Page 44: of Maritime Reporter Magazine (June 1998)

Host Of Factors Conspire To Facilitate Bulk Market Stagnation

Drewry T JL T

Ihe opening months of 1998 have been trauma- tizing for dry bulk ship owners. Freight rates have col- lapsed, there has been talk of applications for lay-up berths and, to cap it all, the progressive draft limit cuts imposed by the Panama Canal authorities in the light of the El Nino phenom- enon have put the Panamax sector in particular in a quandary.

Yet, six months or so previously the outlook had appeared so much rosier. In terms of cargo volumes, 1997 had been a phenomenal year.

Iron ore trade surged through the 400 million tons mark — a figure that many had regarded as an unbreachable ceiling, especially as scrap- charged mini mills rather than huge blast fur- naces and integrated mills appeared to be the way forward.

A key factor was Chinese import demand, this being borne out further by the much smaller traffic improvement for coking coal, the other major steelmaking raw material. In addition, steam coal trade maintained its seemingly inexorable upward path Furthermore, on the supply side the order backlog for new ships was falling. At long last, restraint by ship owners by Mal

Drewry Shipping Consultants ltd. looked to be about to pay dividends — 1997 was going to be the start of the good times, the up- cycle was here.

Then, suddenly, the bubble burst as the Asian "powerhouse economies" on which most near and medium term optimism was built, started to unravel badly. Economists began slashing growth rate expectations and the market, which is heavily influenced by sentiment, got nervous. South East Asia started the jitters but their overall trade volume is not that great.

Nevertheless, they were behind a significant number of independent power projects (IPPs) - which were going to require millions of tons of coal. Some supply contracts were in place and, crucially, ships were on order. Probably, if the problems had been limited to this region, the dry bulk market could have ridden out the storm. However, the vital Japanese market — already sluggish — could not (and still does not seem able to) shake off its lethargy. Worse still, however, the crisis impacted in a major way in

South Korea. When a country responsible for perhaps seven to eight percent of dry bulk demand catches a cold, everybody is likely to be sneezing.

With hindsight, as ever, some claimed to have seen the crisis coming. There were signs — extended periods before bills were paid, for example — but such market intelligence was not widely available. Most, if they are honest, will have been taken by surprise.

How serious is the calamitous market of early 1998?

For charterers, rates are very low — which, naturally, suits them. This said, however, very narrow freight differentials do not necessarily enhance the competitive advantage of end- users of dry bulk commodities. Charterers also know that the advantage they hold is of little value if owners would rather lay up their ships than take loss making rates.

For owners, rates are very low — which, nat- urally, does not suit them. There have been claims that rates — as typified by the Baltic

Freight Index (BFI) falling below the 1,000 points mark — are in reality as bad as during the disastrous market of 1986, when the cata- log of dry bulk ship owners going to the wall still remains too painful for many to contem- plate. If one allows for inflationary factors between 1986 and 1987, there may be some truth in this. There are, however, other points to consider.

The 1986 nadir followed a market decline that had seen rates hemorrhaging for at least five years. In 1988, troubled owners — if prudent — ought to have some reserves to fall back on.

With the summer months inevitably seeing a slacker market and El Nino continuing to bite, there is near term pain for dry bulk ship own- ers.

But beyond then?

The camps divide into optimists and pes- simists. The former see the problems in Asia as a short term correction. Things will stabilize in, say, 12-18 months and then the growth path will resume but at a less frenetic pace. The lat- ter fear the Asia contagion will spread and undermine other markets. A close watch on economic performance in the EU and U.S. will be crucial.

As Table 1 has indicated (see next page), with economic growth still predicted (albeit more modestly) it is still possible to envisage demand being maintained. Nearly two billion tons remains a prospect.

However, for 1998 and 1999, the orderbook averages out at over one new Handymax and

Panamax bulk carrier a week. For Capesizes, the figure might be nearer to one every two weeks, and 1998 also has a notable backlog of

Handysize ships scheduled for delivery.

Pictured above is Daewoo-built bulk carrier SG Prosperity. Despite its moniker, the bulk carrier market has been anything but pros- perous for owners who have helplessly watched a good market turn bad in a mere six months. 44 Maritime Reporter/Engineering News