executive summary
WHISPERS OF RECOVERY Trade Turnaround Bodes Well for MPVs
D BY SUSAN OATWAY
rewry is quietly confident that the dry bulk market has bottomed out and that recovery, albeit slow and soft, is underway. The Baltic Dry Index crossed 1,000 points on Nov. 11 for the first time since August and Drewry expects dry bulk freight rates to follow.
YOUTH ON ITS SIDE
We expect dry bulk trade to grow at about 1.4 percent per year to 2018, compared with growth of 4.6 percent seen over the last five years. However, we do expect to see the usual first-quarter slowdown in dry bulk trade due to a combination of the Chinese New Year holidays and more newbuilding deliveries over this period because of some push-back of the orderbook. For the dry bulk market, the impending additional cost of implementing ballast water management systems is expected to keep demolition
Age profile of the MPV and heavy-lift fleet
2500
2000 heavy-lift
premium project carrier
MPV
project carrier
1500
1000
500
0
‘69 ‘71 ‘73 ‘75 ‘77 ‘79 ‘81 ‘83 ‘85 ‘87 ‘89 ‘91 ‘93 ‘95 ‘97 ‘99 ‘01 ‘03 ‘05 ‘07 ‘09 ‘11 ‘13 ‘15 Source: Drewry 16 BREAKBULK MAGAZINE www.breakbulk.com
numbers high after September 2017. We have also seen increased demand for coal and iron ore from Asia, in particular China and India. When we look at the supply-demand balance, we therefore see a dry bulk fleet with a growth of just 1.4 percent per year to 2018, again much lower than the 5.2 percent growth seen over the previous five years. It is this slowing in fleet growth that will balance this sector. Meanwhile in the container market, we believe that Hanjin’s bankruptcy is just a temporary glitch, despite the short-term turmoil it has caused. Rather than being a harbinger of worse to come, we believe it signals the bottom of this market. The conditions for recovery in the medium term are improving, so long as carriers cultivate them wisely. That said, the excess of ships in the system and the poor prospects for demand in this sector remain at the root of its problems. Consolidation of companies and restructuring alliances may all help to some degree, but none will solve the fundamental problem. For this sector, some of the positive developments include higher scrapping again improving the supplydemand balance; the Panama Canal widening offering a relief valve for the deployment of ships of 8,000 TEUs and above; and higher fuel prices lifting some weaker economies and therefore encouraging more buying. ISSUE 6 / 2016
CAUTIOUS OPTIMISM
So if the outlook is looking cautiously better for the two main sectors that compete for the breakbulk market against multipurpose vessels and project carriers, what does that mean for them? Firstly, the directive from the International Maritime Organization that has made the installation of a ballast water treatment system (BWTS) compulsory for all deep-sea vessels after September 2017 is expected to affect fleet supply here too. Drewry has yet to finalize the numbers (they will be ready for the Multipurpose Forecaster due in mid-December) and accepts it is not quite as simple as for the bulk carrier fleet – in as much as not all vessels are in deep-sea trades – but we do expect to see more ships demolished after September 2017. Vessels that are able to dry dock prior to September 2017 will not have to fit the BWTS until their next special survey, so the focus must be on vessels that are due to dry dock after that date, and will therefore be required to fit the system at their next visit. Various reports suggest that fitting a BWTS to a medium-sized multipurpose vessel will cost about US$250,000 to US$300,000. This is significantly less than the US$1 million expected to be paid by capesize bulk carrier owners. Indeed, the directive is expected to have the biggest impact on bulk carriers because of their current deballasting arrangements. Although it might not be a significant amount of money when spread over, say, a further 20 years of trading, it is a significant amount of money when the MPV market has been at rock bottom for so long. So, unlike with bulk carriers, we are not expecting to see the average age of scrapping drop significantly below 30 years. But we are suggesting that for the 10 percent of the fleet that is above that age, there will be some serious calculations to do as to whether the investment is worthwhile. It is true that of the 338 vessels more than 30 years of age, nearly half are below 5,000 deadweight tons and therefore less likely to be trading deepsea. But the remaining vessels represent about 5 percent of the current operating fleet and could make a big difference to the demolition numbers. For example, if we assume that all vessels more than 30 years old could scrap at a quicker rate than previously expected, we 18 BREAKBULK MAGAZINE www.breakbulk.com
Credit: BBC Chartering
executive summary
could be looking at demolition rates rising back to 1 million deadweight tons by 2019 and fleet growth stagnating at about 30 million deadweight tons for the next few years at least. More significantly, we would expect to see the so-called simple multipurpose fleet (vessels with lift capacity of less than 100 tons) shrink at a sharper rate than previously expected. Add to this the contraction in the handysize bulk carrier fleet and we have the potential for the market to lift significantly over 2018 and 2019. The BBC Pearl in Shanghai. MPVs could face a threemonth lag before realizing the recovery in other trades.
LARGE SCALE LAYUP
In the short term, it is clear that shipowners are hurting. There is now talk by some – Briese Schiffahrt for example – that laying up a significant proportion of their fleets is the only way to ride out the market. Although a single owner laying up its vessels will make little difference to supply in the short term – even an owner as big as Briese Schiffahrt – it would only take a few in the project carrier sector to join forces for there to be a big change to supply. On the demand side of the equation, again the short-term outlook is weak. The end of the year is expected to suffer from a weakening steel trade, largely due to anti-dumping duties. All steel importers are struggling with a surfeit
of steel at the moment and are looking to governments to protect their domestic industry. The U.S. imposed a huge duty of more than 200 percent on Chinese steel imports earlier this year, and now the EU has also imposed an import duty on hot-rolled steel from that region of between 13 percent and 73 percent. On the plus side, global dry cargo demand is expected to start to recover from 2017 onwards, with Asian countries some of the main supporters of trade. As economic development in this region advances, more power and foodstuffs are required to support urbanization and industrialization. The market outlook is therefore soft for the short term, but improving from end 2017. As ever, it is always led by the competing sectors, and while the bulk carriers and container vessels continue to drive freight rates down, this sector is still some way off improvement. Drewry believes that it is likely to lag the other sectors by at least three months in the longer-haul routes, but expects rates to have moved firmly off the bottom of the trough by the start of 2018. BB Susan Oatway FICS is an associate with global shipping consultancy Drewry, specializing in the multipurpose and reefer trades. Drewry’s latest Multipurpose Shipping market review and forecaster for the fourth quarter 2016 will be published mid-December. ISSUE 6 / 2016