Bulk carrier market’s progress hampered

Over the past year it became gradually clearer that broad influences were providing less support for the global bulk carrier market than seen during the preceding twelve months. After a remarkable improvement in the freight rates trend through much of 2021, last year’s performance was inferior. Moreover, current signs for 2023 point to another year when progress may be limited.

Various changes which unfolded in the course of last year, affecting the demand for and supply of cargo carrying capacity in the bulk carrier sector, combined to weaken the demand/supply balance and restrain market freight rate levels. Although changes in the period ahead are likely to differ, the combined effect may be similar albeit perhaps less restricting. This pattern may allow a somewhat more positive freight rates trend than seen in recent months to evolve. However, expectations for many aspects are speculative.

In 2023 a deceleration in the world bulk carrier fleet’s expansion is predictable. An ingredient probably will be greatly increased scrapping, prospects for which are not yet entirely certain. This shift in the carrying capacity trend amid substantial newbuilding deliveries probably will prove necessary, to accompany the prospective minimal dry bulk trade and tonnage demand growth envisaged, presently seeming quite likely.

Other influences also will be instrumental in shaping how the trend of freight rates evolves over the next twelve months. One of these is changes in trading patterns affecting tonne-miles performed. Another is port congestion and loading or discharging delays, the significance of which has been receding recently, boosting the effective availability of ship capacity in the market.

Fleet Growth Variations

Bulk carrier fleet growth during the past twelve months was slightly below its annual expansion rate in preceding years. The world bulk carrier fleet’s deadweight tonnage, a measure of carrying capacity, increased in 2022 by an estimated 2.9%. A substantially lower volume of new ships joining the fleet was recorded, while the amount of old or uneconomic ships leaving also diminished. Consequently the net deadweight capacity added decreased, as

One year ago, at the end of 2021, the world fleet of bulk carriers (including all ships with capacity of 10,000 deadweight tonnes and over) consisted of 12,750 vessels totalling 945.9 million dwt, according to data compiled by Clarksons Research. Twelve months later at the end of 2022 this fleet was about 27m dwt larger at 973m dwt, based on estimates which are subject to revision.

A much lower newbuilding deliveries total was a feature of fleet changes in 2022. The newbuildings volume, provisionally calculated at 31m dwt, may be revised upwards when more complete information is available. This figure is almost one-fifth below the 38m dwt seen in the preceding year. Accompanying this rise was decreased scrapping, measured by reported sales for demolition, totalling about 4m dwt, down by about a quarter.

Among the main vessel size groups (Capesize, Panamax, Handymax and Handysize) fleet growth rates last year varied between 2% and 4%. Enlargement was slowest in the Capesize segment, comprising ships of 100,000dwt and over, forming two-fifths of the entire world bulk

carrier fleet, where growth was about 2%.

By contrast, within the Panamax 70–99,999dwt size group, including Kamsarmax 80–89,999dwt bulk carriers, growth was almost 4%.

Elsewhere expansion rates were in the middle of the range. The Handymax 40–69,999dwt segment (including Ultramax ships exceeding 60,000dwt as well as Supramax bulkers of 50–59.999dwt) grew by 3%. In the Handysize segment of smaller 10–39,999dwt bulk carriers, growth was also 3%.

Actual changes in transport capacity available are not always accurately illustrated by static deadweight capacity figures, however. Changes in world fleet capacity to move cargoes also depend on how productively ships are employed. Large influences on this aspect are ships’ voyage speeds, ballast (empty) voyage patterns, and duration of port visits, data for which involve complex calculations. The advantage of using deadweight tonnage as a measure is that it is simple and available promptly, and is therefore a useful broad indicator of transport capacity for cargoes.

Average voyage speed in the fleet is an important influence. Even a modest change in the bulk carrier fleet’s average speed, resulting in the time taken to complete a voyage increasing or decreasing, substantially affects annual transport capacity available. A declining speed trend has been evident in recent years, resulting in reduced average annual numbers of voyages completed and therefore lower productivity. After an upturn in the average in 2021, a reversal seems to have occurred in 2022, modifying deadweight capacity growth.

Seaborne Trade Weakens

Following a recovery in global dry bulk trade in 2021 when the severe adverse effects of the pandemic receded, further brisk growth was widely expected. But unforeseen events around the world resulted in declining trade last year. A detailed trade overview is contained in another article in this edition of DCI (‘Dry bulk trade growth falters’ — see p4 onwards), so the following comments are a brief overview.

Global seaborne dry bulk trade expanded by well over 3% in 2021, before decreasing last year by an estimated 1–2%. Among the main segments, coal was the strongest performer in 2022, growing by an estimated 1% after a robust performance in the previous twelve months. Elsewhere negative results were prominent. Iron ore appears to have declined by about 2%, while both the grain and soya, and the minor bulk commodities segments apparently saw reductions of around 3%. The 2022 overall dry bulk total is provisionally calculated to have risen by about 95 million tonnes, down to 5.4 billion tonnes.

