Bulk Carriers

By Paul Bartlett

Mixed signals in dry bulk market

Bulk carrier rates usually ease off in the run-up to Chinese New Year as demand for raw materials weakens ahead of the festivities. Capesize earnings followed the usual pattern, falling sharply late in January and early February, but both panamax and smaller rates have held up well. Analysts believe that at least some of this unusual resilience is a result of Chinese Government policy towards the Chinese New Year on February 12.

Chinese authorities discouraged the travel arrangements of many millions of citizens as it tried to control the pandemic and prevent surges in regional infections. The country’s strategy has been to extend the holiday over a longer period, allowing people more flexibility over travel schedules. Meanwhile, some industries were not planning to shut down operations over the holiday period as usual, preventing some workers from taking their usual New Year break in any case. With industrial production set to continue, there was unlikely to be any of the usual dip in demand for basic raw materials including iron ore, coal and grains.

Other factors have also affected the market this year, helping to offset the usual dip in bulker rates, at least to some extent. These included unseasonably cold January weather in large parts of Asia, coinciding with a spell of sky-high LNG prices. For some, coal was the next best option to ward off the cold. Not necessarily in China, though, which is in the middle of a trade dispute with Australia.

The geopolitical row centring on Australian coal follows that country’s move to prevent Huawei Technologies from involvement in the development of its 5G cellular communications network, and a separate request to investigate the outbreak of COVID-19 in Wuhan, the capital of Hubei Province, where the virus is thought to have originated. In retaliation, Chinese authorities have blocked the import of Australian coal, a usually constant trade that provides steady bulker employment across a range of ship size categories.

The row showed few signs of easing as mid-February approached. Despite reports of a small resumption of Australian imports early in the year, figures from Oceanbolt, a Norwegian dry bulk research outfit, indicate that China has imported no coal from Australia so far this year. Oceanbolt data suggests that around 60 bulk carriers – ranging from kamsarmax units to capesize – are currently laden with about six million tonnes of coal, waiting off the Chinese coast to unload their cargoes. Some vessels have been there since May last year and the volume of blocked coal is equivalent to about 2% of normal annual imports, Oceanbolt said.

Some vessel owners have been fortunate enough to be able to divert ships and possibly also cargoes to other Asian destination where demand for coal is high. But for others, the Chinese coal import ban has caused a major headache, with laden ships delayed for weeks or months. While these ships have been effectively removed from the market in terms of supply capacity, other vessels which would have been deployed in the Australia-China coal trade have become available for other business.

No surprise, then, that the Capesize market, which had remained steady through most of January and despite the different approach to Chinese New Year, still fell over the last ten days of January and early in February. Rates dropped sharply across the board for big bulkers, according to Clarkson figures, with Capesize average earnings plunging from close to $18,600 a day during week ending January 22nd, to just under $12,000 a day seven days later.

The Baltic’s Capesize Index (BCI), which had peaked most recently at 3082 on January 20th, lost more than half its value by the end of February’s first week, closing at 1,527 on February 5th. However, to put this in context, on the same day one year ago, the BCI had fallen for 39 consecutive sessions and was deep into red figures. On February 5th last year, it sank to minus 183.

Geopolitical disruption

Chinese authorities have blocked the import of Australian coal

Modern bulk carriers are likely to have had hull lines and propellers optimised for likely service speeds

Grain support

Both the story and the outlook are rather different in the smaller sizes. Baltic indices in the panamax, supramax and handysize categories all made modest gains over the last two weeks of January. Braemar ACM, for example, revealed that the Baltic’s 38,000 dwt handysize index is 63% higher this year than last, and is 70% higher than average January figures over the last five years, based on the Baltic’s earlier handysize index, calculated on the basis of 28,000 dwt vessels.

Meanwhile, Clarkson estimated average day rates for these ship types over January at $13,975, $12,958 and $12,775 respectively and all three sectors were still posting small improvements as the month drew to a close. Part of this upbeat sentiment was probably down to support from the grain sector where China is reported to have bought record volumes of US corn for delivery of the months ahead.

London-based broker Arrow Shipbroking explained that China uses a tariff system to raise the cost of imported grain and encourage selfreliance. But according to the broker, the size of the country’s corn reserves was not clear and there is also concern over the quality of Chinese corn. Rumours in circulation indicate that the tariff structure has been eased to raise demand for imports.

Meanwhile, Arrow’s researchers have also predicted that port congestion could have an impact on the dry bulk market this year, effectively cutting tonnage supply at a time of buoyant demand relating to grain cargoes. The US export programme is in full swing, the firm said in a note, but South American grain is imminent, notably the Brazilian soybean harvest, delayed some weeks by bad weather. Such delays were likely to provide additional support for spot fixtures of supramax and handysize bulk carriers, Arrow predicted.

