As a flood of new ships has forced the dry bulk market into free-fall once again, some are asking how anyone can possibly have thought that the worst of the bulk carrier sector’s crisis was over. Tonnage equivalent to around 60% of today’s bulk carrier fleet remains to be delivered. It comprises of around 750 Capesize bulk carriers, 800 each of Panamaxes and Handymaxes, and 850 Handysize units. As things stand, the ships will deliver over the next 36 months or so but, by then, the number of punters left sitting at the dry bulk table may have fallen sharply.

As we have said before, sentiment can be the shipping industry’s Achilles Heel, tripping it up at almost every turn. Anxious not to be left behind or afraid to appear too cautious, bulk carrier owners – fuelled with a heady mix of testosterone and more than a wisp or two of cloud nine – went on an unprecedented spending spree that was bound to end in tears. And for those who still think the worst could soon be over, think again! Things will get a lot worse before they get much better.

The Baltic Dry Index has crashed again over the last eight weeks or so, falling almost 60% between May and the middle of this month. Part of the decline is down to the sheer scale of new tonnage joining the fleet – just at a time when they are least needed – and part of it is a result of easing demand for raw materials, notably in China. What is so puzzling is that the Chinese writing on the wall has been there quite clearly for many months. Although still growing, the pace at which the Chinese economy was growing fell off sharply. And yet early this year, dry bulk owners started signing up for still more ships. Goodness knows what they were on!

In practice, the scale of new deliveries is likely to be less than some industry statistics would suggest. For a start, analysts believe that a sizeable chunk of the orderbook has not been properly financed yet – owners may have put down the contract signing instalment and may be ready to cough up on keel-laying but, soon after that, it will be down to their bankers to stump up some dosh. And that just might not happen.

According to analysts’ reports on the Chinese economy, there are still signs of sustained strength there. The Government is allocating huge swathes of land for new house construction on the country’s eastern seaboard whilst the central and western regions are likely to provide the basis for tomorrow’s economic expansion. All good so far; however, less encouraging is the prediction that future Chinese strength is likely to be underpinned by domestic demand, rather than an export-oriented bias. Wages are rising fast, and therefore so are disposable incomes. Minimum wage levels have risen by around 20% in the last few months … across the board.

In some respects, this is a very ominous message for other shipping sectors. Sure, domestic demand will still require the import of raw materials such as iron ore and coal and, of course, the energy required to fuel the industrial machine. But even a small decline in manufactured exports could land another major body blow on liner operators.

Chinese economy watchers also point to the steady decline in steel prices which, they say, have been on a downward path since the end of April, just as the country’s steel mills have been coming to terms with yet another round of annual price hikes from the world’s main miners. However, as some of shipping’s wise oil owls point out, it is prudent in this business always to expect the unexpected. Let’s hope they’re right this time round.

Republished by kind permission of: A&A Thorpe, 131a Furtherwick Canvey Island, Essex SS8 7AT Tel: +44 (0) 1268 511300 Fax: +44 (0) 1268 510467 shipaat@aol.com

The views of the Publishers do not necessarily correspond to the views of Lambos Maritime Services Ltd.