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Key Drivers |
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The chief drivers for the use of bulk carriers are the iron ore, coal (thermal and steel making) and other commodities like bauxite (for aluminum production), agricultural produce, etc. Out of these, trade is iron ore and coking coal is relatively volatile as steel production is strongly linked with a nation’s economy. Thermal coal trade (for power generation), agricultural cargo and such items don’t fluctuate much as they are essential items. |
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During the ‘bulker boom’ from 2006 to 2008, China was the main driver, due to its high demand for iron ore. Post Olympics and the subsequent economic downturn, iron ore trade reduced considerably. It has later picked up again, but the dizzying heights of the bulker boom won’t be reached anytime soon. In the long term, India and China, apart from the developed nations are expected to drive the demand for bulkers. |
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Bulker Fleet Overview |
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The dry bulk carrier fleet consists of over 7000 vessels amounting to more than 420 million tonnes (DWT). The fleet has expanded rapidly from 2006 up to mid 2008, and is expected to expand further due to the large number of orders. The bulk carrier fleet is a relatively young one, due to the recent boom in deliveries, with more than 60% of ships under 20 years of age. In the Handysize segment, however, more than 60% of the fleet is older than 25 years of age. |
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The dominant vessel type in the bulker segment is the Capesize, accounting for nearly 1/3rd of the world fleet by DWT, followed by Panamax, Handymax and Handysize.
The Indian bulker fleet represents only 1.2% of the total bulk carrier fleet by DWT. Of this the coastal shipping consists of about 10% by DWT and the rest of the ships ply in overseas trade. The average age of the coastal fleet is nearly 23 years, whereas that of the overseas fleet is 19 years.
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Dry Bulk Market |
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Oversupply of fleet resulting from an overoptimistic perception of China-led growth put the global dry bulk segment in jeopardy. The Baltic Index, which indicates the state of the dry bulk market, fell from a high of 10,144 in May 2008 to 506 in December 2008, but had recovered to 3951 in June 2009.
This was due to the twin effect:
Oversupply of tonnage
Decrease in dry bulk trade due to global slowdown |
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Bulker Orderbook Analysis |
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The global dry bulk order book reached about 65% of total fleet as on October 2008, with the order book for capesize fleet reaching nearly 100% of the current fleet. Handysize orderbook on the other hand, is only 38% of the orderbook. With the prevailing low freight rates, and no sign of a major increase in the near future, there is a strong likelihood of order cancellations, particularly in the larger vessel sizes. Ship owners, who have benefited from high freight rates during the boom time, will be unwilling to acquire more bulkers. They would prefer to cancel the orders and pay the contract termination penalty, especially in those cases where the construction has not begun in the shipyards. |
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As a result, majority of shipyards in Korea, Japan and China face the prospect of large scale order cancellations in the bulk carrier segment.
Indian shipyards don’t have the orders for building post panamax vessels. This could be to their advantage, as bulk carriers in small sizes appear to be the most resistant to the effects of recession. Most of Indian orderbook is much below Panamax size, and hence, these orders might not be cancelled. Currently there are 50 bulk carriers on the Indian shipyard orderbook, amounting to 2.7 million DWT. The average size of these carriers is in the Handymax range (54,000 DWT), and 16 of these vessels are in the Handysize category. |
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Future Outlook |
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In the short term, the picture looks bleak. However, there are small signs of recovery. Chinese iron ore demand has picked up again. There has been a slight upturn in Bulk Carrier freight rates, especially in the small size vessels.
Moreover, several companies are still acquiring bulk carriers for their captive use. These include some companies from India. Indian manufacturing sector is not severely hit by recession, due to a strong domestic economy, which is not heavily linked to US and Europe.
It is expected that the smaller size vessels – handysize and handymax will have the potential to tide over the recession.
This can be due to the fact that Handysizes/Handymaxes are typically used for the minor bulks such as cement, sugar, salt and fertilizer - global essentials that remain in demand even during a severe economic downturn.
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Also, the small size of these vessels means that they are often the only type that can service certain ports – making substitution with larger ships impossible. In addition, outstanding orders for handysize vessels equate to only 47% of the existing fleet – the smallest of any segment of dry bulk ships. The average age of the handysize fleet is 18 years. Some 41% of vessels are already more than 25 years old and will likely be scrapped over the next few years – especially if rates do not rebound. If all vessels are delivered (unlikely, in our view) and all vessels over 25 years are scrapped, the net capacity increase over the next 4 years would only amount to about 6%.
In the long term the bulk segment is expected to recover, but not reach the heights of 2007. The current downturn is the most severe since the 1980s and could last as long. Fortunately, this downturn has come after the longest upturn in bulker history (2002 to mid 2008) and hence, the shipping companies have the amassed profits which might help them see off this phase. |
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Bulker Segment: Meteoric rise, total collapse then some hope |
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| A bulk carrier, bulk freighter, or bulker is a merchant ship specially designed to transport unpackaged such as grains, coal, ore, and cement in its. |
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The Rise |
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Around 2007, the bulker market shot up. China was preparing for its Olympics and there was a massive demand for iron ore, cement, and hence Dry Bulk carriers. Ports were congested in Australia - the chief exporter of iron ore, leading to large delays in deliveries. This resulted in even more demand for bulk carriers. Cargo space aboard these ships was at a premium, the freight rates were at an all time high. |
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This situation was expected to continue for a few more years, and many shipyards were booked to capacity with orders for bulk carriers. The immediate demand for these ships resulted in the second hand price surpassing the newbuild order price for bulk carriers. Speculators entered the market to capitalize on the high demand, and also added to the new build orders. |
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The Fall |
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Post 2008 Olympics, Chinese iron ore demand fell. In addition, the sub-prime crisis in the US, led to the collapse of several financing institutions in the US, and this chain reaction resulted in a global economic downturn - the worst since the Great Depression of 1929.
Suddenly, nobody wanted to transport iron ore, cement, etc. Demand fell all over the world, and bulker freight rates nosedived.
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The bulkers ordered during the boom, were nearing completion and there was excess tonnage in the market. At the beginning of 2009, the picture was uncertain. The freight rates were low; operating a bulk carrier was not viable. There was no demand for additional bulkers, which the shipyards were building and also, the financing of the ongoing newbuilding projects was also uncertain. |
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Hope |
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Chinese demand has picked up again. There has been a slight upturn in Bulk Carrier freight rates, especially in the small size vessels.
Moreover, several companies are still acquiring bulk carriers for their captive use. These include some companies from India, which is not severely hit by recession, due to a strong domestic economy, which is not heavily linked to US and Europe. In addition, at least 1 bulker segment - the Handysize, seems to have escaped the recession, as the Baltic indices in small vessels have shown some gains.
This can be due to the following reasons:
More recession resistant – handysizes are typically used for the minor bulks such as cement, sugar, salt and fertilizer - global essentials that remain in demand even during a severe economic downturn.
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No substitution - the small size of these vessels means that they are often the only type that can service certain ports – making substitution with larger ships impossible.
Smallest order book –outstanding orders for handysize vessels equate to only 47% of the existing fleet – the smallest of any segment of dry bulk ships.
Oldest fleet -the average age of the handysize fleet is 18 years. Some 41% of vessels are already more than 25 years old and will likely be scrapped over the next few years – especially if rates do not rebound. If all vessels are delivered (unlikely, in our view) and all vessels over 25 years are scrapped, the net capacity increase over the next 4 years would only amount to 6%.
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