Ocean Transport: Dry bulk shipping’s future

   After hitting an all-time low in February, dry bulk shipping rates have more than tripled. The Baltic Dry Index—which reflects estimates for the cost of moving a variety of different dry bulk commodities in different size ships on a variety of routes—has climbed from a record low of 290 to more than 900 in early October.
   But does this augur good times ahead for the industry?
   Probably not for some time, according to an analysis by the Baltic and International Maritime Council (BIMCO), which says dry bulk shipping will only return to profitability by 2019 if shipowners demolish as much ship capacity as is delivered.
   “This is not an easy task, as the dry bulk shipping industry has only achieved zero supply side growth in three of the last 35 years,” BIMCO wrote in a recent article, adding that “many of the outcomes will be the same for the tanker and container industries.”
   Dry bulkers are a sizable segment of the overall shipping market. New York-based Genco Shipping & Trading estimated that in 2012, for example, dry bulk ships carried upwards of 4 billion tons of cargo, about a third of international seaborne trade.
   The Danish shipping bank Danmarks Skibskredit (Danish Ship Finance), said earlier this year in its Shipping Market Review, an update of which will be published in November, that iron ore, coal (both metallurgical coal and steam coal) and “minor bulk” cargoes (bauxite, aggregate, fertilizers, scrap, etc.) each accounted for 30 percent of the 3.9 billion tons of annual seaborne demand for dry bulk transportation last year, while grain accounted for the remaining 10 percent.
   Bulkers can also be used to carry breakbulk cargo such lumber and steel, and a report published by Drewry last month noted the operators of breakbulk and/or multipurpose ships are facing increased competition for that sort of cargo from both container operators loading cargo in containers or on flat racks and dry bulk shipowners.
   BIMCO said total dry bulk trade has grown by 40 percent since 2007, “largely driven by developing nations in Asia. The demand for dry bulk commodities has peaked in advanced economies, for instance demand from Europe, North America and Japan has not returned to pre-crisis levels and is unlikely to in the future.”
   The question, according to BIMCO, is “how close to the peak are the larger developing nations in Asia that have driven dry bulk demand over the last 8 years?” 
   China’s economic growth is slowing and its focus is “moving away from infrastructure, housing and heavy industry towards a consumer and service driven economy,” the group noted. “This transition has already hit China’s import of dry bulk commodities and will continue to play out in coming years.” In addition, several countries, including the United States, are reducing their use of coal to generate electricity.
   Just as  the container industry has turned to large ships to reduce the cost of transportation, a similar trend has occurred in dry bulk shipping, the most extreme example being the so-called “Valemax” ships built to carry iron ore from the mines of Brazil’s Vale, the largest iron ore producer in the world.
   Those ships can carry 400,000 dwt of cargo and 34 have been built since 2011. In March, it was announced that three Chinese companies had ordered 30 more of the leviathan vessels. When those deals are completed, half of Brazil’s iron exports will be able to be transported on the Valemax ships.
   Container shipping has become considerably more concentrated in the past decade, both as a result of organic growth by the largest companies and of recent mergers and acquisitions. Drewry notes the five largest container carriers—Maersk, MSC, CMA CGM, COSCO Container Lines, and Hapag-Lloyd—control about 54 percent of the world containership fleet. Back in 2005, the top five carriers had just a 36 percent share.
   Bulk shipping companies, by comparison, are much less concentrated. BIMCO says the largest owns less than 4 percent of the world fleet, and there are only 11 bulk shipping companies that own more than 80 dry bulk ships and only four with more than 100.
   “This means that each individual owner has very little influence and bargaining power with its customers and is often reflected in low levels of mutual trust,” said BIMCO. “Due to the small size of many owners’ businesses, today a very large part of dry bulk chartering continues to be done via brokers. This means that the relationship with the shipping customer is effectively owned by the broker, further weakening the negotiating capability of the owner.”
   At the same time, the organization it says there is mounting pressure from shippers to eliminate brokers and their commissions.
   As BIMCO points out, many shipowners have traditionally been more focused on making asset plays—buying ships cheap and selling them at higher prices—than on operating a fleet.
   While there are some dry bulk shipping executives that are less interested in playing the sale and purchase market and more interested in securing long-term relationships with shippers, BIMCO noted “they have been caught out by the length and severity of the downturn with most, if not all, of their long term charters now expired.”
   In addition, it says financing is becoming more difficult to obtain.
   Consolidation may be a way forward for the dry bulk sector, BIMCO suggests, predicting in the future there will be many larger companies in the industry that will serve as logistics providers to the commodity giants with a focus on risk management and return on capital employed, while small players may be limited to niche trades.
   If that occurs, “the large and frequent shipping cycles that made the asset play so profitable in the past will be dampened in intensity and reduced in frequency,” the group said.