THE YEAR 2004 ENDED AT HISTORIC HEIGHTS with never before seen (or even believed possible) Capes earnings levels of over $ 100,000 for the average of the 4 time-charter routes, Panamaxes at over $ 50,000 and Handymaxes at a less impressive but nevertheless respectable $ 33,000 daily. Thus this year started on a note of euphoria but with an undertone of scepticism. November and December 2004 led into 2005 with huge port congestion on top of accelerated liftings of iron ore by European and Far Eastern steel mills in anticipation of price rises.

The Chinese steel industry was again the moving force behind most of the market movements this year. The end of the year pressure on the steel makers by the suppliers forced the steel industry to accept a huge (+71 %) increase in iron ore prices. Destocking and surely some readjusting and retrenching by the importers thereafter led to a significant fall just after the New Year, dragging down Panamaxes and Handysizes before bottoming out in February, March and April when the air had cleared and stock piles had to be rebuilt.



Congestion continued to play a major role in the exaggeration of the market movements. As the year progressed, the major suppliers increased their throughput, maximising their profits, but at the same time releasing tonnage from inefficient port delays and this had the effect, when combined with the summer slow down, of pushing all the markets down. During the month of August freight rates have reached their lowest levels of the year, with Capes down by 80 % compared to January, to just over $ 20,000, Panamaxes lost 70 % to $ 10,000 and Handymaxes 60 % to $ 12,500, demonstrating volatility that has never before been experienced in the dry cargo market. The Chinese authorities announced, with all their weight, an intentional cooling of their steel industry with rationalisation and mergers to attain economies of scale as national policy, but to the bulk market it seemed to indicate the end of the iron ore boom.



Confusion reigned during the early summer as the traditionalists saw a return to the 'usual' and pointed to the onslaught of deliveries of 30 Capes, 44 Panamaxes and 55 Handymaxes in the first half of the year as the reason that the inevitable had happened. A closer analysis led to a different conclusion which astute charterers realised and took advantage of by fixing long term freight cover at rates resembling pre-boom periods.

The imbalance of supply over demand, as it turned out, was more a function of a limited throughput in the major iron ore ports. As the Australians and Brazilians increased their throughput to meet the ever present demand, the excess tonnage was again absorbed and the Cape market led the others to a mini boom throughout the fall; Capes tripling to close to $ 60,000, Panamaxes doubling to the midtwenties and Handymaxes -less concerned by the iron ore gyrations- moving up to close to $ 20,000 per day. Indian iron ore exports and coal imports have also provided a healthy push to the activity in the Panamax and Handymax sectors.




The tension on oil prices surely played a role in market volatility, but unlike previous years, where bunker price increases automatically correlated with market increases, even as we saw huge price increases (from $ 160 per ton of IFO 380 to over $ 300 per ton), the markets started to fall from the beginning of November.

Other factors, psychological and physical, continue to make the traditional supply and demand analysis less conclusive in anticipating and understanding the dry cargo markets. Freight traders now control more market tonnage than traditional owners; using risk management tools like freight derivatives, they have a greater tendency to anticipate and encourage market swings as their profits lie not in a return on investment, but in buying freight low and selling it marginally higher.

The mergers of the major bulk freight buyers continued, whether it be in steel, energy, cement or coal trades. Because these bigger groups require and can offer a longer term perspective, adding to the memory of burnt fingers from being too exposed to a spot market, much more long-term period activity was apparent and long term contracts were again the vogue which we hadn't seen since the early eighties.



As the year ends, iron ore price negotiations, and particularly the open question of whether the Chinese really will have the appetite for another 40 million ton increase in imports is debated, there is clearly again the weight of the remaining 29 Capes, 45 Panamaxes and 43 Handymaxes delivered in the second half of the year, coupled with less congestion weighing on markets and sentiment which has brought the dry markets back down to close to summer levels.



Nevertheless, a number of elements will influence the next few years.

There is a regain in vetting and non acceptance by the charterers, shippers and insurers of overaged tonnage. There could be some scrapping as opposed to 'none' for the past few years. The shipyards are full until the end of 2008 and new-building prices seem to be less elastic as the yards suffered from steel price increases and are still enjoying a strong demand so they are not ready to offer significant discounts.

India is no longer a potential player, but has added at least 20 million tons of seaborne trade this year and the Middle East is already gearing up to add new long haul traffic.

The bulk markets seem to be less opaque with communication tools and the internet giving quicker access and more information availability to all participants.

