The dry bulk market in 2003

 Due to last, but for how long?

The freight market:
     Capesize - Panamax - Handymax & Handysize
The second-hand market:
     Capesize - Panamax - Handymax & Handysize

Twelve months ago we started our review of the dry bulk market with the heading �towards a brighter horizon?�, largely due to the fact that freight rates had tripled during the previous quarter, and we ended by stating �the future is always right!�. A number of factors could have had a negative influence on the dry bulk transport demand at that time: with the question of the world economic recovery, and principally the American one, being continually pushed back to a later date by the forecasters.

Some of the aspects that clouded the picture were:

• commercial trade had come to a standstill and for the first time in ten years showed no sign of progress,

• an imminent Iraqi conflict which nobody could predict the outcome,

• a drop in confidence on the part of American consumers, the mainstay of the economy, as well as that of managers and in consequence on investment,

• the persistent deep recession in Japan.

 However 2003 has been historically speaking a year of records for all sizes, with the dry bulk market hitting levels that have never been seen before. Time-charter rates reached and over several months remained more than $80,000 per day, even occasionally $100,000 per day on certain movements for modern Capesize, whereas rates for Panamax and Handymax reached levels of $40,000 and $30,000 respectively.
 

However 2003 has been historically speaking a year of records for all sizes, with the dry bulk market hitting levels that have never been seen before. Time-charter rates reached and over several months remained more than $80,000 per day, even occasionally $100,000 per day on certain movements for modern Capesize, whereas rates for Panamax and Handymax reached levels of $40,000 and $30,000 respectively.

The explosion of the freight futures market this year, which should continue to grow, was between $4.5 and $6 billion in 2003 as compared to $3 billion a year earlier, is also a sign that the players are facing a market which is unpredictable.

It would be presumptuous to try and give an exhaustive explanation to such a phenomenon. The shipping industry is above all cyclical and every 7 to 10 years there are peaks, followed by long depressions, of which the last peaks go back to 1988 and 1995.  However, these were not of the same amplitude as today�s one.

Certain elements leave one to believe that we have not yet reached the end of this growth cycle, which while it may experience some hiccups, could also, according to some analysts, continue for another 2 to 10 years - which illustrates the uncertainty of forecasting.

Amongst the causes that �explain� the year 2003, which are more prevalent and numerous than a year ago, therefore suggesting that the trend will continue, we can mention:

• commercial trade, according to WTO, was on the rise after a year of stagnation, and which should increase by 3% in volume over 2003, but 15% in value during the first half, and which should continue to expand by more than 4% in 2004,

• the enormous appetite for energy and raw materials in China to meet its sustained economic growth of around 9% in 2003 and forecasts of not less than 7% in 2004,

• this strong trend in growth could continue until 2008 at least, with the prospect of organising the Olympic Games being a showcase to the World: the Three Valleys dam, the development of the Chinese car industry, and the plethora of industrial investments which will require imports of iron-ore, of which China is a modest producer, and of coking coal,

• world steel production which rose to 864 million tons for the firsts 11 months of the year according to IISI sources, an increase of 6.6% over the previous year, but with important divergences by country. The Euro zone only registered an increase of 0.8%, whereas China can boast of an increase of 21% and broke the historic barrier of 200 million tons, over twice that of Japan, its immediate rival. China has thus become the largest steel producer, whereas in 1990 production was only 66 million tons, and helped contribute to break all records for world steel production. Analysts in the Japan Iron and Steel Federation even predict that Chinese steel production could reach 500 million tons in 2010! In this respect on December 15^th the lifting of duties imposed on imported steel by the Bush administration since March 2002 will alleviate trade and prevent a commercial war against the US which was being prepared by their trading partners,

• the investment projects of two steel giants Thyssen-Krupp and Arcelor in China to develop the mining potential. The reactivating of mining development projects in Australia for a total of $800 million in order to respond to future demand,

• the rise in price of nickel, zinc, copper, plus tight stocks and growing demand, mainly Chinese, will incite new developments in this sector and expansion should be concentrated within the Pacific zone,

• the more discrete emergence of India, both as importer and exporter. Following a recent study carried out by Goldman Sachs, India should surpass the US and Japan in terms of GDP in a handful of decades. The lack of infrastructure in this country and the size of its population should in themselves contribute to a growth in domestic needs for raw materials. Growth in steel production for example was 11.3% during the first 11 months, at over 28 million tons and is now bigger than that of Italy,

