Dry bulk market to recover no earlier than second half of 2013 says Commodore Research

The recovery and next upward cycle of the dry bulk market shouldn’t be expected to occur earlier than the second half of 2013, according to Jeffrey Landsberg, managing director of US-based Commodore Research & Consultancy. By then, he says, a large

amount of the orderbook should be absorbed, especially when it comes to capesize vessels, the most overweighed part of the dry bulk fleet. Should scrapping activity pick up even more, then the comeback could happen even earlier. According to Commodore, India’s coal needs will also become a major factor for dry bulk trade in the coming years (something already taking place), as the country’s imports are expected to grow by at least 10% annually.

China was for the most part of the previous decade the locomotive, which pushed the global shipping industry to new heights. With the global financial crisis and the oversupply of newbuildings, this seems to be over. When do you believe the next upward cycle of the market will occur?

We believe the next upward cycle will begin during the second half of 2013.Β  By this point, we expect that a large amount of the orderbook will absorbed — specifically for the capesize fleet.Β  We expect Chinese iron ore and steel demand will remain firm.Β  Robust capesize scrapping will also help allow the recovery to come a bit sooner than most expect.Β  We want to stress, however, that dry bulk has become a tale of two different markets, with capesize rates the only rates that have been struggling to meet operating costs.Β  Panamax, supramax, and handysize rates, on the other hand, continue to exceed operating costs –but the market continues to look at all vessel classes as in the midst of crisis.

There’s been a lot of talk lately, regarding coal trade. Do you think that coal will actually be the next “iron ore” in terms of its impact on dry bulk trades?

It is important to recognize that China consumes roughly 3.5 billion tons of coal per year, and that coal imports contribute to only a fraction of overall Chinese coal consumption.Β  It is our view that Chinese coal import demand is significantly affected by problems arising from railing, trucking, and barging domestic coal from western and central China to end-users on the east coast.Β  Since Chinese coal ports lie it close proximity to the majority of major cities on the east coast, it often makes sense to simply import coal directly to the ports, rather than deal with inland transportation problems.Β 
We do not expect that coal will be the next “iron ore”, at least to the effect that we do not expect Chinese coal imports will average say 50 million tons per month.Β  We do expect that imports will increase, however, and that coastal and river coal trade will expand by a large amount, which will require the use of more dry bulk vessels. Ongoing electricity shortages and inland transportation constraints have prompted the Chinese government to begin focusing more on constructing coal bases along the Yangtze River, Beijing-Hangzhou Grand Canal, and the coast.Β  The government has also recently announced that the Yangtze River will be further dredged to allow vessels with a carrying-capacity of up to 50,000 tons to be able to travel from Shanghai to Nanjing by 2015.

Most recently, China has been facing acute power shortage issues. How have these affected the shipping markets and what do you expect in the near future?

In the near term, steel mills will be receiving less electricity.Β  This will put pressure on steel production and iron ore demand.Β  Overall iron ore consumption will come under pressure.Β  Iron ore imports will likely come under moderate pressure, although a case can be made the iron ore imports could find support, and domestic iron ore production will decrease.Β  Using high quality iron ore to make steel requires less electricity than using low quality iron ore.Β  China’s domestic iron ore is low quality.Β  So far, Chinese iron ore fixtures volumes have stayed moderate, which is interesting and has been one reason why capesize rates have found support recently.Β  We will be watching Chinese iron ore fixtures and domestic iron ore production closely.Β  There is a chance that domestic iron ore production will decrease and fixtures will remain at moderate levels.Β  The electricity shortage issue is also likely to result in more thermal coal being imported.

Will India’s coal needs be the next big thing for dry bulk markets?

Yes.Β  We believe Indian coal imports will continue to grow.Β  Indian demand for thermal coal and coking coal is expected to rise by at least 10% during the next few years, as Indian electricity consumption and steel production continues to increase.

The BDI has been more or less on a falling trend since the beginning with a few spikes here and there. With the second half soon upon us, do you believe that a recovery is due?

No. We do not expect a sustained recovery, especially as capesize and panamax rates are concerned (these are the two vessel classes that are under the greatest amount of vessel supply related pressure).Β  The market has continued to show that significant increases in spot freight rates can occur however (despite the vessel supply problem).Β  We anticipate that freight rates will continue to be periodically assisted by surges in commodity demand and availability ““ but will not experience a sustained recovery in the near term.

How has the rally of commodities affected shipping?

Strong commodity demand has continued to allow dry bulk freight rates to remain rather resilient. We continue to expect that global commodity demand will rebound as we head into the summer months.Β  Chinese thermal coal demand is expected to remain robust and imports are expected to surge due to the significant difference between domestic Chinese thermal coal prices and regional prices.Β  In addition, most Australian coal mines are likely to recover from late 2010 flooding by the end of June.Β  Global grain demand is expected to remain strong, and Russian wheat exports will be returning in July. Prospects are less encouraging for iron ore, however, as major Chinese steel mills will be receiving less electricity.Β  There is a chance, though, that demand for higher quality iron ore will increase, as making steel with higher quality iron ore requires the use of less electricity.

Nikos Roussanoglou, Hellenic Shipping News Worldwide