The Dry Bulk Market is volatiled and directly related with the movements of supply and demand. During periods that the demand for shipping services exceeds the deadweight capacity, the market is moving up while during periods that the supply is higher than demand, the market is moving down. In oligopolies, the suppliers would try to control the supply dynamics in order to make sure that it will not exceed the demand, in such a way that their profits will remain viable. However, shipping –especially the deep sea market – is fully competitive and such synergies are not possible at all. Therefore, shipping is cyclical and high market days are followed by low market days or the opposite. This happens because when the market is profitable, Shipowners order more ships than what they scrap while the opposite happens during periods that the market is low. However, a depressed market contains opportunities, at least for those who focus on the new challenges instead of the old problems.
Dry Bulk Market Overview – 8 years of recession
After two years of significant strength and the historical high of the Baltic Dry Index (BDI) on May 20, 2008 which exceeded the 11,000 points, the dry bulk market fell over 90% from May 2008 through December 2008 reaching a low of 663 points. After this collapse, which mainly resulted due to the heavy financial crisis and not due to the shipping fundamentals of supply and demand, BDI recovered during 2009 and closed the year at 3,401 points while during this period it had reached a new high of 4,661 in November 2009, which was about 700% above the December 2008 lowest point. The charter market in 2009 was a good setting for a fundamentally more stable 2010, although the significant orderbook influx put pressure on overall fleet utilization which led the market into a new decrease the period after 2011. The excess orderbook which developed during the market growth of the previous years changed substantially all the market dynamics when the delivery of these vessels touched the market. As a consequence of the increased fleet capacity, the BDI experienced a severe pressure and its average for the period between January 2012 and December 2014 stood at 1,077 points, which is more than 50% lower as compared with the average of the period between January 2009 and December 2011. Market weakness intensified in 2015, mainly due to the sharp slowdown in drybulk trade, with a BDI annual average of 718 points which was the lowest since 1986. This slowdown continued and followed by a new historical low of 291 points in February 2016, when the steady growth of fleet along with weak global production, disruptions to cargo availability, low demand for commodities and lower bunker prices, all contributed to the further weakening in the freight market.
The dry bulk market has remained at about such low levels all during the 1st half of 2016 and it has been attributable to the heavy oversupply. In fact, the current levels of demand for dry bulk commodities looks unable to absorb the increased supply of approximately 155 million of new deadweight tonnage that has entered the market from January 2012 until the end of 2015, despite the almost record high scrapping levels and a high delivery slippage.
Investment opportunities: Time to buy new ships
As a result of the depressed market conditions and the poor prospects as well as a heavy orderbook the years after 2008, vessel values have also remained under severe pressure. Indicatively, as of December 2015, the value of a Japanese five-year old Panamax vessel with 76,000 deadweight ton carrying capacity has been reportedly decreased by about 30% compared to the same value in December 2014 ($14 million vs. $20 million) while it has remained at the same levels during the first half of 2016. Five-year old Japanese modern Handysize vessels of 32,000 deadweight ton carrying capacity were valued about 41% less on December 2015 compared to December 2014 ($10 million vs. $17 million) while their price has further decreased during the first half of 2016 down to about $9 million which is historical low. Despite the fact that such high decrease, affects the current asset value of all companies, it also creates new investment opportunities, especially for the shipowners who have available cash to invest or the ability to raise new financing. If we consider that the market has touched its bottom and also that the shipping market is cyclical, we would expect that the profit potentials are really high.
Chartering challenges: Enstrong your current relationships – Connect with new partners
During periods of severe market pressure, the companies’ profitability and viability is decreasing and thus the counter-party risk is increasing. On the other hand, new players find the opportunity to enter the market, take advantage of the market challenges and grow. In such periods it is useful (a) to cooperate more closely with your existing and tested business partners and enstrong your existing relationships (b) perform a stricter due diligence before you enter into a new contract with a new counterparty so as to minimize your risks and (c) look for new upcoming players and connect with them so as to take advantage of future contracts that they may have. People usually appreciate those who have stood by them during their first steps and helped them become stronger. On the other hand, this is the right time for a charterer/cargo owner to enter into a long time charter or contract of affreightment with a shipowner in order to take advantage of the very low freight rates and decrease their transportation costs. Of course, this may have the opposite result for the shipowner who will need to commit his vessel at a low rate, however will also increase the coverage of the fleet and will increase the contracted/secured revenue, which is very important for each company in order to ensure that its cashflow will remain viable.
Technological Challenges: Invest in new technologies & innovative services
Business environment is becoming technologically oriented and shipping companies cannot be an exception to this evolution. New technologies could assist a company have a better communication with the ship, control and maximize ship’s performance and connect easier with new customers. During a depressed market, a lot of companies prefer to cut such type of expenses as the first strategy to avoid potential losses; however such cuts should not be blind but evaluated beforehand. A today’s cost on such a new technological service or equipment may result to much more profits in the future. Furthermore, during these days of the bad market conditions the technological companies are offering their services/ technologies at a good discount, in order to increase their sales, therefore it seems that a depressed market is best period to invest in such innovative systems.
Operating Challenges: Keep your ship well maintained
A common mistake that a lot of shipowners are doing during a bad market is to minimize their operating expenses, something which in turn has a negative effect on the condition of the vessels. Bad maintenance will definitely result in lower quality on the services offered as well as higher costs in the future due to potential repairs. Those who keep their vessels in a satisfactory condition, without lowering the maintenance costs, will keep Charterers happy, build a better reputation and will avoid further future expenses. It is highly recommended that Shipping companies to keep on buying original spare parts in order to ensure the proper working of their machines and also keep any available guarantee in good standing.
After all, how long will the market remain depressed?
Despite the fact that a depressed market contains a lot of opportunities, a long period of recession may create various financial problems to the companies therefore, after 8 years of a very bad market, everyone is now wondering when the cycle is going to close and how long it will take for the good days to come. In order to evaluate, we may have a look on the supply and demand dynamics.
Those do not seem positive in the short-term since the current tonnage capacity, despite the record levels of demolition - is still well above the demand. However, the picture looks quite positive in the long term since the rate of supply growth is highly decreasing while the demand growth is stable or increasing; therefore the Supply/ Demand equation is improving. Specifically, the rate of growth of the dry bulk fleet (in deadweight capacity) is expected to be almost zero during 2016, while same was about 2% in 2015, much lower than the 4.4% of 2014, the 5.5% of 2013 or the relevant rate of growth during the period from 2009 to 2012 which appeared to be higher than 10%. On the other hand, the rate of growth is expected to be about 2.3% during 2016 higher than the 1.80% of 2014 but still lower than the about 3.4% of 2013 and 2014. Therefore, if the estimations are confirmed it is going to be the first year after such long period that the rate of growth of demand is going to be higher than the rate of growth of supply. Provided that the same sentiment will continue the forthcoming years are appearing to be more promising.
OpenSea Team has realized the current challenges of the shipping market and the upcoming needs of the chartering world and has developed an innovative tool which not only gives professionals the opportunity to find and fix new chartering business promptly but also provides useful market insights which help companies evaluate the short term & long term market dynamics in order to make appropriate and successful investments.