• the unexpected economic growth in the US, due in part to the lowering of taxes, the weakness of the dollar and an unswerving confidence by Americans in their economic policies. After wavering between recession and growth, the latter should achieve around 3% in 2003 and between 3.5-4% in 2004, it has hit 8.2% in the third quarter - its best performance over the last 20 years,

• 2003 also saw a growth of around 2.7% in the GDP of Japan after years of recession, and the recovery of South Korea, which had a more modest growth of nearly 1 %. For part of the year Japan underwent a prolonged shutdown of 17 out of 51 its nuclear power plants, which produce 30% of domestic energy needs, resulting in a large increase in the import of steam coal,

• even the Euro zone has revised its forecasts upwards, and France could achieve 1.7% in 2004, somewhat above the initial government forecast.

The combination of these factors should enable the upward trend that has prevailed throughout the last year to continue.

In respect of the dry bulk fleet, certain conditions have contributed to a reduction in available capacity:

• a small number of Panamax being delivered, only 20, for the first time in several years, and the moderate additions to the fleet for Capesize, which will also be the case for 2004,

• congestion in a number of Australian ports, mainly due to the volume of exports. As an example, Australian ports have exported around 215 million tons of coal in 2003 against just over 200 million tons in 2002.

2003 witnessed a dramatic revival of orders for Capesize on behalf of Japanese and Chinese owners. Mitsui at the end of the year announced the firm order for 30 ships, of which some were destined for the Chinese market.

Orders for Panamax and Handymax sizes were also omnipresent, with certain Chinese and Japanese yards being able to offer early deliver dates, due to a slack orderbook and thanks to ever-increasing gains in productivity.

Construction prices remained stable for the first half of the year before seeing increases in the third quarter. The price of a Capesize moved up from $40 million in January 2003 to nearly $50 million by the end of the year.

The size of the last Capesize ordered has varied on one hand towards over-Panamax coal carriers of 90,000 dwt, as well as a considerable number of big ore carriers of 200,000 dwt or more, whilst the standard size of 170,000 dwt is always in strong demand. The Chinese steel giant Baosteel even has on the drawing board a project for a ship of 545,000 dwt, but for which the feasibility has still to be proved. In the Panamax category, the �Kamsarmax� design of 82,000 dwt has also had significant success. The standard size of Handymax is moving more and more towards 60,000 dwt. The Japanese yard Mitsui took in orders for 43 Handymaxes of the �56� type in 2003.
 

The debate within the shipping community about the worthiness of introducing double-hulls, which should get decided by the IMO in 2004 with an application as from 2007, has been anticipated by a certain number of owners who have placed orders for such vessels, which require an additional 500 tons of steel for Capesize.

In the industrial sector, the weakness of the dollar risks to weigh heavily against European steel plants if it persists, and some companies such as Corus are going through a difficult period with results much lower. In face of the pull of attraction towards China, yearly negotiations for supplies by Japanese steel companies are likely to open in a tense atmosphere.

The main merger/acquisition took place in the aluminium sector, which after their abortive marriage two years ago, saw Alcan take control over Pechiney (previously first in terms of capital on the French stock market), and to become close competitor of Alcoa, the leader in this sector.
 

The evolution of freight rates over the year

The reference index of the Capesize market on the Baltic Exchange, the BCI, went from 2,993 points on January 2^nd 2003 to 6,734 points just before Christmas. This historic rise goes without comment! Apart from a slight correction during the first three weeks of November, freight rates followed a particularly strong upward curve as from September. These increases apply both to spot rates as well as time-charters.

A few examples can clearly illustrate this incredible ascent. On the classic iron-ore route from Brazil to China, the rates per ton went from less than $7.00 at the beginning of the year to achieve $17.00 at mid-year, and over $33.00 in October and end December, which were the two high points in the period. In the coal market the rise was slightly less spectacular. Liftings from Richards Bay to the Continent went from $9.00 in January to $11.00 in June to finish at $26.00 at year-end. In the Pacific we find a similar trend with rates for iron ore out of Australia to China at less than $6.00 at the start of the year only to finish near the $18.00 level in December.

Perhaps even more impressive were the time-charter equivalent rates, which illustrate the inexorable rise that was experienced over the last 12 months. Fronthaul trips for delivery to the Continent via Brazil with redelivery in the Far East started out at $24,000 at the beginning of the year, to climb to around $36,000 in June/July, and to finish at over $80,000 in October and November. By comparison, the same ships were obtaining 12-month rates at the end of 2001 of $9,000 per day.

