The shipping industry is experiencing the biggest dry bulk market recession since the 1980s. The uncertain global economic outlook and the increased imbalance between supply and demand have lead to historical low freight rates. The downturn seems to continue until 2017 if a viable equilibrium is not achieved.
The recent measures in 2013 which promoted the replacement of older tonnage with newer in combination with the Chinese financial backing provided to shipowners resulted in a large orderbook that made freight market to perform at very low rate levels. In addition, there is strong disappointment for private equity funds which invested large amounts because their expectations failed to materialize.
The limited growth on key trades in 2015 makes average bulkcarrier earnings to drop at around $6,500 per day. China, the world’s biggest dry bulk market, has decreased its coal imports at a significant level that cannot be recovered by other positive trades such as iron ore. Some shipowners have converted their newbuilding orders to tankers while others turned to pooling strategies in order to minimize their exposure.
As a result, the prices of second hand vessels and newbuilding orders have dropped by nearly 40% and 95% respectively. It is worthy to note that a 5 year old Capesize costs around $32m while only 35 new ship orders have been placed from Jan to May 2015. The demolition activity counts for 262 ships or 17.3m in terms of dwt until May.
The positive news are that the Baltic Dry Index has started to move upwards during June and the rate of demolition will limit dry bulk fleet growth up to 2,4% this year. This makes investors wonder if it is the right time to get in the dry sector. The market risk of such an investment is at its lowest point, therefore it might be the right timing to get involved in the game. The market is going to recover for sure but the question mark is when.
John Nikolaou, Financial Analyst