Drewry warns against false dawn in dry bulk

London, UK, 21st May - Dry bulk shipping will have to dig itself in for a long recession, according to Drewry Shipping Consultants. In its quarterly Dry Bulk Forecaster, published this week, Drewry notes that the nauseating descent in market indicators seems to have reached the bottom. However, the few signs of recovery are mostly temporary while the heavy orderbook will weigh the sector down for several years to come.

“There are encouraging signs in the market, but these are offering temporary relief rather than the promise of sustainable recovery,” observed Jaya Banik - Editor, pointing out that the orderbook still needs to be trimmed. She said, “Orders are being deferred or postponed but not cancelled in sufficient numbers. Scrapping in 2009 will exceed the last five years put together, but deliveries will still be double that figure. Even though new ordering has come to a near-complete halt, the present orderbook promises fleet growth at an average annual 8.7% for the next five years. Clearly that needs to be reduced significantly if we are to see any serious recovery prior to 2012.”

The first quarter of 2009 did see a number of government stimulus packages targeting infrastructure projects. These are expected to increase steel demand and there are some suggestions that this could mean as much as 200 million tonnes of extra demand worldwide. Unfortunately, Drewry has calculated that the market would need five times that amount – or an extra 1,000 million tonnes of dry bulk demand per year – to service all the new ships that are being built. These initiatives are concentrated in Asia and in developing countries. In Europe and the US, the focus of government aid is on projects to encourage consumer spending.

We expect seaborne trade in 2009 to be 6% lower than in 2008, as global GDP is expected to fall by 1.6%. This suggests that the economic effect on the global economy is multiplied four-fold in the dry bulk trade. This ‘multiplier effect’ is felt even more strongly when it comes to freight rates, which are down by more than 50% in nearly every segment of the dry bulk sector.

Optimism in the first quarter was encouraged by the unexpectedly high volumes of iron ore being imported by China, which imported a record 130 million tonnes after smaller steel-makers concluded their supply contracts. The result has been a stockpile that is approaching the record of 73.88 million tonnes set in September last year. A similar story has happened in the case of coal, but neither increase is sustainable until China’s overseas markets recover – and there is no sign of that for the time being.

Drewry predicts that demand levels this year will drop by 11%, while the fleet will grow by 4%. Next year the figures are +6% and +13% respectively and 7% and 17% in 2011 (based on the current orderbook). This produces an increasing balance (that is the dwt difference between supply and demand) of 105 million dwt in 2009, rising to 140 million dwt in 2010 and 200 million in 2011. The balance is not expected to narrow until 2014; indeed, rough estimates suggest that the increase in trade needed to balance the predicted supply growth is in excess of 1,000 million tonnes per year for the next three years and over 2,000 million tonnes per year from 2012 to 2014. That would be an extra 40% volume in 2010, an extra 55% in 2012 and an extra 60% per year from 2012 to 2014.

If the still-widening balance is to be restored by reducing tonnage, the fleet would theoretically need to lose an average 35% per year to 2014. Unfortunately, the rate of confirmed cancellations has slowed in recent months. We fear that this is shipowners taking a very short-term view of the market after recent rises in the BDI.

Drewry has plotted the path of this downturn against the lesser downturns of the past two decades. In line with classic economic theory, rates do not turn significantly upwards till trade growth exceeds fleet growth. Current projections suggest that this will not happen until 2014. But before owners prepare for a five-year recession, Drewry believes things might not be that bad. As the recession forces owners to swallow the bitter pills of premature scrapping and newbuild cancellation, and as the stimulus packages announced by national governments, the EU and the G20 take effect, supply and demand could move towards balance rather more quickly.

“We believe that the recent recovery in the BDI is a short-term phenomenon and the market is likely to remain extremely volatile for the next 12-18 months,” added Jaya Banik. “The overall trend is for a further weakening as the glut of newbuildings takes to the seas. We do not expect to see any sustained improvement in demand before 2011, with rates only starting to make a comeback in 2012.”

“Drewry Dry Bulk Forecaster” is published 4 times a year by Drewry Shipping Consultants Ltd. An annual subscription to the Forecaster is.

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It is also possible to purchase a copy of the latest edition (1Q 2009)

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For further information, please contact:

Jaya Banik - www.drewry.co.ukwww.drewry.co.uk

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