Shock for owners as repairers prepare for new line of business

Owners of bulk carriers need to get their skates on if their vessels are to meet IMO’s latest requirements for existing vessels, agreed in principle at MEPC 75 in November and set to be approved at the next meeting in June. The new regulations, likely to apply from January 2023, will impact ships from their first interim survey after that date. At that point, existing vessels will have to demonstrate efficiency gains and carbon intensity reductions of between 15-20%, compared with baseline figures from 2008.

According to analysis by DNV GL, more than three quarters of existing vessels may require modifications if they are to meet new standards for existing ships – the Energy Efficiency Existing Ships (EEXI) index and the Carbon Intensity Indicator (CII) – see article below. Across the bulk fleet, about two thirds of bulk carriers and tankers are likely to be affected, according to figures released in a recent report by shipbroker Galbraiths. Even some younger ships of around ten years are likely to require efficiency modifications, according to the broker’s analysis.

There is likely to be a direct correlation between efficiency and age of ship, experts point out, because engine designers have made huge strides in raising efficiency over the last two decades. Meanwhile, other ship design features have also resulted in energy improvements onboard, whilst modern ships are likely to have had hull lines and propellers optimised for likely service speeds. Nevertheless, many bulk carriers will still require attention.

According to statistics from Clarkson Research, 20% of the dry bulk fleet is 15 years old or more, and a further 24% lies in the 10-14 year range. The skewed age profile is particularly marked in the smaller sizes - 15% of handysize bulk carriers are more than 20 years old, for example, and an astonishing 45% of bulkers in the 40-49,999 dwt range of also more than two decades old. Of course, this reflects the steady transition to larger ships in the supramax (50-59,999 dwt) and ultramax (60-64,999 dwt) categories but nevertheless, it still leaves 288 ships over 20 years in the smaller handymax size range.

Across the fleet as a whole, about 1,200 bulk carriers are more than 20 years old, with further 1,220-plus vessels in the 15-19 year-old range. Together, these two categories total more than 2,400 ships, most of which will require attention within the next couple of years. Depending on the freight markets, some vessels will not be worth fixing, and will be recycled. However, IMO’s latest decarbonisation moves indicate a promising new revenue stream for repairers, particularly those that take a positive approach to marketing IMO-compliance packages ahead of time.

Analysts believe that IMO’s initiatives will inevitably have an impact on supply therefore, and this new constraint is likely to become evident across the dry and wet bulk trades. The two main supply restrictions are likely to result from a reduction in ship speed from engine power limitation (EPL), viewed as probably the easiest and most effective way of achieving a significant efficiency gain. But then there are also likely to be hundreds of ships for which additional investment is not an attractive option so they will leave the fleet.

Despite calls from shipowner groups for a global approach to regulation on the basis that shipping is an international transport business - there are signs that regional measures are likely

Decarbonisation disruption ahead!

Although many shipowners have yet to address the issue and decide on new operating strategies, thousands of bulk carriers will soon be affected by IMO’s introduction of new measures to gauge the carbon efficiency of existing ships. Two new indices were agreed in principle at last November’s meeting of the Marine Environment Protection Committee (MEPC) – the energy efficiency existing ship index (EEXI) and the carbon intensity indicator (CII).

The new measures of individual vessel’s fuel and carbon efficiency are likely to enter force in less than two years. The indices are likely to apply at the next interim survey after January 2023, provided that this timetable is agreed at the next meeting, MEPC 76, in June of this year. There are significant implications for all owners of existing ships, particularly older ones, with DNV GL estimating that as many as 80% of existing ships on the water today will require modifications of one type of another.

Ship operators who think that these issues can be left until tomorrow and adopt a wait-and-see policy should think again. Improvements to the energy efficiency of ships in operation is essential if there is to be any chance of meeting IMO carbon intensity reduction targets and greenhouse gas emission reduction aims by 2030 and 2050 respectively. Those who fail to take the necessary steps could find their ships relegated to Categories D and E in the Carbon Intensity Indicator gauge, meaning that improvements are essential. These vessels are likely to become more difficult to fix, particularly in a weak market, since major charterers’ will relegate them to their second or even third set of chartering options.

There are many people outside the shipping industry who are already critical of its regulatory framework. On the issue of carbon, IMO’s regulations to cut emissions are already considered by many outsiders as too little, too late. They would like to see more robust measures put in place as soon as possible.

Whether or not this is reasonable, the fact is that IMO is a UN agency with a membership embracing 174 countries many of which have widely different priorities. It works remarkably well on the basis of compromise.

But despite calls from shipowner groups including the International Chamber of Shipping (ICS) and the European Community Shipowners’ Associations (ECSA), amongst others, for a global approach to regulation on the basis that shipping is an international transport business, there are signs that regional measures are likely. In Europe, for example, it now appears increasingly likely that shipping will be included in the trading bloc’s emissions trading scheme, with a range of daunting implications for shipowners and operators.

SORJ