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“œDry bulk orderbook not to pose oversupply challenges” says senior analyst

In what could be seen as an overly optimistic view, yet fully justified based on his arguments, Mr. George Grigoriadis, head of Finance & Research department at shipbroker G.Moundreas, said that the rapidly increasing coal and iron ore trade is bound

to absorb any excess tonnage capacity, thus limiting fears of a looming oversupply of vessels. In an interview with Hellenic Shipping News Worldwide, he pointed out that newbuilding delayed deliveries and order cancellations should limit this year’s new additions to the global fleet at 900 vessels the most. Together with new factors favoring an increase of global coal trade, like China’s imports of higher quality coal, the dry bulk market is set for a year of stability, which could even turn into a positive surprise, should demolition activity pick up any time soon.

The freight market has been steady at around the 3,000 mark for some time now, although we’ve been seeing China’s commodity trade booming. Why is that?

We had predicted since the summer of 2009 that the market would be at around 3,000 points (Baltic Dry Index) and that scenario was materialized. Besides the increase of seaborne trade in India and China, we also have more shipments of iron ore in all three major economies of USA, Europe and Japan. Also, compared to 2009 the world steel output is up by 15% ““ 20%, which in turn is translated to higher iron ore volumes traded. Of course, on the downside, the market is also having to face new building ship deliveries. During the course of 2010, we expect that the total orderbook actually delivered will range between 750 and 900 dry bulk carriers, with 190 ships already handed over to their respective owners during the first quarter of the year. Still, the actual number of deliveries, based on the orders placed, should be at 1,800 ships for 2010. As one can realize, such a number won’t be the case, as a result of delays in deliveries and order cancellations.

How do you see future dry bulk tonnage supply shaping up in the future, with regards to demand?

Well, as we said, we believe that no more than 900 dry bulk carriers will join the world’s fleet this year. But, what’s more interesting is to see how demand will shape up. I’ve calculated that this year’s increase of the world trade for iron ore and coal will be about 300 million tons, versus 2009. If we translate this number to panamax bulk carriers, which is an average size of vessel, it means that we shall need 500 more carriers. The rest of the dry bulk trade (i.e. grains, wheat, sugar, cement etc) will absorb the rest of the newbuilding deliveries. That’s why I believe that the market will be balanced this year, despite of fears of the opposite. This can be seen already in the BDI, where, despite what we thought, there isn’t this high volatility we witnessed last year.

Where do you see the BDI in the coming months?

We could see a further increase of freight rates, on the condition that more of the older vessels are scrapped. But, as we all know, things in the dry bulk shipping market are often unpredictable and developments are constantly factoring in new data. The latest trend of the last six months which wasn’t predicted by analysts, was that China is rapidly replacing its domestic coal with imports. This occurred because the country’s own coal, which is of huge quantity and is mined at a staggering rate of 3 billion tons per year, is of low quality and very polluting. Of course this was the case for years now, but at the moment, for reasons of limiting pollution in major cities and for protecting the environment, the government has decided to replace it with higher quality coal imports. Through this, the Chinese steel mills will achieve better performance per ton, which means that fewer quantities will be necessary. But in any case, at least 500 million ““ 1 billion tons of imported coal will be needed. This is a major new factor which helps eliminate concerns of a dry bulk tonnage oversupply in the future.

How is scrapping of older vessels shaping up for far this year?

Demolition of older ships is limited this year, as a result of a profitable dry bulk market, which leaves ship owners with limited motivation to sell their older carriers for scrap. But the latest increase of demolition prices could be a signal for many ship owners to remove more vessels from the market, thus helping freight rates move even higher. One of this year’s Asian surprises, which alters things is the increase of scrap demand, which has triggered an increase in prices as well. China, which wasn’t an active market until recently (only domestic ships were acquired for scrap), now is boosting international demand for old vessels at an impressive rate of 440%, compared with the previous 12 months, which was quite high in activity anyway.
Similarly, Pakistan’s market has been more active, with scrapyards there paying up to $520/ldt. It’s a clear indication that growth rates in the country is picking up steam, with scrap needs increasing, in order to feed their steel industry. Currently, there are predictions that scrap prices could reach $800/ldt. But even at $600/ldt, with the BDI now at 3,000, most ship owners will be very tempted to sell their old ships for scrap.

Do you think that the recent increases of India’s iron ore export tax will have a negative impact in freight rates?

No, because steel prices are on the rise, which means that the additional costs which steel mills are facing, due to increases of iron ore contract prices, are already passed on to the final product and the consumers. Also, most of the major Chinese iron ore importers are already diversifying their sources, with Mozambique and Canada now entering the market, as the latest in a series of countries, which are iron ore exporters to China. This development is even more important for ship owners, because of the higher ton/mile involved in those routes.

Is the scenario of a new huge market for ship owners in India and its coal needs materializing?

Yes, it is already happening, we are seeing it to the latest charters. We recently saw Indian contracts for coal hauling even from Colombia, instead of the usual “suspects” of Indonesia, Australia and South Africa. This year, as Indian government officials have declared, India will need to import about 80 million tons of coal.

Ship owners have been investing heavily both in second hand and newbuildings? Is this justified?

Newbuilding orders are genuine and are coming from companies that either had cash liquidity, or have raised funds from investment funds and banks, or even took advantage of Chinese banks’ funding, which is another new factor in the market. Now that Western banks have been lacking liquidity, their role was substituted by Chinese banks, which have the additional motive of providing business for local shipyards (loans are provided with the condition that the order is placed to a Chinese yard). Meanwhile, ship prices are still low.
Ship owners are placing new orders, because they see that the market is absorbing new tonnage in a satisfactory rate, while the global orderbook has been pushed back in terms of deliveries, which means that freight rates won’t move back to loss-making levels. So, this is a chance to order the tonnage which wasn’t ordered during the time-gap of 18 months, from the fourth quarter of 2008 till now.
At the same time, there is added optimism that even this increased tonnage supply could not be enough to cover the added needs of the market in the years to come. This notion is supported by new factors like the appearance of a new coal trade in India and China, the gradual recovery of Western economies, which will signal an similar increase of steel production there.
Of course, one should note that a large part of the newbuilding orders placed during this year, has to do with smaller Handysize vessels of around 30,000 ““ 35,000 dwt tons. This is because, this segment of the market isn’t threatened by oversupply, quite the opposite, since not many orders had been placed by the time the global economic crisis broke out. Also, much of the current active fleet is already quite old, which means that there is a great room for new orders.

Do you see ship prices heading up again as a result of this renewed demand?

There will be very limited upward trends, not so much because of a higher ship profitability in terms of rates, but because we are approaching towards the end of the crisis at a higher pace than earlier anticipated, which in turn provides for improved market sentiment.

Nikos Roussanoglou, Hellenic Shipping News Worldwide

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