Although the Chapter 11 bankruptcy filing of a number of American steel companies of which Bethlehem Steel is the most noteworthy had a relatively small impact on the volume of ore transported by sea, the world economic environment dictates the rules for steel operators. According to the International Iron and Steel Institute, American production in 2001 has dropped back by 10.9 % as compared to 2000. Production in the E.U. was down by 2.7 % and the two heavyweights - France and Germany- were respectively down by 7.7 % and 3.4 %. At the same time India saw its production rise by 1.4 % and Japan’s dropped by 3.4 %, but Asia registered a combined production of 332 million tons namely 4.0 % higher as compared to 2000. Once again China showed itself to be a major player with production reaching 141 million tons.

In 2001 world crude steel production totalled 823.9 million tons against 829.6 in 2000. Given the uncertainties in the international scene, the result is remarkable.

In the light of these figures one is tempted to conclude maybe a little hastily that the fall in freight rates was the result of an excess of tonnage on offer. This impression needs to be tempered somewhat. One of the highlights of this year was the merger, after that of British Steel and Hoogovens in 1999, of Usinor, Aceralia and Arbed to give birth to the number one steel company in the world with a production capacity of 45 million tons. Other steel companies are following as a merger between NKK and Kawasaki has been announced.

Whilst awaiting the outcome of the big merger, as well as doubts about the world demand, an important volume of contractual cargoes was not covered. Elsewhere the necessary adjustments to production and stocks were done at the last minute, on a step by step basis as the American economy slipped into recession, as Japan went deeper into its stagnation, and with the slowing-down of activity in Germany.

Finally, suffering from a double monetary constraint and the high freight rates of 2000, Japan and more especially China relocated their ore supplies from Australia at the expense of Brazil, thus reducing the volume in tonnes-miles transported. This situation prevailed right throughout 2001.

Elsewhere world demand for coal, despite rising regularly, has also seen some changes. As for ore, the Asian economies switched increasingly to Australian or Chinese coal, at the expense of South Africa and America. To illustrate this, in the first nine months of 2001 South Africa exported 5.9 million tons towards Asia as compared to 11.8 million tons for the same period in 2000.

Steel companies have not been the only ones to merge. The Australian mining company BHP and the South African Billiton have created one of the biggest world groups. In the cement industry the merger between Lafarge and Blue Circle has created the biggest world force in this sector with a production of 14 million tons. The German Heidelberg Cement with its purchase of Scancem are close on their heels. Grain companies got into the act with the purchase of the American Continental Grain by its compatriot Cargill in 1998. There are others who have been left aside in this consolidation as can be witnessed by the bankruptcy of the Swiss André.

This process could not leave the shipowners totally indifferent. Their response came quickly as already in November 2001 the English ABC-Zodiac (ABC being already the product of a merger between P&O/Shougang) and the Belgian Bocimar announced their union, giving rise to the largest world Capesize owner with 80 ships (bearing in mind that the total Capesize fleet is 656 ships). The creation of very large Panamax or Handymax owners has not yet occurred, but it is true that these markets are much more dispersed.

We are therefore seeing a globalisation of the market with a small number of players but with increased influence. At the same time freight has become a commodity like others that one can buy and sell spot and term, giving birth to a new type of operator specialised in Capesize and/or Panamax in certain geographical zones or trades, such as SwissMarine or Enron (whose bankruptcy is only a blip in this evolution). The recent period when a contract was wide open, now seems something of the past. Nowadays for each charter, a dozen owners at least (luckily not always the same) propose variations of a theme. In this respect the growth in the market for buying and selling freight ‘futures’, provides a host of possibilities for hedging or making other alternative complex coverings.

The nearly instantaneous knowledge of ship’s positions, the rapid circulation and the abundance of information paradoxically can complicate getting to the basic essentials. In order to remain in the game, it is now more than ever crucial to be part of the initiated few.

It is true that after an euphoric 2000, 2001 pales in comparison and the facts are there to back this up. However the rationalisation of the market, which began several years ago, has quickly accelerated and only a more positive economic situation will lead to improved freight markets.

Values then flattened out between March and April. They rose strongly up to the end of June when they literally collapsed until September, before steadying out at a level well below last year’s. One only needs to look at the fluctuations in freight rates to find the reasons for these dramatic variations in prices.

As always the oldest ships were the most affected, whereas modern units tend to gain less in rising periods and lose less in falling ones.

There were some 26 sales for further trading (comprising 16 ships delivered from 1990 to 2001 and 10 built between 1981 and 1989.) Eight ships built between 1969 and 1978 were demolished this year amounting to 1,043,000 dwt, whilst 34 ships were delivered totalling 5,769,000 dwt.

For a fully classified ship and in good condition, the following values were applicable:

January 2001 December 2001
150,000 dwt built in 1995 about $26 / 27 m about $18 / 19 m
150,000 dwt built in 1990 about $19.5 / 20 m about $14 / 14.5 m

The consolidation in the market, reinforced by the setting up of the Cape International pool, does not prevent some strong crosswinds from blow-ing. Even if at year’s end it seems to be calmer with a slight rise in the freight rates, the tendency for ship’s values are declining as there are big uncertainties within the world’s economies.

Construction prices should not rise next year which will have a direct repercussion on values of the most recent ships. In a poor market, it is always preferable to renew one’s fleet by a newbuilding rather than by acquiring a modern second-hand ship with immediate availability.

The drop in the yen if it continues its path pursued at the end of the year, should incite Japanese sellers to be more flexible on asking prices for their ships financed locally. Values expressed in dollars should therefore suffer.

