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Friday, December 15, 2017

POINTS OF VIEW

The necessary task of cutting through the euphoria and putting the current dry bulk boom in context with a warning that there will be difficulties along the way, was undertaken recently by INTERCARGO Secretary General Roger Holt. His comments, published recently by Euromoney in its latest Shipping Finance Annual (see reference below), have a relevance for the tanker industry as well.

The current extraordinary dry bulk freight market has not been seen since a brief period in 1973 when capesizes were making USD 40,000 a day and in 1952 when Liberty ships were scoring from the Korean War. Over the last 20 years, capesize rates from South Africa to NW Europe have seen five 12-month troughs at around USD5/ton and a bottom point of USD4/ton, interspersed with six shorter peaks at around USD10/ton. The January 2004 high point was USD27/ton – ‘completely outside the norm and seemingly not predictable’, says Holt – and even today the rate is USD19/ton.

Looking at cargo demand, he points to the amazing increases in major dry bulk export cargoes, which rose 2.1% over 2001, 5.5% for 2002 and 7.6% for 2003. For the immediate future, Australia’s BHP is forecasting that iron ore exports will increase from a projected 524m tones in 2004 to 700m in 2007 – that is more than 10% growth a year. He comments on the current elasticity of price whereby the customer seems to be prepared to pay whatever it costs to buy and transport raw materials and semi-finished products, but asks whether that can continue.

On the ship supply side, he highlights the relatively modest dry bulk newbuilding orderbook (16.7% of the fleet on order for delivery by 2006) – modest at least compared to the 26% of the tanker fleet currently on order. However, he demonstrates that while projected fleet additions for 2004 and 2005 are less than for 1997 and 2001, the net change will in fact be higher because of the low level of deletions. Scrap prices may be around USD400/ldt, but freight rates are too high for owners to be tempted.

There are danger signs in this, warns Holt, as there are also in booming prices for five-year-old bulkers which have been overtaking the newbuilding price. ‘This is a demonstration of extreme confidence and denotes the anticipated length of the market,’ he says.

Out of this scenario come a number of challenges for the shipping industry, he continues, where all will be put under increasing commercial pressure, and, perhaps contrary to their better judgement, will be forced into making difficult decisions.

Challenges for the charterer will include securing the required shipping to move cargo at the right price. When the price does not make sense, because the freight costs are so high, he has to choose between either deferring the cargo, or taking the ship anyway (which is what is happening most of the time) and increasing the cargo nomination to arrive at the lowest per ton transportation cost. The charterer also needs to examine port operation and port congestion, as some players suggest that 25% of the world bulk carrier fleet is tied up in port at any one time.

Challenges for the owner will include making the best of the high market; getting it right on newbuilding and scrapping (including being wary of attractive offers made on newbuildings by repair yards, many of which do not have the facilities for a newbuilding job); ensuring that repair and maintenance schedules are not squeezed by commercial considerations. Holt warns against decisions to minimise out of service time and to select repair yards for their speed of completion rather than for their competence. ‘Care needs to be taken, otherwise the industry will end up with a bad record of bulk carrier casualties where poor repair and maintenance are the prime cause. This would be tragic after so many years of clear improvement.’

Challenges for the operator will include keeping his finger on the pulse (he owns nothing except his knowledge of the market) and securing a balance between charter-in and charter-out.

The common challenge for all three is to be clear on his strategy for the future – for the charterer, having the right COAs and period charters; for the owner, spreading his risk in a good balance between spot and period charters with the right charterers; for the operator, developing a clear direction for the future.

Important for the future health of the dry bulk industry will be resisting the tendency to over-react – strong markets do not give players much time to take decisions. Seeking cover in a rising market can easily translate into paying too much in a falling market.

INTERCARGO’s particular concern is with the use of poor quality tonnage – ‘a strong market can be the saviour of the substandard’, says Holt. A charterer may be tempted to lower its normal chartering standards and secure a lower freight cost by taking a ship with a poor port state control record. He urges charterers to use the Equasis database as part of their ship selection process and to resist the temptations offered by cheaper vessels.

Click here for full details of Euromoney’s Shipping Finance Annual 2004/5

Click here for the full text of the Euromoney article

Contact: Bill Box