Continued volatility with less pressure during the first half of the year seems to be the outlook, but the Chinese are holding their cards very close to their chests and there could be serious tonnage movements once iron ore prices have been concluded. But whether it will be enough to absorb the remaining 222 Capes, 206 Panamaxes and 238 Handymaxes on order is hard to imagine until well into the year.

THE DRY BULK SECOND-HAND MARKET

The second-hand market for Capesize bulk carriers
In 2004 we ended our article by stating 'that at the end of the year a distinct bullish trend was still clearly perceptible'.

In practice, this tendency carried on up until the end of the first quarter 2005. For ships with early delivery dates, prices have been pushed up by the 'IPO' buyers (mainly Greek), provoking some operators to declare their purchase options, which they had in their long term charters, in order to be able to make a quick sale and to enjoy comfortable profits.

This enthusiasm was reflected in February and March, with record price levels being recorded (between $ 84 and $ 85 million), with the sale of a Capesize of 170,000 dwt, built by Hyundai in 2004, to Greek buyers, and two other Capesizes of the same tonnage, built in Japan in 2002 and 2003, (the price of these two newbuildings being $ 81/82 and $ 82/83 million respectively). It is interesting to note that orders for new ships to be delivered in 2007 were being negotiated in January at between $ 57 million (for a unit built by Shanghai Waigaoqiao) and $61 million (for a ship on order at Hyundai).

Second-hand prices peaked in the month of March and April 2005, before sharply dropping in correlation with the freight market. They have continued to slip, up until the end of December.

As an illustration: in December 2004, a Capesize of 170,000 dwt, 5 years old, built in a good yard, was valued around $ 65.4 million, then revised to nearly $ 73.5 million in April 2005 (+12.5 %), before seeing its price drop to $ 57.5 million at the end of the year (-21.8 %).

Older units have experienced even more important price fluctuations. Ships of around 165,000 dwt, built in 1995, were being negotiated for $ 50 million in January 2005, after which their values went up to around $ 55 million in March/April (+10 %), but in December they were no longer able to find any buyer willing to spend more than $ 36 million ('34.5 %).

Similarly, a 15 year-old unit of 150,000 dwt, valued at $ 39 million in January 2005, saw its price reaching $ 43.5 million in March/April 2005 (+11.5%), before dropping to $28.75 million at the end of the year (-34 %).

Although freight rates rose strongly between August and October 2005, the second-hand values continued to drop, owners had anticipated that this rise would only be temporary and were therefore waiting for the eventual adjustment of ships' values in line with freight rates.

With the value of ships continuing to slide at the end of the year, even though freight rates can be considered at satisfactory levels for owners (in comparison to the historic averages before the freight explosion at the end of 2003), there are a certain number of questions being asked about the future.

In practice, in terms of tonnage capacity, there are no less than 220 Capesize ships (80,000 dwt or more), with a total capacity of around 36.4 million dwt, which will be delivered during the course of the next four years. We can mention, as a corollary, that the orderbook for Panamaxes is slightly over 200 ships with some 15.5 million dwt. In 2005 scrappings of Capesize ships were virtually inexistent.

It is therefore justified to question the ability of the market to absorb all this tonnage.

Port congestion could perhaps come into play again as an adjustment factor and, if it returns to the record levels (achieved in 2003 and 2004), would reduce the effective tonnage supply, cause freight rates to rise and thus affect ships' values. However, in China, ports are getting equipped and the shipbuilding capacity is increasing significantly.

Will therefore the dynamism of China and India, which are today the main source of growth for our markets even though they have recently become more moderate, be sufficient?

The second-hand market for Panamax, Handymax & Handysize bulk carriers
'For all of us in shipping, 2004 will be the year we shall remember for a very long time' and 'second-hand prices for Panamax, Handymax and Handysize bulkers might behave in a much more volatile manner than the past 12 to 24 months and as such any investment in this sector should be pursued cautiously. The other face of the coin, would of course be to capitalise on the present very high values and sell any tonnage purchased at much lower levels'. These were statements we made in our last year's annual review of this segment of the dry bulk carriers sale & purchase market. Looking back to what happened during 2005 we can safely say that these statements proved to be rather correct.

As usual, prices for second-hand tonnage followed the freight market increases and when freight rates started to firm during the first few months of the year, buyers outnumbered sellers and we witnessed several occasions with buyers offering, negotiating and concluding purchases without inspecting vessel or her class records. The successful flotation of many companies, controlling and operating dry bulk tonnage, in the U.S. capital markets (Dryships, Diana Shipping, Excel Maritime, Eagle Bulk Shipping, Quintana Maritime) seeking to acquire modern vessels within a specific time frame, kept prices at historical highs.