Lower import demand in China was a feature of last year’s weakness, amid very slow economic growth reflecting the ongoing coronavirus pandemic and property market downturn. The volume of dry bulk imports into China is estimated to have fallen by 4–5% in 2022, including lower coal, grain and soyabeans, and some minor bulk commodities. This outcome is especially significant because China comprises almost two-fifths of global dry bulk commodity import volumes.

From a shipping market perspective, another aspect also determines demand for the services provided by bulk carriers, how much ‘employment’ is created. Trade volumes transported are the usual focus, because these can be measured relatively easily and are a convenient proxy for vessel demand. But voyage distances are influential as well. The distances affect the number of cargo-carrying trips performed annually by a ship. Any significant change in the annual average voyage distance performed by each deadweight tonne of cargo-carrying capacity has an impact on vessel demand.

Incorporating these measurements within a ‘tonne-mile’ unit includes both cargo (trade) volume and voyage distance, providing a more accurate gauge of demand for transport capacity. However, statistics compiled on this basis are often not as readily available or as timely, because additional information and extensive calculations are required. In 2022, according to preliminary estimates by Clarksons Research, the annual tonne-miles percentage decrease was about one percentage point smaller than the tonnes volume decrease, implying that bulk carrier demand was reduced by less than cargo tonnes.

DEMAND/SUPPLY BALANCE

The balance between demand for, and supply of, carrying capacity in the bulk carrier freight market slackened in the past twelve months, contributing to a weaker freight rates trend. As already discussed dry bulk commodity trade diminished, while the world fleet of ships carrying these cargoes expanded briskly.

For much of the extended period since the global economic depression experienced after the world financial crisis more than a decade ago, together with its adverse impact on trade volumes, surplus capacity was evident in the bulk carrier sector. Over-expansion of the bulk carrier fleet prevailed amid excessive optimism by shipowners and other players about recovery prospects. Consequently the world fleet remained under-utilized.

When the pandemic began, the impact initially was a huge setback for progress towards a sustainable bulk carrier market recovery which could boost freight rates. Vessel employment was weakened, while the fleet of ships available continued to grow. But then, in 2021, strengthening trade volumes and other favourable influences affecting the market balance were a feature. Last year this pattern was not fully maintained, causing a freight market setback.

There is considerable uncertainty about how the freight market trend will evolve in the period ahead. Evaluations must include effects from the direction and trend of the market demand/supply balance, and the complications of many temporary influences. Estimates suggest that minimal or no growth in dry bulk trade could be exceeded by slower growth in the bulk carrier fleet. Other influences could modify this relationship, but it seems likely that a sustained freight market strengthening is not yet foreseeable.

The Freight Market

In 2022 bulk carrier freight rates varied within a wide range. Rates obtained by all the main bulk carrier sizes moved in broadly similar directions although, as often happens, changes tended to be larger in the Capesize segment than elsewhere. Market Capesize freight rates are often especially volatile, reflecting short-term employment fluctuations in the two commodity trades — iron ore particularly, and coal — on which these bulk carriers mostly depend.

Early in 2022 the bulk carrier freight market experienced downwards pressure but strengthened towards mid-year. Capesize charter earnings during this period were frequently exceeded by those secured by the smaller Panamax and Supramax ships. From around mid-year onwards up to the end of the year a weaker trend became established. During this period the unusual pattern of Supramax and Panamax earnings at higher levels than those of Capesize vessels persisted, reflecting subdued iron ore trade employment for the larger vessels.

The evolving bulk carrier market freight rates trend is represented by the Baltic Dry Index (BDI), although this index does not fully illustrate the sector. The BDI, calculated daily by the Baltic Exchange, is based on a basket of time charter hire rates for various bulk carrier sizes and typical employments on the specific long-distance international routes included. It is an indicator of changes in the cost of transport for dry bulk cargoes.

From around 2,300 at the beginning of 2022, the BDI quickly fell to about 1,400. It then climbed by about 2,000 points over several months to around 3,400 in May. But this recovery proved unsustainable as the demand/supply balance deteriorated. From June onwards a lower market ensued, down to around 1,000 before improving to 2,000 at the beginning of the fourth quarter after which a reduction to the 1,200–1,500 level was seen.

Bulk Carrier Market Prospects

Events around the world during the past twelve months have complicated any assessment of bulk carrier freight market prospects in 2023. The expected pattern of post-pandemic global economic recovery with benefits for seaborne dry bulk trade volumes was not fulfilled last year, and the disruption experienced seems likely to continue, at least partly through the period ahead.

Some optimism has been expressed among market observers about tonnage supply. Bulk carrier fleet growth is widely expected to decelerate markedly, restraining excess capacity. But the tonnage demand side of the balance is not yet showing convincing signs of strengthening much. So it is unclear whether an upturn in dry bulk trade volumes and tonne-miles performed will be sufficient to match or exceed the lower pace of fleet expansion envisaged. A weakening balance is still a possibility.

