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Dry Bulk – “Suicide is Painless”

November 9, 2015
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In August 2009, we stated in a letter to Shareholders and have commented on since, “We believe the [dry bulk] shipping markets represent a disaster in the making and if the ship has a propeller, it should be sold.” Long-term the dry bulk market is still in trouble, with few solutions for shipowners – and solutions available, shipowners are loath to enact. [“Suicide is Painless” is a line from the movie MASH. the dentist “Painless” recovers by morning. Dry bulk shipping’s survival will not be so quick or easy.]

Ten more Valemaxes are on the way. China Ore Shipping (“COS”) recently ordered 7 x 400,000 deadweight (“dwt.”) newbuilding Valemaxes. These seven of these vessels are being built at Shanghai Waigaoqiao Shipbuilding (“SWS”) for delivery 2017-2018. COS is a joint venture between China Shipping Group (“CSG”) and China Ocean Shipping Group (“COSCO”). The balance of the order is expected to be ordered from a yard controlled by China Shipbuilding Industry Company (“CISC”). The ships will be chartered to Vale in Brazil as part of a 25 year contract of affreightment (“COA”). As of the end of September 2015, by the end of 2017 nearly 50 million dwt. of Capesize vessels were due for delivery (i.e., approximately 16.0% of the Capesize fleet). An additional 4 million dwt. on the orderbook is not the solution for the dry bulk market and additional orders that may be forthcoming will not improve the dry bulk market.

The real problem for the dry bulk shipping market is that BHP Biliton (“BHP”), Rio Tinto (“RIO”) and Fortescue (“FMG”), the “Big Three” Australian iron ore producers have taken a page out of the Organisation of the Petroleum Exporting Countries (“OPEC”) playbook. The “Big Three” producers are raising output to peak production and prices are sagging, betting that they can pare costs per ton and boost market share while less efficient Australian and other global miners face closure. Last week, as a  result of peak production, iron ore sank below $50. This has occurred in spite signs that demand for iron ore and steel in China is contracting.

However, productive capacity is not closing, particularly among the “Big Three”. Production has hit historic levels. Cliffs Natural Resources Inc. Chief Executive Officer Lourenco Goncalves in an interview stated, “In their (the “Big Three”) imaginary world, 60 million tons of capacity will go offline this year, then another 125 million tons of capacity will go out of commission next year. That’s not the case. Everyone is driving down costs, everyone is trying to continue to cope. You’re not seeing any meaningful number of tons going offline”. (Source: Bloomberg L.P.)

With coal production contracting and iron ore production unsustainable, a reality wake-up call by the “Big Three” will ultimately lower future production levels and  make an already dismal market catastrophic. Shipowners need to initiate “out of the box” solutions. The only problem is that shipowners, financial institutions and investors are loath to enact non-traditional decisions. And while, Quantitative Easing in Asia and Europe will have a positive effect on the dry bulk market, its impact is essentially like “waiting for Godot”.


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