Outlook for dry cargo

At the end of 2007, the Dry Cargo Department had 43,584 known ship days for 2008. The high rate levels at the end of 2007 have been used to increase the cover of known ship days, which at the end of the year was 78% for this year.

 

NORDEN expects a strong dry cargo freight market in 2008, with an overall performance exceeding the average for 2007. At such high levels, even minor fluctuations in supply and demand can cause major changes in freight rates, and the volatility is therefore expected to remain significant. A clear example of this was seen in late 2007 and early 2008, when the Baltic Dry Index dropped from just over 11,000 to 6,000 in two months. The main reasons for this was the cancellation of a number of iron ore transports from Brazil and Australia and the closing down of a number of Australian coal mines due to flooding. It is assessed that the fundamental demand remains strong, and rates may therefore see a renewed upturn if these infrastructure-related problems are solved.

 

NORDEN’s high degree of coverage at 78% for 2008 gives the Company considerable protection against such volatility.

 

The net increase in the global dry cargo fleet is expected to be 7.1% in 2008, more or less in line with the growth in demand, which is expected to be approximately 6% (source: R.S. Platou).

 

The growth in demand in the dry cargo market will remain driven by the growth in world trade, and consequently the global economy in general. The US economy seems to be slowing down, but with interest rate reductions and a more lenient fiscal policy, the slow-down is expected to be relatively mild and short-lived. The Asian growth economies are still expanding rapidly, and the IMF in 2007 assessed that China and India both contributed more to global growth than the USA did. As the growth economies have become bigger and their internal trading has grown, they are deemed more able to withstand the economic downturn in the USA than was previously the case. As the dry cargo market is primarily dependent on the building of infrastructure and the industrialisation of Asian economies, the demand for bulk commodities from these countries is expected to continue its positive trend in 2008.

 

The main contributors to the growth in demand are in 2008 once again expected to be steel-related products and coal. Global steel production is expected to increase by 7% (source: IISI) and global coal consumption by approximately 7% (source: R.S. Platou). Both are historical highs. The Chinese economy will continue to play a central role, although the growth in other South-East Asian countries also contributes significantly. For 2008, China’s GDP is expected to rise by 10.0% and India’s is expected to rise by 8.4% (source: IMF). China’s imports of iron ore are expected to contribute to the dry cargo market with an expected growth for 2008 of 12.5% (source: R.S. Platou). As the Indian economy grows, the country will increasingly consume its own iron ore rather than exporting it to China, and Chinese imports will therefore primarily be sourced from Australia and Brazil.

 

A trend that has become increasingly important to the dry cargo market in the past few years is the longer transport distances. In recent years, China has significantly increased its imports of raw materials and sought to do so from nearby countries. However, in the years to come these countries are expecting to a greater extent to use their raw materials in the countries’ own industrial production, and China is therefore expected to secure its supply in other ways. This will happen by a combination of importing from more far-off countries and directly buying resources where they are found, e.g. in Africa and South America. This trend is expected to have a positive effect on the demand for dry cargo tonnage.

 

The increase in coal consumption is also driven by China and India. 56% of India’s consumption of energy in 2006 was generated by the country’s coal-fired power plants. For China, the corresponding figure was 70% (source: BP). Both countries, which used to be self-sufficient, have in recent years begun importing significant amounts of coal, primarily from Australia, Vietnam and Indonesia.

 

The net increase in the global dry cargo fleet is expected to be 7.1% in 2008. A factor of uncertainty in relation to the fleet’s growth is the effect of conversions of old single-hulled tankers into bulkcarriers. The soaring dry cargo rates combined with the prospect of single-hulled tankers being phased out after 2010 has prompted some shipowners to convert their tankers into bulkcarriers. There are reports of up to 70-80 conversions of vessels of varying sizes on order, but as the process is a complicated one which relatively few shipyards are able to perform and there is no spot market for such vessels, it is uncertain how many vessels will actually be added to the dry cargo fleet, and when. However, NORDEN assesses that the number will be considerably lower than the reported 70-80 vessels.

 

The scrapping of vessels has been limited in the past four years, and as long as rates remain high, the number of scrappings is not expected to increase significantly.

 

As a result of the high freight rates in 2007, the contracting activity rose markedly and the order book – expressed as a percentage of the existing fleet – doubled during the year, standing at approximately 54% of the active fleet at 31 December 2007. This level is historically high and means that the net addition to the fleet in 2009 and 2010 will be above 10% p.a. An important question will be whether the vessels on order will in fact be delivered according to plan, however. The rapid global order book building has largely taken the form of orders of vessels from new – primarily Chinese – shipyards with little or no experience in building vessels. This, in combination with the occurrence of major shortages of qualified labour and key components and the fact that it has become more difficult and more expensive to finance vessels, may result in delays or cancellations of some of the orders.

 

The increasing fleet growth is expected to create a downward pressure on rates. Consequently, the market performance in the slightly longer term is expected to be dependent on continued growth in demand and the amount of scrapping of old tonnage. Almost 30% of the dry cargo fleet is now in excess of 20 years old, and if the freight market stabilises at lower levels, many of these old vessels are expected to be scrapped, which may cause the imbalance between tonnage supply and demand to be redressed more quickly.