Dry bulk: A Challenging Future

We know we are operating in one of the more volatile industries in the world and have been through severe down cycles before, but his time it is different. Slowly, but surely the realization that the commodity boom and the unprecedented Chinese hunger for raw materials was likely a “once in a lifetime” bubble, is sinking in. 

Effectively all data relating to the dry bulk market, whether on the supply - or demand side, underlines the fact that we are now moving into a very different environment than what we grew accustomed to post-2000. It is therefore likely that the market will see less volatility on both freight rates and asset values for the foreseeable future. Keeping these fundamentals in mind, it is important to consider what the most sustainable dry bulk business model might be in this “new normal.”

Looking forward, underlying demand growth will most likely at best be in the order of one to three percent. Demand will not solve the tonnage overhang this time as it did during the China boom, unless to significantly alter existing barriers (or the lack of barriers) to international trade. For the market to return to even modest break-even levels it is the supply side of the equation that needs to be significantly adjusted - and history tells us this will be a drawn-out process.

Recognizing these hard facts, the next step is for the industry is to adjust to a new norm, with more realistic expectations relating to market trends and profit margins. And this realization process is painful for many reasons:
•    We all think the other shipowners should scrap their vessels. My vessels are superior!
•    The moment there is the smallest uptick in the market, owners choose to hold onto their older vessels rather than recycle.
•    It hurts to take and accept a loss. Many companies choose to close their eyes and hold on tight for as long as possible, even if this means a further deterioration of their position.

Unfortunately, the reasons above are driven as much by emotion and hope as the cold reality of the accountant's ledger. Fewer ships may be the answer, but this will require the manifestation of a sense of mutual solidarity, something this industry has never been known for. Such decisions and actions do not come easily or without cost. 

If we are looking for a silver lining, the dry bulk industry has probably seen the worst of this unprecedented downturn, at least for the more robust Handy and Supramax markets. Western Bulk Chartering has a strong history for producing positive margins in all market scenarios, but it is obvious that it is also harder for commercial operators to extract a substantial margin when rates are around opex levels. Harder, but still possible. 

We have learned to always be prepared for the unexpected, and so far this year there are at least two elements that may yet provide the market with some long awaited tailwind; Firstly, China may continue to close domestic coal mines and could further strengthen the trend we have seen lately with increased imports of coal. The other element that may play out positively is the fact that IMO now finally managed to get sufficient support for the Ballast Water Treatment regulations that may over time force more recycling of tonnage as an alternative to investing $1-2 million in older vessels.  

The question is, therefore, what we can expect the market to do going forward? Our best-case scenario is for modest demand growth and reduced supply of vessels. This will improve the tonnage balance slowly, and contribute to a recovery over the next 18 months. It will be a fragile recovery, and will very much depend on the world economy and continued soberness on behalf of shipowners.

Hopefully I am wrong, but we need to be prepared for markets, from a historical perspective, to stay low for at least the next 18 months - which is also probably what is required to bring scrapping to the level where it will support a more permanent recovery. As the downward trend reverses, we also expect our margins to return more in line with traditional performance levels. 

It is hard to answer the question as to which is the most viable business model for survival in the dry bulk business - through asset plays or through a pure operating model? However, irrespective of how the recovery plays out, we believe our operating model is a safer place to weather the storm than to be exposed to the asset markets. 

Jens Ismar is CEO of Western Bulk Chartering.