The financial results of some operators are not however always in line with the tenor of the market, to the extent that certain contracts were made at the bottom, and moreover, to �relet� a vessel in a strong market is not always easy. As a result in the second half of the year, we saw an increasing number of fixtures for periods up to 5 years in order to balance out the excesses, either up or down. The 12-month time-charter rates, for modern ships went from around $18,000 per day at the start of the year to over $60,000 in December. Smaller and older vessels of the China SB type saw their charter rates go from $16,000 per day at the beginning of the year to $38,000 by the end. The extreme tightness of the Capesize market this year was on some occasions illustrated by the use of two Panamaxes to replace a Capesize on certain shipments, thus helping to bolster the market of the smaller sizes.

As to scrappings, there were very few since only 6 Capes for 0.731 million dwt went to the breakers. The historic highs for scrap prices were not enough in comparison to the attraction of the spot freights, which allowed owners of old vessels to achieve substantial profits. Thirty-five ships for 5.6 million dwt joined the existing fleet and the forecasts for 2004 are for 38 ships and 6.6 million dwt. Nonetheless, the 78 new units for 13 million dwt, which were ordered in 2003, could result in a tighter position in 2005 and beyond, if the rise in the dry bulk movements should run out of steam.
 

As predicted, the Panamax market saw an extremely limited number of new units enter the fleet in comparison to previous years and for those to come. Only some twenty vessels joined the ranks in this category in 2003. 2004, 2005 and beyond will see numbers greatly increased with 73 and 122 units anticipated. These figures however are expected to vary considerably as a number of contracts are concluded at the last minute and the construction time of a Panamax is only a matter of months between keel laying and delivery.

At the time of writing a number of recent ships have been fixed for one year around $32,000 to $33,000 per day, rates which seem ridiculous with respect to those at the beginning of 2003. At that time, a Panamax could obtain about $12,000 per day, compared to the end of 2001, when rates had dropped to around $5,000 per day.

The Panamax market, like the Capesize, benefited from the healthy performance of iron-ore and especially coal, but also from the continuous rise of other bulks mainly into China. Demand for bauxite and alumina should continue to increase in 2004, as well as the volumes being transported. Within the main bulk markets only cereal should stay flat or slightly regress over the next two seasons due to climatic conditions, for a quantity of some 204 million tons.

On the spot market important gains were recorded across the scene, with the grain route between the Gulf of Mexico to Japan doubling between January and December, going from $25.00 per ton to $50.00 per ton. The transatlantic route also improved by the same proportions going from $15.00 to $30.00. The poor harvests in Northern Europe due to the drought will have an effect on the zone, being traditionally a large exporter.

Demand from other bulks in the Far East and the active market of fertilisers out of the Baltic and Black Sea, enabled fronthaul rates to reach highs, as well as transatlantic round voyages, to increase from $12,000 per day up to $17-20,000, and to finish the year at above $30,000. The situation in the Pacific and the Indian Ocean offered even more spectacular opportunities within the coal trade, with rates for local trips jumping from $13,000 to $40-43,000 per day at the end of the year. Two years earlier, rates for modern ships on similar voyages were being concluded around $5,000 per day. What a way we have come!

As with the Capes, the figures for scrapping remain very low, with only 8 ships totalling less than 0.6 million dwt being demolished, compared to 24 a year earlier. A total number of 119 of ships have been ordered, and others will follow shortly, as there still remain some available berths for delivery in 2006. The number of orders is however subject to revision as some contracts are still to be confirmed.
 

As for the Panamaxes, this category of ship, which now extends up to 60,000 dwt, enjoyed a much more active market than during 2002. Sugar, scrap, coal and all that is traditionally included in this size of vessels are on the increase, based on available provisional sources. But it is above all the increased volumes of coal heading for India and China, plus iron-ore from Australia to China, which have had such an effect on the rates in the region.

Handymax rates on fronthaul voyages have gone from $11,000 at the start of 2003 to nearly $27,000 end December and ships of 50,000 dwt and more in the Pacific have climbed up to $25-26,000. In the same way the Handysize of 25,000-35,000 dwt have benefited from an extremely favourable market due to their scarcity. For example, a modern 28,000 dwt ship chartered for $5,000 at the beginning of the year finished at nearly the double. Period charter rates as with the Capes and the Panamax went rocketing, moving from $ 7,000 in January for a modern Handy of 28,000 dwt to $ 13,000 several months later, while as Super-Handymax (grabbed) saw levels for 12 months, shoot from $ 9,400 at the beginning of the year to over $ 28,000 end 2003 for short periods and $ 26,000 for 12 months.

