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Dry Bulk Market Review 2017 – Was it a recovery or just a good break?

Do you remember our market analysis almost one year ago, when we tried to predict the market trends for 2017? It looks like the market moved into this direction and it also outperformed our expectations. After approximately two very bad years when the market touched historical low levels, a moderate market improvement started during the 2nd half of 2016 and in 2017 we saw again the growth rate of demand for shipping services (ton-mile trade) to supersede the fleet growth. Consequently, the BDI, as shown in graph 1, experienced high improvement, stabilized above the 1,000 points and reached its highest point at 1,727 points during December 2017 which is the highest since December 2014 when it had reached the 2,330 points. Therefore, the freight market returned at much healthier levels especially during the second half of the year increasing the positive prospects for 2018.

Graph 1: Baltic Dry Index (BDI) 2012 - 2017

Graph 1

Overall, earnings across all bulkcarrier sectors averaged at $10,986/day during 2017, a six-year high yearly average, with the highest point of the year in December 2017 at $14,297/day which was a 8% m-o-m increase and a four-year high. Average Capesize earnings increased 19% m-o-m to $23,737/day reaching the highest level of the year in December 2017, while its average yearly earnings was estimated at $13,475/day, the highest average earnings since 2013. Average yearly Panamax and Supramax spot earnings also reached a 6-years high during 2017 at $10,570/day and $10,680/day respectively, while their highest rates were met in October at about $13,500/day. Finally, the handysize market experienced its higher earnings since 2014 with a yearly average at $8,087/day (basis 28k dwt vessel) while it approached close to the $10,000/day at its highest level during October 2017.

We see that the market rates experienced a considerable improvement giving some positive prospects for the future. But what are those facts who helped the dry bulk market rates show such increase?

Seaborne trade growth boosts market

After a zero growth during 2015 and a very small of about 1.60% in 2016, seaborne trade grew with almost 4% during 2017. Coal and grains led this jump, followed by iron ore. All these three major bulk commodities experienced a growth of about 5%, while, on the other hand, the minor bulk trade grew with about 2%.

Global seaborne coal trade has experienced a 5-year peak in 2017 and such increase was one of the main reasons of the market recovery. Coking coal trade has experienced the fastest growth since 2013 with an estimated rate of about 4% to around 255mt. This largely reflects improved steel industry profitability in a number of countries, which have increased their steel production following a 30% decline in Chinese steel products exports in 2017, as a result of various steel industry reforms in China. For example, total European seaborne coking coal imports are estimated to have grown by approximately 7% in 2017, which is the fastest pace of growth in the European continent’s coking coal imports since 2010. Same picture in the thermal coal industry where the seaborne trade is estimated to have grown by around 6% in 2017, the fastest since 2012. This largely reflected firm growth in imports into China and other Asian countries. China’s imports are estimated to have grown with about 7%, mainly supported by the cuts in the domestic coal output. Furthermore, South Korean imports grew by about 16% to reach 117mt in 2017, reflecting the disruption to nuclear power generation and a substantial increase in coal-fired power generation capacity. Imports into other developing Asian countries such as Malaysia, Vietnam and Pakistan have been supported by rising demand for low-cost fuel as electricity demand grows rapidly.

Iron ore seaborne trade is estimated to have grown by about 4% to 1,477mt in 2017, driven by robust increase in China’s iron ore imports following 2017’s steel industry reforms. Brazilian and Australian seaborne iron ore exports grew by about 3% to total 380mt and 828mt accordingly in 2017, supported by increased output from mining projects, including Vale’s S11D mine in Brazil and the Roy Hill mine in Australia.

Seaborne trade in grain products also grew by about 7% to about 516mt. Such growth is mainly attributed to a jump of the soybeans trade which improved by about 14%. It is notable that soybeans seaborne trade has almost doubled during the last decade from about 79 million tons in 2008 to about 153 million tons in 2017. Wheat/coarse grains trade also improved after its exports were supported by firm production and a record global harvest. Global wheat and coarse grain stockpiles at the end of the 2016/17 crop year reached 523mt, the highest on record and equal to around 145% of its annual seaborne trade during 2017, while the increased consumption, which followed, has brought the stockpiles down.

On the other hand, minor bulk trade, after a slow-down during 2015 and 2016 has now increased by about 2% mainly attributed to the growth of bauxite and scrap. Scrap metal trade, which was remained steady for a number of years, is estimated to have grown by about 9% to total 111mt in 2017. This largely reflects significant growth in scrap metal trade on key routes from North America and Europe to countries such as Turkey, the world’s largest scrap metal importer, and other steel-producing countries such as South Korea. Furthermore, Chinese regulations and environmental restrictions have reduced China’s ability to process some scrap, with China’s scrap metal exports growing from almost zero in 2016 to about 2.2mt in 2017.

