Beyond the normal supply-demand imbalance

Beyond the normal supply-demand imbalance

Regular Splash contributor Panos Patsadas gives readers his take on dry bulk’s collapse

It was only a few months ago that many key figures and analysts of the dry market, openly shared their optimism on the outlook of the market for 2019. And rightfully so. All the signs were there that the worst had been over. Secondhand sales were booming, capes and kamsarmaxes were trading at healthy levels covering opex and leaving a healthy return, and a slow but steady scrapping activity, all pointed towards recovery.

For the first time in years, the seasonal slowdown during Chinese New Year was seen as somewhat of a formality, and everyone expected the market to resume straight after from where it had left off. Only for the market to prove everyone wrong once again. There are a number of factors in my opinion that have led to the recent collapse that can be summarized in three categories: trade factors, compliance, and last but not least strategic positioning.

Trade specific factors, would include Vale’s dam disaster, pulling out demand for some 40 capes over the next year, China’s import restrictions on Australian coal (as well as the reduction in US coal imports vis a vis the trade war) and other similar actions or events that will one way or the other affect short term confidence and demand in the dry market. Although such factors cannot be predicted, they are to be expected as part of global trade, and players have learned to adapt to them on short notice. So, I personally do not think these factors are the ones to blame for the recent collapse.

What is more alarming, and is creating a damaging uncertainty, is the compliance factor and the 2020 deadline on the sulphur cap. Shipping reducing CO2 emissions has been on the agenda for a long time, yet the approach to it has changed fundamentally. Initially, better fuels were to be the solution to the problem, and although met with some resistance, it was finally accepted as a fair compromise. Then scrubbers came into play, and the whole burden was shifted to the owners, to fit their vessels with the technology and comply with the 2020 deadline. The will to serve a greater cause prevailed, and owners started fitting their vessels with the new technology. And while this is a work in progress, three major trading/transiting hubs, China, Singapore, and Fujairah have now all limited the use of of open loop scrubbers. All in a matter of three months, with probably a few more to come. If you were the owner of a bulk fleet, and were preparing for the 2020 deadline, would you rush to take action, or would you wait to see where this whole game is headed? Owners already paid for fitting their vessels with open loop scrubbers, and despite an average investment of $2.5m to $4m per vessel, they are now being told they cannot trade in Chinese ports, or call Singapore, or Fujairah. This factor alone is making owners hesitant in taking quick action, and at the same time prevents charterers and operators from committing to long-term charters. How can operators commit to vessels to cover their annual requirements and contracts if they do not know what vessels they can use and where? They can’t! And the bigger part of the answer lies here I believe. Of course, China leading the game by banning open loop scrubbers in its waters has already hinted it has the solution, and will provide the quality of fuel it allows vessels to burn in Chinese waters; but that’s just a part of China’s greater influence in the world market.

Last but not least, the newbuild and S&P activity over the last year indicates that we are going through a more general restructuring of the market, with some owners strategically limiting their exposure to the dry market, or divesting at the expense of the dry Fleet. Greek owners have historically managed to read not just the markets, but more importantly the change in times. Being Greek myself, I cannot help but consider their activity, (or lack of), and their placement of investment as a reliable barometer of where the future is headed. Just follow the money! The biggest headlines of the last year involved investments in the fractions of billions of dollars in the LNG, gas and container markets, With Economou, Marinakis, Angelikoussis and the likes spending between $500m and $1bn each on LNG and VLGC order sprees. Of course, they scooped a few bargains on the dry side along the way, but nothing close to what they spent on energy carriers and container vessels.

Altogether, I would conclude that the present collapse of the dry market can be attributed to a combination of factors and not just to a supply-demand imbalance as the case may have been in the past. Although seasonal and incidental factors do have a temporary effect on the market, China’s strategic positioning as it races towards self-sufficiency and world trade dominance has a much bigger part to play in the present collapse. The shipping world can no longer ignore China’s first mover advantage, and while big commodity houses and operators with long ties to the Silk Road will still maintain a steady share of the dry market, smaller players will find it increasingly difficult to maneuver all the hurdles China will put along the way, be it scrubbers, or import restrictions. Finally, the aggressive investment of certain key Greek players towards LNG, gas and container markets indicates in my opinion a move towards steadier long-term cash-flows, ones that oil majors and container giants can provide, and that the dry market has in recent years not been able to guarantee. Unless of course, shipping takes us all by surprise again.

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1 Comment

  1. Avatar
    Peter Lindström
    February 22, 2019 at 5:12 pm

    With reference to this part of the article I think it is prudent to make a clarification: “… Owners already paid for fitting their vessels with open loop scrubbers…. and they are now being told they cannot trade in Chinese ports, or call Singapore, or Fujairah…”.

    While it is true that you cannot utilize your open loop scrubber in these coastal waters/ports it does not mean that you cannot trade in these ports. The vessels would simply burn LSFO/MGO while in coastal waters where the usage of open loop scrubbers are banned. This will off course prolong the payback period of a scrubber to some degree as the utilization of the scrubber decreases and makes a scrubber investment at a given cost less appealing. However, the majority of the scrubbers installations is on larger vessels which which are used on long haul voyages where the time spent in coastal waters is only a fraction of the total voyage duration. Thus, the negative effect on these larger vessels should be very limited. More important is the spread between HSFO and LSFO which last was settled at a spread of 170$/ton for Cal-20 on the Ice platform. This is considerably below the spread anticipated by most of the companies opting for scrubbers….