Contrary to the Capes and Panamax, scrapping figures were not so much affected by the strong state of the market, doubtless due to the high number of old vessels which remain in this segment. 73 ships, as compared to 108 in 2002, were demolished. Deliveries this year should reach around 70 ships of 25,000 to 38,000 dwt and 63 ships over 50,000 dwt. A total of 359 ships is on order, but given the variety of building sites, delays, bankruptcies and the fact that some Chinese yards will not be able to honour all their orders, again cause the figures to be liable to fluctuation.
 

Prospects

 What factors could be a possible source of problems for conditions continuing as in 2003?

• the devaluation of the dollar, which has lost 25 % of its value compared to the euro in a year and, if it continues, it will have a negative effect of European exports, but it is difficult to see how it could affect developments of China in the short term.
• The steel agreement between the US and its partners is now behind us, but the monetary debate between the US and China, with the latter pushed to re-evaluate their currency, is still unresolved.
• A resurgence of the SARS virus or something similar could easily come to upset business and trade within the Asian zone.
• The major concern is perhaps, as outlined by Alan Greenspan, the amount of the American deficit, which has reached giddy heights and the debt which must sooner or later be reimbursed (but probably not in an election year) and could put growth at risk in the US.
• The Iraqi conflict, America getting bogged down there or the problems spreading to other adjoining states?

Notwithstanding and compared to a year ago, we can nonetheless state that the positive elements far outweigh the negative ones.

In line with freighting levels, prices obtained for the large bulk carriers did not stop beating record after record since the beginning of the year. Between January and December 2003, the average value of ships has appreciated by about 70 % and even more in some cases. No less than some 40 sales have been reported, of which some were for the same ship within an interval of several months.

The buyers? Once again the award goes to Greek owners with 50 % of the sales. Owners such as Lykiardopulo with 5 ships, or Overseas Marine, have distinguished themselves in particular. Just behind them is Bocimar, who purchased 5 ships of which the famous �H hull� initially ordered by Transmed for $ 36 million in June 2002, then resold for $ 38 million to Metrostar Management in April 2003, who then sold again the hull to Bocimar in October 2003 for $ 48 million, finally the latter reportedly committed the same ship to Ocean Longevity at a price of $ 60 million last October, but a final sale was however not concluded.

                                               January 2003           December 2003

150,000 dwt, 10 years                  $ 21 m                      $ 33-34 m
170,000 dwt, 5 years                    $ 30-31 m                 $ 48-49 m

This episode is very symptomatic of the crazy evolution of the market during the year. We have to go back to the years 1991 and 1995 to find anything similar. However the absence of any slipways available before 2007 in shipyards, combined with the excellent prospects for steel and energy needs in Asia and more particularly in China, is creating a situation which on the face of it, looks likely to hold at current levels, if not get even tighter. But for how long? Some project a positive cycle of several years.

Nonetheless, opinions can differ as to the correction more or less drastic, which could occur in the short/medium term. Being brokers we would only hope that the market calms down, which can only be beneficial to all players including owners. Chinese economic authorities are trying in turn to control from their side the surge of their GDP growth in order that it will stay firm and steady.

Faced with such a tense market, who can blame owners for preferring to charter out their ships on the spot market (up to $ 100,000 per day being achieved!) to the sometimes tantalising offers of buyers in search for tonnage. One thing is sure for the moment: all owners of a Capesize delivered in 2003 can congratulate themselves for their investment�

Outside of Golden Union and Metrostar, who benefited from the market take-off to resell their shipbuilding contracts at a more than comfortable profit, all owners who placed orders in the last two years have resisted the temptation for a quick sale and have turned towards chartering out.

Logically the number of ships sold for scrapping has remained quite modest, with only 5 ships being withdrawn from the fleet this year.

Three-quarters of ships sold in 2003 (31) were less than 10 years old, including the resale of ships under construction. Owners of older ships, already more or less amortised, have preferred in the manner of the owner Zodiac, to operate them and to collect over the year revenues that are sometimes greater than the book value of the ship.

2003 has therefore been an exceptional vintage for the Capesize market and prospects are still more than reassuring for owners!
 