Less modern vessels had their moments in the spotlight, with even 20 year-old ladies securing prices about 200 % to 300 % more than the levels paid when purchased less that 24 months earlier on!

Demolition sales remained very few and prices very high at about $ 340-350/ldt for vessels heading for demolition in India and Bangladesh.

Freight markets started to cool off, during the second half of 2005, resulting in a substantial correction by the end of the year. A number of companies planning IPOs have put their plans on hold or called them off all together as the U.S. capital markets seem to have taken a break in their appetite for additional 'shipping stocks'. This resulted in potential buyers becoming more selective and cautious in their approach towards acquiring ships, which led into negotiations that lasted longer and on many occasions resulting in 'Can again secure for sale at reduced levels as previous sale failed' scenarios.



Comparing second-hand values, for the various sizes under consideration, at the end of 2005 against those at the end of 2004 we've noted that:

A 10 year-old Panamax bulk carrier was worth about $ 23'24 million, representing a decrease in value of about 25 % over the past 12 months, and a 5 year-old Pana-max bulk carrier was worth about $ 29 million, which represents about 27 % depreciation when compared to the value of one year earlier in December 2004. These are the values at year end, but it is worth noting that during April/ March 2005, when the 'heat was on', these vessels of 5 and 10 years old, were worth $ 45 and $ 37'38 million respectively which, compared to end 2004 / beginning 005, represented a 12.5 % and 22 % increase within a few months.

A 10 year-old Handymax bulk carrier was worth about $ 20'21 million, representing a fall of about 16 % over a period of 12 months, and a 5 year-old Handymax bulk carrier was worth about $ 26 million, which represents a 16 % depreciation when compared to the same period one year earlier in December 2004. Once more, these are what the values were at the end of the year, so if we look at what happened during April/March 2005, we note that, 5 and 10 yearold Handymax bulkers were worth about $ 35 and $ 26 million respectively which, compared to end 2004 / beginning 2005, represented a 13 % and 4 % increase within a few months.

A 10 year-old Handysize bulk carrier was worth about $ 19 million, representing an increase of about 18-19 % over a period of 12 months and a 5 year-old Handysize bulk carrier was worth about $ 25 million, which represents a 16 % appreciation when compared to how much it was worth one year earlier in December 2004. It is interesting to note that this is the only size that has recorded an appreciation over the past 12 months as opposed to the Panamax and Handymax sizes. This can be explained first by the fact that most selling interest is focused on the larger sizes therefore creating the volatility mentioned above and then because this is the size with the lowest newbuilding orderbook, therefore these ships are a 'rare species' when compared to the other 2 categories. As such any buyers seeking to acquire Handy bulk carriers with an age of 10 years or younger are prepared to offer a higher price than a year ago. 'Supply and demand' all over again.

So we have come to the end of a second record year in a row in shipping. What's next? Is it over? As always, no clear answer can be found and all analysts involved in shipping will be trying to 'read' the world economic data and the supply and demand situation, which is fundamental in all markets. But, more importantly, everybody will be looking closely at the Chinese economy, which has been a driving factor for the dry bulk markets over the last few years.

We believe that second-hand prices for Panamax, Handymax and Handy bulkers will experience a stronger volatility over the next couple of months before they settle. Whereas we could easily say that the secondhand bulk carrier market over the past 24 months was a sellers' market, it is definitely no longer so and we can now safely call it a buyers' market. Ships remain unsold much longer at the prices asked for by their owners and they are finally sold only once significant discounts are achieved. Buyers no longer chase vessels, nor do they fiercely compete with each other and, naturally, there are far less buyers per ship on the market for sale than a year ago.

So if you are a buyer: inspect and be ready to offer once the time is right. If you are a seller of a ship you have had for some time now, offer your ship for sale realistically pricing it, (meaning perhaps 5 to 10 % less than what you believe she is worth), this way you will definitely find a buyer, otherwise you will be stuck with it. Today's 'low' price may prove to be a 'very firm level' a few months down the road. If you purchased your ship over the last 12 months and are thinking of selling, be patient and don't do anything irrational. Instead, inspect with a view to purchase at a lower level so as to lower your 'average' acquisition costs.

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Shipping and Shipbuilding Markets in 2005

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