It will take a real and solid recovery in freight rates together with a renewed revival in growth prospects for second-hand values to be able to move up substantially. If the hopes are less muted at the end of the year, the reality remains stubbornly subdued even if in a thin market like the Capesize, changes in situations can sometimes be quicker than expected.

While deliveries took place, demolition was very slow to follow. The world economy did not continue with the same vigour, to say the least, Japan still cannot get out of its decade long recession, Far Eastern economies again walking a tightrope, the European Union slowing down and we now have an U.S. economy officially declared as being in recession since March this year, resulting in decreasing industrial production figures.

The effect of all the above was, as expected, a severe downward pressure on freight rates which, as one would anticipate, put ship values under pressure. Values softened across the board for all types and age segments of the dry bulk carrier market.

The youngest units too, experienced similar downward pressure on their values as the yards started to look for new business and were expected to become more aggressive, trying to secure new orders by offering attractive prices and terms.

All this was already happening when terrorists struck the U.S.A. on September 11th.

The uncertainty and speculation of what the future may bring, has become the number one preoccupation in everybody’s mind which, in the shipping industry just as with every economic activity, translates itself into "inaction, do nothing, wait and see".

As one would anticipate, the above mentioned factors had a negative effect in the second-hand sale and purchase activity resulting in a lower number of successful transactions in all sizes. The number of reported sales during 2001, when compared to those for 2000, yield the following:

• 26 % less Panamax sales (40 vessels in 2001 against 54 during 2000)
• 31 % less Handymax sales (48 vessels in 2001 against 70 during 2000)
• 23 % less Handy sales (77 vessels against 100 during 2000)

The Greek shipping community still had a leading role amongst buyers this year, although the number of reported bulk carrier sales to Greek buyers was half (59 ships) the one recorded in 2000 (120) and about one third of 1999’s figure (158). The much publicised listing of shipowning companies on the Athens Stock Exchange did not happen this year although we understand that the legislation is in place. It may take a while before any company attempts such a listing and definitely not in an exchange, which after having gone through "a very drastic correction" has also been suffering from a long "bear" period.

Chinese buyers made their presence felt this year, by doubling the number of ships purchased, 19 ships as opposed to only nine during 2000. Similarly Norwegian buyers were reported to have purchased 17 vessels versus only seven in 2000.

As 2001 is drawing to an end, second-hand dry bulk carrier values continue their downward trend at a slower pace and many feel that we may be very near the bottom of this cycle. The result is an increase in the willingness of prospective buyers to inspect vessels, that are being offered for sale, even if most are of the opinion that prices may drop somewhat further before they pick up again. An apt example of this is the number of interested parties, 16, who inspected in Argentina (not on the Continent) earlier in December 2001 the ‘Panagiotis A’, a 1995-built 71,500 dwt Panamax bulker. She has been reported sold to Greek buyers, Angelicoussis, for a price in the region of $13.4 million. This is $100,000 more than the reported price for which the ‘Maratha Memory’, a 1997-built 72,000 dwt vessel, was sold only a week earlier! Is this a "blip"? Could it be the proof that we have indeed reached the bottom? Or, is it just because competition was fierce and not seen since 1999? We do believe that it is a mixture of all the above.

The Japanese yen has weakened further this year and at the end of 2001 has reached a three year low ($1 = yen127) if this trend continues, and according to exchange rate specialists, it may well do so considering the dire state of the Japanese economy, there may be a greater number of vessels being offered for sale from Japanese shipping companies. This together with the fact that prices will be considered as very near the bottom may well "kick start" second-hand sale & purchase activity.

Among a total of 48 ships were reported sold during 2001:

• 23 % (11 vessels) built in the 90’s of which one was built in 1990 and the rest after 1994.
• 54 % (26) built in the 80’s of which 10 after 1985.
• 23 % (11) built in the 70’s.
• As opposed to the Panamax sales, few en bloc deals were reported and even fewer involved long period charter back arrangements to the sellers.
• Chinese buyers made their presence felt by inspecting and offering on 80’s built ships calling to China.
• This is the size of vessel that the former principal of Golden Ocean (the VLCC shipping company that was taken over by Frontline) chose to make his comeback in shipowning by purchasing the ‘Bara’, a 1998-built 42,000 dwt unit, from Louis Dreyfus Armateurs, for a reported price of $14.5 million including a four year time charter back to the sellers.

The value of a 10 year old Handymax bulk carrier 12 months ago was about $ 11.5 million, whereas at the end of 2001 it is estimated at about $8.75 / 9.0 million representing a 20 % drop in value, a five year old vessel of this size currently stands at about $12.5 million, about 19 % less than what it was worth ($15.5 million) in December 2000.

Our feeling is that for this size of ship we are very close to the bottom, however there have not been any recent end-of-the-year sales to indicate a reversal of this downward trend, but this may be just around the corner. So if one is considering investing in a Handymax bulk carrier, one should actively be inspecting such vessels in order to be ready to "move" once one feels "the time is right". It will not be too long…
 

Concluding this year’s review of the second hand bulk carrier market, the majority of the Panamax and Handymax deliveries is behind us and prices are at levels similar to those of early 1999. The world economy is experiencing a recession after many years of expansion, but economists are forecasting a recovery in the second half of 2002. The reasons evoked for this recovery include the level of interest rates, which are at record lows, generous financial stimulus in the U.S. (tax cuts, emergency spending following the 11th September attacks…) amounting to about $375 billion and lower oil prices. The recovery may come more rapidly if all the above has a stronger impact. Confidence and sentiment will revive faster than expected.