping spree” during the months of spring, with things peaking by May, when rates could be quite higher than today’s levels.

Where do you think the market will be during the second half of the year?

Well, this year, things won’t be as positive as they were for the most part of 2010. In my view, the Baltic Dry Index is very unlikely to reach last year’s highs of over 4,000 points. During the course of 2010, a total of 80 million tons of tonnage were accumulatively added to the global dry bulk fleet, with a large chunk of this extra tonnage being delivered by the end of the year. This is probably going to occur during this year as well, especially after August, when shipyards are speeding up the new buildings delivery process. Given that a very small portion of older vessels is expected to be sold for scrap, I don’t see how the market could climb to higher levels.

Do you think that this volatility of the market will continue in 2011 or will things be more stable going forward?

For sure, volatility in the market is expected to be the norm this year as well. Of course, as has been the case in recent years, it all depends on the Chinese, it’s not a secret. Global economic recovery in other important for dry bulk trade countries, hasn’t yet reached levels enough to offset the current high levels of tonnage oversupply. During this year, we’re expecting more Supramaxes to be delivered as well. These ships are of a capacity of 61,000 tons, which used to be the Panamaxe’s territory. So, as you see, it takes two older and smaller vessels, to make up for one modern one. So, as ships sizes have grown, the number of cargoes needed to be transported by a single vessel has been reduced.

Oversupply issues have plagued the dry bulk market since mid-2010. Will this be the case as well as we inch forward?

Last year, this oversupply was in a large part covered, either by newbuilding orders’ being cancelled, from China’s healthy growth and coal demand, as well as demolition activity. This was the case until October. Since then, newbuilding deliveries were multiplied, leading the market down, without any hope of recovery, as each day more and more vessels were hitting the water. So, this scenario is highly probable to occur during this year as well, as the global dry bulk orderbook is still at very high levels.

During 2010 we witnessed a strong rebound of newbuilding orders which are difficult to justify given the already huge orderbook. Are valuations really that low? What’s your opinion on the matter?

It’s true that many ship owners opted to reduce the average cost of their fleet, by taking advantage of today’s lower prices, as compared to the prices paid during the 2003-2008 boom years. Of course, at that time, ship owners earned a lot of money, a part of which were invested last year in new buildings. On the other hand, a lot of owners have undertaken big shipping loans, but it’s a positive development that banks are much more lenient and in many cases open to refinancing, because the majority of them don’t want to become ship owners. Of course, there’ve been reports of foreign banks seizing vessels and reselling them based on the debt assigned to each ship. As a result, a ship owner with enough credit and liquidity can easily build up a big fleet for a reasonable price.

New building cancellations and scrapping of older bulkers seem to be the best chance that shipping has to improve freight rates. How is each of these solutions progressing?

In order for scrapping activity to pick up, ship owners must make a strategic decision towards this direction. But, one problem lies within the fact that many of the older ships have been acquired by Chinese owners, who are still using them, due to their low operational costs, although part of those ships are being used for inland China river transportation, so they aren’t weighing that much in the ocean-going trade. Nevertheless, it will all come down to how many deliveries of new buildings will be made this year.
As far as orders’ cancellations, we’ll be better informed by the end of the year, as it’s pretty difficult to make such an assessment at the moment. Some analysts are debating about cancellation of 10% – 15% of the total orderbook, but it’s pretty difficult to estimate.

How would you characterize the current market for second hand vessels? Are asset values corresponding to current freight rates?

Although, second hand prices have come down, they are still higher than current freight rates, so they are stilling holding their ground. Of course, compared to 2010, prices have already gone down this year, by an average of 10% – 20% depending on the vessel’s type and age. In general, ship types like Supramaxes and smaller bulkers of up to 20,000 tons are holding their values better, because of the lower orderbook compared to other ship classes. After all, Supramaxes have only been around for the past 5-6 years, so it’s difficult to face oversupply issues so soon in their lifespan.

Nikos Roussanoglou, Hellenic Shipping News Worldwide

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Oversupply issues to plague dry bulk trade for 2011 as well

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