What a year has 2003 proven to be. For those of us involved in shipping, it is times such as the past few months that we have been waiting and hoping for. Adjectives describing freight rates and ship values as �fantastic�, articles in the shipping press talking about �party times� and �owners re-writing the rules� can give some idea of what took place and still is taking place in the dry bulk markets.

In our last year�s annual review covering these sizes we were �expecting values to remain stable with a slight upward trend over the next few months.� We were correct for the first six to nine months of 2003, but, like most professionals in this industry, we were caught totally unaware of the dramatic increase of freight rates experienced in the fourth quarter of the year, which led to �booming� prices in all sizes and age categories.

At the end of 2003 second-hand values of dry bulk tonnage seem to behave in a similar manner as the stock exchange markets were behaving in 1999-2000. It is our opinion that prices will remain at such levels and will continue to record further gains should the chartering markets remain at such healthy levels.

Record prices were achieved on a weekly basis with �new benchmarks� lasting only for a couple of days - �today�s extremely firm price� became �tomorrow�s normal market price� and a few weeks later it was considered as �cheap�.

Prices across the board increased by 10 to 15 % during the first 8/9 months of the year and skyrocketed during the last 3 months resulting in an overall price increase at the end of 2003 which in some cases reached as much as 60 to 65 %.

A total of 341 ships reportedly changed hands during 2003, almost the same (330) number of transactions as during 2002. We also note that when looking closer at the three size segments, the number of sales is almost the same as the previous year.

• Panamax sales: 76 ships in 2003 against 70 ships in 2002.
• Handymax sales: 127 ships in 2003 against 117 ships in 2002.
• Handy sales: 138 ships in 2003 against 143 ships in 2002.

As expected at times of booming freight markets, nobody would like to sell for demolition and this therefore has led the number of ships reported sold for recycling during 2002 being significantly less than the those sold during the previous year.

• Panamax: about 0.3 million dwt were removed this year, 5 vessels, representing a decrease of about 66.6 % over the figures for 2002.
• Handymax: about 0.45 million dwt were removed during 2003, 11 vessels, representing a decrease of about 48.0 % over the figures for 2002.
• Handysize: about 1.9 million dwt were removed this year, 70 vessels, representing a decrease of about 10.0 % over the figures for 2002.

As freight rates increased on a daily basis, the number of ships offered for demolition decreased. This naturally led to a sharp increase of prices obtained per light displacement ton from buyers of such tonnage, which at the end of 2003 for a bulk carrier stands at about $ 270-275 per ton and could soon break the $ 300 mark if freights continue to increase or even stabilise at present levels.
   

• Panamax (55 500-77 000 tpl)

  A 10 year-old Panamax bulk carrier was worth about $ 19.0-20.0 million in December 2003, representing an increase of about 60-66 % over a period of 12 months, a 5 year-old Panamax bulk carrier was worth about $ 28.0 million, which represents about 65 % appreciation when compared to the value of one year earlier in December 2002.

• Handymax (36 5000 � 55 500 tpl)

  End 2003, a 10 year-old Handymax bulk carrier was worth about $ 16.0 million, representing an increase of about 50-52 % over a period of 12 months, a 5 year old Handymax bulk carrier was worth about $ 20.0 million which represents a 38-40 % appreciation when compared to the same period one year earlier in December 2002.

• Handysize (18 000 � 38 500 tpl)

  A 10 year-old Handysize bulk carrier was worth about $ 10.75-11.0 million at the end of the year, representing an increase of about 35 % over a period of 12 months, a 5 year-old Handysize bulk carrier is worth about $ 14.5 million which represents a 28-30 % appreciation when compared to how much it was worth one year earlier in December 2002.

* * *

Concluding this year�s review of the second hand dry bulk carrier markets, all parties involved in shipping, be it owners, charterers or brokers do not forget the basic laws of physics such as �What goes up, eventually comes down, and the higher it reaches the greater the fall ��. However the crucial question is not �Will the market come down?� but �When will it come down?�

If the world economic indicators available can be considered reliable, then we would expect the dry bulk freight market to remain at levels considered as very firm and we would not therefore expect bulk carrier prices to ease off any time soon.

In fact we would expect prices to firm further. So for those contemplating an investment in dry bulk tonnage the sooner this is undertaken the better it will be. Do not forget �Today�s extremely firm price becomes tomorrow�s normal market price and a few weeks later it is considered as cheap�.