Shipping Business Outlook

I expect freight rates to be on downward bias and volatile given the China’s strategic shipbuilding policy. This will ensure continual deliveries of dry bulk carriers to the market, on top of lower ship demolitions and lesser order cancellations.

The influence of China on the dry bulk shipping in 2009 was unexpectedly strong and will be one of the key influences into 2010 unless China or South Korea unexpectedly reduce subsidies or support to its established yards. China is aiming to be the largest global shipbuilding nation, which should have resulted in most of the 48% order placed with Chinese yards being delivered. The short 10-14 months construction timeframe for dry bulk carriers and more than 30% down-payments and progressive payments would not help either to slow down the trend.

The current short-term charter rates for Capsize and Panamax vessels are significantly above longer-term charter rates and this reflects the possibility of high speculative activities. The smaller-sized dry bulk carriers, namely Handymax and Handsize will face better supply/demand dynamics in 2010, anchored by a return of positive growth for grains and minor bulk. The order-book to fleet ratio for Handsize is 0.3x and Handyman of 1.8x are significantly lower than the 4.7x order to fleet ratio for Capsize vessels.

On the other hand, the monthly deliveries of new-build Capesize/Panamax vessels since June 2009 have been above the peak in the previous cyclical upturn for drybulk shipping industry, which could negatively affect the day charter rates.

The key turning point in this case will depend on China’s import of iron ore and that can be traced to production of steel, also the Chinese government’s stimulus policies, which have resulted in strong rebound in construction, infrastructure development, car production, new factories etc. Having said that, headwind for steel production could become stronger should Chinese authorities choose actions over words. The Ministry of Industry and Information Technology, the Ministry of Commerce and the CISA have warned about steel production oversupply in 2009.

The high iron ore surplus and huge 66m iron ore inventory at ports are also not helpful to China’s likely attempt to negotiate downward the annual iron ore prices for supplies in 2010. The premium of local iron ore prices over imported iron ore has been greatly reduced. China’s iron ore (Hebei, Tangshan) have dipped from an undeserving 8% premium over imported iron ore in late 2008 to the current 22% discount. This is even lower than the historical average 15% price discount to imported iron ore.

Chinese government is setting up the China Shipbuilding Industry Investment Fund by December 2009 as to give further support to its shipbuilding industry and this will increase the supply of dry bulk carriers globally. The demolition activities, which are on a a steady downtrend, are needed to resume to assist the rebalancing of demand/supply dynamic.