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Bulk shipping zippier than expected but profits still elusive

by April 8, 2016 General


Encouraging signs are emerging in the dry bulk shipping industry, which has been slammed by weak demand and an oversupply of vessels. The imbalance sent prices plunging, but on Monday the benchmark Baltic Dry Index reached 471, up 60% from the historic lows hit in mid-February.

Trouble is, even with an improving supply-demand balance driving the uptrend, profits remain hard to come by. Charter fees for large bulk carriers are still only 10% of the level needed for profitability.

Boats to China

An already weak Baltic index went into a steeper decline last September. The assumption was that China’s decelerating economy would continue to dampen demand for transporting iron ore, coal and other bulk commodities. A global glut of bulk freighters made matters worse, pushing down the fees paid by cargo owners and the charter rates paid to shipowners.

In September, Japanese bulk shipper Daiichi Chuo Kisen filed for bankruptcy. In March, leading Norwegian bulk ship operator Bulk Invest was forced into insolvency.

The conventional wisdom in the industry has been that China’s slowdown is the No. 1 challenge, according to Yasumi Kudo, chairman of top Japanese shipper Nippon Yusen. Many industry experts figured that for the market to recover, the Chinese economy would have to regain momentum.

Lately, though, China-bound shipping activity has been brisker than anticipated. The country’s iron ore imports in February rose 8.3% on the year.

Additional infrastructure spending was proposed at the National People’s Congress in March, raising hopes that domestic steel demand would pick up again. China accounts for two-thirds of the world’s iron ore transactions.

In March, capesize bulk carrier contracts rose 12% on the year. These vessels are typically used for iron ore and coal.

Dropping anchor

Meanwhile, efforts to curb the glut of ships are starting to pay off. In January, shipping companies in Asia and Europe began suspending some of their bulk carriers, including capesize ones. Large vessels can be seen anchored off Singapore and other major seaports.

Worldwide, the oversupply amounts to about 100 large bulk ships, out of 1,650 in total. As of the end of March, 80 to 90 ships were sitting idle.

Nevertheless, industry insiders are not convinced that the storm has passed. The supply of bulk carriers is expected to increase this year, compared with last year, and there is no telling whether demand will be sufficient. The profit problem is as vexing as ever.

Yukio Toriyama, a director at Japanese shipping company Kawasaki Kisen, warned that it will be awhile before the bulk carrier market makes a full recovery.
Source: Nikkei