Dry bulk freight market conditions improved significantly in 2017 from a historically low base in 2016. Handysize and Supramax spot market rates averaged US$7,250 and US$8,880 per day net respectively in 2017, representing a substantial 46% and 52% improvement in average earnings year on year.
Following a similar pattern as in 2016, although at a significantly higher level, freight market indices experienced a short seasonal decline at the start of the year, recovery after Chinese New Year and a general strengthening thereafter. Handysize and Supramax spot market earnings in the fourth quarter reached their highest since early 2014.
Against the backdrop of reduced scrapping and increased fleet growth, the market improvement in 2017 was largely demand driven with stronger seaborne trade growth apparent across most dry bulk cargo categories. Stronger Chinese industrial activity drove robust growth in both major and minor bulks, and record South American grain exports underpinned stronger than expected global grain trades.
As significant as the improved market conditions are, the dry bulk market overall in 2017 was still in the bottom third of the 33 years since the dry bulk index began.
The global fleet of 25,000-41,999 dwt Handysize and 42,000-64,999 dwt Supramax ships grew 2.6% and 4.1% net respectively in 2017, and overall dry bulk capacity expanded 3.0% (2016: +2.2%) as much reduced scrapping outweighed the benefit of fewer newbuilding deliveries.
As expected due to the declining orderbook, newbuilding deliveries reduced to 4.7% of existing dry bulk capacity, the lowest level since 2003.
Scrapping reduced to 1.7% of existing dry bulk capacity and 1.6% of Handysize capacity due to the markedly improved freight market conditions.
The freight market improvement despite increased net fleet growth indicates that the recovery was demand-driven.
Even so, continued scrapping of older and poorly designed ships and limited ordering are required for further improved market conditions to be sustained.
The global dry bulk fleet continues to operate at below full speed, so there remains potential for effective tonnage supply to increase without adding new ships to the fleet.
Reflecting recent evolutions in ship design and the composition of the global geared bulk carrier fleet, we now refer to the Handymax, Supramax and Ultramax segments more generally as “Supramax” (as is the common practice in commercial shipping parlance), and we now consider 42,000 dwt as the cut-off between Handysize and Supramax.
Improved freight market conditions have supported sale and purchase activity and increased vessel values. Clarksons Research currently values a benchmark five year old Handysize bulk carrier at US$14.0 million – up 4% since the start of 2017. Newbuilding prices have increased 14% since the start of 2017 to US$22.3 million.
The gap between newbuilding and secondhand prices (and uncertainties over future design parameters) continues to discourage new ship ordering which will continue to benefit freight market fundamentals in the future.
Clarksons Research estimate dry bulk shipping tonne-mile demand in 2017 grew by 5.1% year on year (4.0% on a cargo volume basis), outweighing supply growth of 3.0% and significantly improving on demand growth of 2.3% in 2016 and 0.9% in 2015.
Stronger seaborne trade growth was apparent across most dry bulk cargo categories. In particular, stronger Chinese industrial activity drove robust growth in coal and iron ore imports and, more importantly for us, in the trade in minor bulks.
Global grain trade expanded more than expected primarily due to record South American grain export volumes. US coal exports improved strongly having bottomed out in 2016, and strong Atlantic exports overall drove Atlantic earnings to significantly outperform Pacific earnings during all four quarters of 2017. Longer trade distances also supported stronger global dry bulk seaborne tonne-mile demand.
Earnings in the Pacific peaked in October and declined in the fourth quarter, impacted by the onset of the northern hemisphere winter and Chinese anti-pollution measures taken to limit industrial output in advance of the National Congress.
The overall dry bulk orderbook stands at 9.8% compared to 9.5% a year ago, and the combined Handysize and Supramax orderbook has reduced to 5.7%, its lowest since the 1990s. New ship ordering in 2017 increased from a very low base in 2016. Most new orders were for larger Capesize and Kamsarmax ships. New ordering for Handysize and Supramax vessels remains at historically low levels, which bodes well for a better market balance ahead. Total dry bulk scheduled deliveries for 2018 are 37% smaller than a year ago, and actual deliveries are expected to be around 26 million deadweight tonnes compared to 38 million in 2017.