Prospects for continuing solid demand means big bulk carriers may be milked for some time to come.

August 14th, 2003 22:00 GMT

Published in WEEKLY

Geoff Garfield London

Strong fundamentals make capesize and panamax bulkers potentially profitable punts for the “savvy shipowner”. But a surge of orders could rapidly change the outlook, warns a leading bank.

Tight vessel supply and increased deadweight demand mean freight prospects look firm, says the research and strategic planning department of DVB Nedship Bank NV.

Both subsectors of shipping appear to offer investment opportunities, says DVB in a new report, “The Bulk Carrier Market Outlook”.

Those currently milking their capesize herds for up to $40,000 a day (see story this page) are unlikely to dispute the bank’s optimism. DVB says there are sound reasons to believe the run can continue. Even so, owners swayed into ordering newbuildings could be caught out by the next freight-cycle dip, which is projected for 2007.

For the time being, however, average six-month time-charter rates for capesize bulkers have increased by 77% for the first five months of 2003 and now stand at $24,698 per day. This compares with an average $13,900 in 2002, says the report.

It highlights one forecast that in 2004, dry-bulk deadweight will grow by 4.8% to 276.7 million dwt because of the booming steel industry. However, it is then that time-charter rates across all dry-bulk segments are projected to peak.

Stronger bulker earnings have lifted both secondhand and newbuilding prices. However, only marginal short-term firming is now expected. Surplus yard capacity should subdue price hikes longer-term. “Six months into the current upswing, newbuilding prices are still 30% lower than at the same point in the cycle during 1995 but on a par with prices seen during the 2000 cyclical upturn,” DVB said.

So far, bulk-carrier orders lag behind the strong improvement in freight rates and owners’ appetite for tanker newbuildings.

Sven Oldendorff and S Riaz Khan of DVB say political events may distort market projections but the Asian economies, particularly the new “locomotive”, China, will continue to be the driving force behind bulkers.

Chinese steel output increased by over 30 million tonnes (mt) last year to exceed 200 mt, while Japan recorded almost 108 mt, its highest steel output since 1990.

This spurred the 20 mt global rise in iron-ore consumption in 2002 to a record level. Chinese consumption is projected to rise by another 28 mt through 2004.

DVB, whose shipping operations are led by Dagfinn Lunde, lists various reasons why Chinese iron-ore imports should remain buoyant — including difficult domestic mining conditions and ore quality — but questions how long its strong steel industry can sustain demand.

Asian coal consumption is projected to grow at an average of 4% year-on-year and imports in 2007 could breach 400 mt, up 33% on 2000.

The bank points to a “real opportunity” for Chinese owners to expand on the capesize front, where they only control 55 vessels. Overall, the world capesize and panamax fleets will not meet forecast demand from charterers unless the Japanese change their five-year restriction on tonnage age for coal contracts.

In summary, DVB says projections point to sustained high growth for the three main commodities of iron ore, coal and grain between 2003 and 2006.

Grains are expected to see average growth of 8.5% in the period year-on-year, well ahead of iron ore and coal (2.4% and 1.7%). “But considering the high volume behind [iron ore and coal], firm demand for bulk carriers can be expected,” adds the report.

By 2008, capesize demand is expected to reach 108.1 million dwt, overtaking handymaxes at 107.6 million dwt.