Table 1: Dry Bulk Trades (in million tons)

Table 1

Source: Clarksons

Newbuilding deliveries: Less is more!

In 2017 newbuilding deliveries reached a 10-year low and this helped the fleet growth to remain lower than the annual increase rate of the seaborne trade, despite the fact that the demolition activity was almost half than in 2016. As shown in table 2, fleet grew with about 2.9% to 817.2 million dwt with the new deliveries being 20% less than in 2016. Despite the fact that the demolition activity was almost 50% less than the demolition in 2016 (since the lower scrap prices and the improved freight market were negative factors for scrapping), the fleet growth still remained lower than 3%, though it moved higher than the fleet growth of 2016 (i.e. 2.2%).

Table 2: Fleet Growth (in million dwt)

Table 2

Source: Clarksons

Supramax (including handymax & ultramax) bulkers experienced the higher fleet growth with about 4%, Panamax and Capesize followed with about 2.7% each, while the Handysizes were the type of bulkers with the smaller fleet growth during the year. Despite the fact that Supramaxes experienced the highest fleet growth, we saw above that they were those also with the highest market freight rates showing that they are the vessels which absorbed a big proportion of the increased seaborne trade due to their extreme versatility resulting from their size and their overall technical characteristics.

Bulkcarrier Fleet Development

Source: Clarksons

Improved Macroeconomic Indicators

World economy in general and most of the seaborne trading nations, in particular, have shown signs of weak recovery during 2017. World GDP is estimated at 3.7% for 2017 which is the highest since 2011 and improved as compared with the 3.4% of 2015 and the 3.2% of 2016, though it still remains below the 30 years historical average (which is around 4%). Both the developing and the advanced nations have experienced a GDP Growth (4.7% and 2.3% respectively up from 4.4% and 1.7% in 2016). Middle East countries, Australia and India were the only countries which have shown some y-o-y GDP slowdown in 2017. On the other hand, USA, Europe, Russia, Africa, Brazil, Argentina have shown high GDP increase of much higher than 0.5%, while China and other emerging Asian countries have experienced of slight improvement of about 0.1%.

Furthermore, global steel production has experienced a high improvement with a growth of about 5.3% during 2017; which is the highest annual growth since 2010. Except of Japan which experienced an estimated slowdown of about 0.1%, the steel production in all other producing countries grew and especially in China (the largest producer in the world) production is estimated to have increased by about 5%.

Graph 2: Steel Production 2010 - 2017

Graph 2

Finally, Industrial production which is an indicator showing demand for raw materials has also improved considerably during 2017 in Europe, China and Japan. Industrial production in the European Union, surged by 3.3%, higher than the 1.6% in 2016 and the highest growth rate since 2010. The highest growth since 2010 has also appeared in Japan with an average industrial production surge of about 4,63%, much higher than the average of 0.44% during 2016. Last but not least, in China the average Industrial production growth was estimated at 6.5%, higher than the about 6% in 2016 and the highest increase since 2014.

Will this market recovery last? What are the initial prospects for 2018?

Despite the positive growth during the year, the high market volatility still exists and the BDI experienced another slow-down during the first two months of the year probably as a result of the New Year Holidays in January and the Chinese New Year holidays during February. The BDI dropped up to 1,082 points during February 2018 which is 37% lower than its highest point of 2017. This drop brought a confusion to market participants who wondering of whether the 2017 growth was an actual recovery or just a break (market peak due to volatility). Despite the fact that we cannot reply with much certainty, it seems that all indicators remain positive:

  • · Dry Bulk trade is expected to remain steady with a growth at around 3% during the year.

  • · The new deliveries are expected to be about 10% less in 2018, as compared with 2017 and this percentage will most likely be even higher due to slippage. Also, the orderbook is decreasing making the expected new deliveries even less in 2019.

  • · Approximately 9% of the dry bulk fleet has an average age of older than 20 years old while in handies this is even higher. This, along with new regulations (e.g. ballast water treatment) may increase demolition activity during the year.

  • · Even if we assume that the demolition will remain at levels similar with 2017 and there will be no slippage, the fleet growth is expected to be less than 2.50%.

  • · World economy is expected to remain firm and we could probably see a small improvement in the GDP at around 3.9% mainly supported by a higher growth increase in Australia and South America. Though, a possible slower growth in Europe, China and Japan may have some negative impact in the market.

It looks like the market sentiment remains optimistic. In this positive environment OpenSea keeps growing and has already reached a portfolio of 3,300 clients, including a few large companies with whom we have started to work on pilot projects. Nowadays, we also explore opportunities in the US market and we are preparing for the first round of venture funding. Therefore, stay tuned since the best is yet to come!

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