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The Dry Bulk Market – A Changing Horizon

August 11, 2015
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With rates up over the past seven/eight weeks, dry bulk owners, particularly Capesize, are breathing easier. Daily earnings increased by an average 45% month-over-month in July 2015. Dry bulk rates are exceed operating costs for the first time this year. In July, Capesize spot rates nearly doubled and approaching $20,000 per day (“p/d”) in early August. Panamax spot rates increased to an average $8,400 p/d (up 45% month-over-month), peaking at $9,400 p/d during mid-July.

On May 26th, we stated we saw the beginning of “Green Shoots” in the dry bulk market [See: Dry Bulk Shipping Market – “Green Shoots”, 5/26/15] . Since the middle of June, iron ore imports into China from both Australia and Brazil have increased significantly. By mid-June, Capesize ships saw an increase in cargoes loading in Brazil (Vale) [See: Dry Bulk – Short Term Positive, 6/24/15] and, by the end of June, the Australian iron ore market was producing at a staggering level. Rio Tinto iron ore exports hit a record run-rate of 360 mt. per annum. Rio Tinto, BHP and Fortesque have taken a page out of the OPEC handbook and focused on market share to eliminate marginal Australia production and even stress Vale (Brazil) [See: Dry Bulk Shipping Risks – A Concern, 7/18/15]. For the meantime, dry bulk shipowners are digging their own grave.

All is good (well, let’s say better), then again…

Dry bulk shipowners have a way of not understanding the concept of “Do No Harm”. Scrapping activity collapsed in July to only one Capesize vessel and 14 sub-Capesize vessels. The 15 dry bulk ships scrapped were the fewest number of ships scrapped in any month in almost five years. While better freight rates played a role, weaker scrapping was also caused by an increased in the supply of cheap steel from China into the Indian sub-continent, undermining the scrap market. One can expect that cheaper steel prices will continue to lower scrapping rates and thus increase Capesize net fleet growth. Further down the size chain, it is expected that net fleet growth will surge, underpinned by a strong schedule for Ultramax vessel deliveries. This is happening as sell-side analysts are becoming increasingly positive on the dry bulk market.

Investors should not bank on dry bulk shipowners to balance the size of the fleet to meet demand expectations. The structural issues will remain with the market, even with “Green Shoots” having emerged.

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