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Net dry bulk fleet growth to reach up to 70 million dwt in 2012 says Braemar Seascope

Monday, 08 October 2012 | 00:00
Despite record-breaking demolition activity, especially in the dry bulk segment, shipping markets are expected to keep facing tonnage oversupply issues, which will continue to exert pressure in freight rates for the monts to come, said Mark Williams, Research Manager at Braemar Seascope Ltd., in an exclusive interview with Hellenic Shipping News Worldwide. Mr. Williams notes that the 2011 total of 25 million dwt in dry bulk scrapping activity has already been surpassed, with projections now reaching up to 35 million dwt by the end of the year, but these figures are still not enough to help the market overcome its oversupply problems. All, in all, 2013 is expected to be yet another tough year for the shipping industry.

Were you expecting the current dismal state of the dry bulk market, a trend which appeared with such intensity at the start of the year?

These are the conclusions from our Dry Cargo Market Outlook published in December 2011:
• The large orderbook will ensure a mostly weak freight market out to 2013, even with record scrapping levels. Cargo is still king
• There is the chance of continuing Capesize resurgence if China switches from domestic iron ore production to imports over a long period.
• Supramaxes continue to out-perform but Indian iron ore export ban may hurt them.
• Shipbuilding capacity may not be able to deliver all newbuilding contracts on time. Cash-weakened owners may struggle to obtain delivery finance. Expect a return of cancellations and continuing slippage in the delivery schedule.
• The timing of market recovery post 2013 depends on:
– Industrialisation & urbanisation rates in emerging markets
– The response of emerging markets to commodity price changes
– Supply response to demand changes (scrapping, new orders)
Those conclusions appear fairly robust to me now!

How has the demolition activity been progressing so far this year both in the tanker and dry bulk segments?

This will be a record year for dry cargo recycling, with over 30m Dwt, maybe 35m Dwt being sent for demolition by year’s end. The 2011 total of 25m Dwt has already been surpassed.
Tanker demolition has not been so strong, though still historically firm, with less than 10m Dwt sold for recycling so far. However, ongoing weak conditions in the crude oil tanker market may encourage further recycling sales.

Do you think these levels of activity are enough to help alleviate oversupply pressures in both markets?

Unfortunately not. Taking slippage into account, over 100m Dwt of bulk carriers is still likely to deliver this year, as the world reaches the peak of a long-term shipbuilding cycle. If 35m Dwt are deleted from the fleet, net fleet growth could still be 65m Dwt to 70m Dwt, maybe 8-9 per cent growth by capacity. Even the strongest demand forecasts can’t attain those levels.
In the tanker market, oversupply is likely to be maintained as perhaps 36m Dwt of new tankers deliver into a weak market. Net fleet growth could be in the region of 25 to 26m Dwt or around 6 per cent. Global oil demand growth is likely to be one per cent this year. Crude oil tonne mile growth is weak, while products tonne mile demand growth looks a little healthier.

When do you expect to see an easing of the pressures caused to the freight markets, especially in the dry bulk segment, from the current imbalance of the supply/demand scale?

Not before the second half of 2013, ceteris paribus, but the shipping markets are good at throwing up surprises that are positive for freight rates.

Do you think that newbuilding orders make sense in today’s market for a ship owner? Is attractive pricing from shipyards enough to entice owners into placing more orders?

If an operator is long on cargo and time (e.g. has long-term supply contracts with steel mills, power stations, oil refineries, petrochems plants) then newbuildings may indeed make sense. However, this hypothetical ship owner also has a strong balance sheet, good banking relationships, access to debt finance at realistic levels, and refund guarantees to guard against the shipyard defaulting…

In terms of scrap prices offered, would you say that they are attractive to ship owners or not?

Yes. Scrap prices are down on their levels at the start of the year, but they still represent cash today for owners whose ships are approaching SS/DD and the prospect of putting in a few million dollars of equity when the bank refuses to extend the revolving credit facility. In the past, spikes in demolition have been driven more by credit crunches than by scrap prices. An owner who sells his fleet for scrap may strengthen his balance sheet but he no longer has ships!

Do you believe that 2013 will prove more positive for shipping companies’ earnings?

On the whole, it may be a difficult year. Individual companies with flexible strategies, good risk management, up-to-date market intelligence and a slice of good luck will find positives in 2013 and in any year.

Nikos Roussanoglou, Hellenic Shipping News Worldwide
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