Complicating this outlook is the role of ‘disruptions’ in bulk carrier employment patterns which have adversely affected the fleet’s carrying capacity. Recent signs suggest that logistical and operational delays and disruptions are diminishing, enabling the fleet to provide more efficient transportation activity. Port congestion and delays in a number of countries are reported to have eased in past months, enabling bulk carriers to improve productivity, effectively expanding supply and acting as a restraint on freight rates.

Several prominent uncertainties affecting the trade picture are evident. The return of inflation as a major challenge, leading to weaker real incomes, with adverse effects on growth in spending and economic activity, may continue to restrict import demand for dry bulk commodities for some time. This trend has been exacerbated by the war in Ukraine coupled with the sanctions imposed on Russia, directly constraining global energy and food supplies. How long these events will persist is debatable, although economists indicate that inflation rates may improve during 2023.

Another imponderable is when China’s economy will resume a more ‘normal’ rate of growth. The outcome clearly depends greatly on how the ongoing Covid pandemic, and the policies implemented to control it, affects the future pace of economic activity. A successful easing of restrictions during the next few months potentially could provide an economic boost, which is likely to be reflected in additional bulk commodity import demand. Nevertheless, over two-thirds of the China volume consists of iron ore and coal, two commodities potentially facing downwards pressures in the longer term although not necessarily declining in the next twelve months.

SLOWING FLEET’S CONTRIBUTION

On the supply side of the freight market, one relatively plausible expectation for 2023 is slower growth in the bulk carrier fleet. Newbuilding deliveries are unlikely to contribute to this deceleration because signs point to these increasing from last year’s level, based on interpretations of shipyard orderbook schedules. The scheduled newbuilding deliveries total for

2023 is well above the actual volume delivered in the past twelve months.

But the scrapping volume potentially could increase substantially from the minimal volume seen in the past twelve months. If this occurs, it could result in a diminished annual net deadweight capacity added to the fleet, implying a much slower growth rate. After the past two years when unusually low scrapping totals were seen, an increased level is foreseeable.

Higher scrapping of old or uneconomic vessels may seem predictable. But forecasting recycling volumes more specifically is largely based on guesses. It is a speculative exercise because market sentiment among shipowners — reflecting recent, current and expected future freight market rates, and how secondhand vessel prices are evolving — is often a major influence on demolition sales decisions which is not predictable.

However, two main influences in 2023 could boost scrapping. The bulk carrier fleet is ageing. The average age is increasing because of low demolition sales in recent years and there is a significant volume which has reached an advanced age. More shipowners may decide not to incur the extra costs of extensive surveys and maintenance involved in older vessels with a limited remaining lifespan. Another influence is that international maritime regulations aimed at cutting greenhouse gas emissions are tightening in 2023. Compliance costs may not be justifiable on some older bulk carriers, resulting in extra sales to the recycling yards.

Shipping investment: will higher steel values mean dry bulk carriers hold their value?

Investors in middle aged dry bulk tonnage may be cheered by the impact of sustained higher recycled steel values, according to research commissioned by the Baltic Exchange.

Analysis of the dry bulk carrier values undertaken by consultancy Zuoz Industrial looks at the potential impact of longer-term higher ship recycling values on five year old tonnage. With recycled steel an increasingly popular choice, thanks to its lower carbon footprint when compared with virgin steel, the paper discusses whether higher steel recycle values are a longerterm trend. Although down 20% since its April 2022 high, the price of lightweight steel is ~$520/ldt and more than double the historic average since 2009.

“Should the current multi-year higher cycle value turn out to be a fundamental risk trend supported by some of the evolving demand factors, the fundamental risk of investing middle aged dry bulk tonnage, particularly in softer freight markets, will have decreased,” says report author Urs Dür.

The Baltic Exchange publishes a set of investor indices for the major dry bulk sectors which includes the Baltic Residual Risk Index, a ratio of the residual value of the vessel against its recycling value, and the Baltic Residual Value Index, which calculates the value by taking the written down cost of a five year old vessel by fixing the earnings on the basis of a five year timecharter and adding back the operating costs.

The Baltic Exchange Investor Indices (BII) are an easy to use online analytical dashboard displaying data relevant to vessel investment decisions, residual value, health of earnings, spot and five-year timecharter earnings, purchase & recycling values, and running costs.

They offer a high level of clarity and transparency for investors in Capesize, Panamax, Supramax and Handysize vessel types. Tanker and gas carrier assets will also be added to the service at a later date.

Subscribers to the Baltic Exchange Investor Indices are offered a health of earnings index which compares spot income with daily running costs; a residual value index which provides an implied write-down value of the vessel over five years; and an implied residual risk assessment which gives the recycling steel value of the vessel as a ratio of its residual value.

About Baltic Exchange

The Baltic Exchange is the world’s only independent source of maritime market information for the trading and settlement of physical and derivative contracts. Its international community of over 600 members encompasses the majority of world shipping interests and commits to a code of business conduct overseen by the Baltic.

Baltic Exchange members are responsible for a large proportion of all dry cargo and tanker fixtures as well as the sale and purchase of merchant vessels.

In November 2016, the Baltic Exchange was acquired by Singapore Exchange, bringing together complementary strengths of Singapore and London, two of the world’s most important maritime centres.