Drewry Calls Dry Bulk Recovery Temporary

Drewry Calls Dry Bulk Recovery Temporary

Drewry Shipping Consultants is warning against a false dawn in the dry bulk shipping sector.

The sector will have to dig itself in for a long recession, it said in its quarterly Dry Bulk Forecaster, which was published this week.

The London consulting firm said that although the steep decline in market indicators seems to have reached the bottom, the few signs of recovery in the dry bulk sector are mostly temporary, while the large number of orders for new ships will weigh the sector down for several years to come.

“There are encouraging signs in the market, but these are offering temporary relief rather than the promise of sustainable recovery,” said Jaya Banik, the editor of the new report, who said the lines need to trim the number of orders.

“Orders are being deferred or postponed but not cancelled in sufficient numbers,” she said.

Scrapping in 2009 will exceed the last five years put together, but deliveries will still be double that figure. Even though new ordering has come to a near-complete halt, the present order book promises fleet growth at an average annual 8.7 percent for the next five years. “Clearly that needs to be reduced significantly if we are to see any serious recovery prior to 2012,” Banik said.

Global government stimulus packages targeting infrastructure projects are expected to increase steel demand and there are some suggestions that this could mean as much as 200 million metric tons of extra demand worldwide.

But Drewry has calculated that the market would need five times that amount – or an extra 1 billion metric tons dry bulk demand per year – to use the services of all the new ships that are being built. These initiatives are concentrated in Asia and in developing countries. In Europe and the United States, the focus of government aid is on projects to encourage consumer spending.

Drewry expects seaborne trade in 2009 to be 6 percent lower than in 2008, as global GDP is expected to fall by 1.6 percent. This suggests that the economic effect on the global economy is multiplied four-fold in the dry bulk trade. It said this ‘multiplier effect’ is felt even more strongly when it comes to freight rates, which are down by more than 50 percent in nearly every segment of the dry bulk sector.

Optimism in the first quarter was encouraged by the unexpectedly high volumes of iron ore being imported by China, which imported a record 130 million metric tons after smaller steel-makers concluded their supply contracts. The result has been a stockpile that is approaching the record of 73.88 million metric tons set in September last year. A similar story has happened in the case of coal, but neither increase is sustainable until China’s overseas markets recover – and there is no sign of that for the time being.

Drewry predicts that demand levels this year will drop by 11 percent, while the fleet will grow by 4 percent. Next year the figures are plus 6 percent and plus 13 percent respectively and 7 percent and 17 percent in 2011 (based on the current order book).

It said this will produce an increasing imbalance between supply and demand of 105 million deadweight tons in 2009, rising to 140 million deadweight tons in 2010 and 200 million in 2011.

The consultant does not expect the balance to narrow until 2014; indeed, rough estimates suggest that the increase in trade needed to balance the predicted supply growth is in excess of 1 billion metric tons per year for the next three years and over 2 billion metric tons per year from 2012 to 2014. That would be an extra 40 percent volume in 2010, an extra 55 percent in 2012 and an extra 60 percent per year from 2012 to 2014.

“We believe that the recent recovery in the Baltic Dry Index is a short-term phenomenon and the market is likely to remain extremely volatile for the next 12-18 months,” said Banik. “The overall trend is for a further weakening as the glut of newbuildings takes to the seas. We do not expect to see any sustained improvement in demand before 2011, with rates only starting to make a comeback in 2012.”

Contact Peter T. Leach at pleach@joc.com.