Bulk carrier optimism on the Increase

Malcolm Latarche
Malcolm Latarche

15 June 2018


Of the three major sectors in shipping, bulk carriers are the simplest in terms of construction and specialist equipment. After some time in the doldrums, bulk carrier newbuilding orders are rapidly regaining ground.

Bulk carriers are the work horses of the shipping industry moving the raw commodities and semi-finished products around the globe. It is a sector plagued by overcapacity but solving that problem is not easy except in specific size or trade segments.

The bulk sector comprises five basic segments by size; Handy, Handymax, Panamax, Capesize and VLOC although some would add Supramax and New or NeoPanamax to make seven sectors. There are as well some sizes based upon ports for specific trades such as Newcastlemax, Kamsarmax and Dunkirkmax. With there being a degree of overlap between size ranges for most cargoes except the VLOCs for which iron ore is the only commodity, there is a possibility for displaced ships to move between different cargoes.

Making solving the overcapacity issue more difficult is the fact that the volume of trade and the more important tonne/mile measure is never static or even changing at a linear rate. Cargo volumes can be affected year on year by both natural and geo-political events. Currently it is the potential impact of US tariffs on steel and aluminium products together with retaliatory tariffs on US agriprods to China that is the worry.

Those events can occur at very short notice, but between a newbuilding order and delivery the time span can be a year or more. That is well down on the height of the building boom when the wait for a building slot could have been just as long or longer as construction itself.

That is highlighted by the table and the number of newbuildings delivered between 2010 and 2012. Many of the these would have been ordered before or during 2008 when the banking collapse badly hit trade for a period of several years. The level of scrapping in 2008 and since also shows how owners like to keep vessels operating in the good times but are prepared to scrap when necessary.

After the spike of deliveries in 2012, the general trend in newbuildings has been downward and that is continuing into the next few years with the number of vessels scheduled to join the fleet throughout 2018 is 359 ships for 33.21mdwt followed by 367 ships for 37.96mdwt in 2019 and 165 ships for 20.44mdwt in 2020. Beyond that only 23 vessels – mostly ore carriers and Capesize – are appearing in orderbooks.

However, there are signs that owners are looking to begin ordering again perhaps in preparation for an increase in scrapping but also for other reasons. Second hand prices have been rising in recent months, up by a reported 18% in the first quarter of 2018 and are rapidly approaching that for newbuildings offered by yards looking for new work. The price differential in many cases is such that it is cheaper to order a newbuild with ballast treatment and scrubber rather than a second hand tonnage and organising a retrofit of needed equipment.

Newbuilding orders in the first quarter of 2018 are almost four times those reported in Q1 2017. Unless an owner has an urgent need for vessels that cannot be satisfied by time charter, then newbuildings are looking better prospects than buying even modern second hand vessels.

The restraint of shipowners in ordering new vessels until now has not been matched by their enthusiasm to scrap vessels. Last year saw the lowest level of scrapping in terms of both numbers and deadweight since 2010 when it became clear that the 2008 crash was not going to be a sudden blip. There are just under one thousand bulk carriers above 10,000dwt that will be above 20 years old at the end of this year and a further 931 ships between 15 and 20 years.

That is a large number of scrapping candidates but to what extent owners will be prepared to scrap ships in the coming years is the big unknown. There are plenty of reasons why scrapping should increase but the main driver will be the need to install ballast treatment systems, the cost of which may not be covered by operating profit on the oldest vessels and to accommodate the new orders that are being made. Certainly any vessel being offered on the second hand market will be passed over if it does not have a ballast treatment system installed or sufficient life span remaining to make fitting one worthwhile.

The 2020 global sulphur cap is likely to be less of a problem because the older vessels will not be so disadvantaged as all ships regardless of age will be obliged to pay more for compliant fuels, so freight rates should be able to be increased accordingly.

Shrinking choices and innovation in new orders

Bulk carrier construction was at one time carried out in many shipbuilding nations but the list of those involved has been shrinking for some time. Today there are just eight countries with a bulker of Handy size or above on their books. Not surprising China is top of the list but Japan’s reputation for building higher quality ships has put it in second place with South Korea in fourth place behind the Philippines in terms of ship numbers but in third place by deadweight tonnage.

The effect of the newbuildings’ delivery into the operational fleet will in many cases depend upon which segment they are built for. Up to and including Panamax there are far more trades and route options for ships to participate in. However, the vast majority of the newbuildings are Capesize or VLOCs and will be engaged exclusively in the coal and ore trades. Of the 80 VLOCs almost three quarters (56 ships) will be operated by Brazil’s Vale.

The Vale ships are being built at seven different yards including one in Japan (Ariake) two in South Korea (Hyundai Heavy and Hyundai Samho) and the remainder in China. The ships being built at the two South Korean yards total 22 vessels and so account for virtually all of South Korea’s involvement in the bulker newbuilding market. The confidence shown in ordering Capesize vessels suggests that China’s demand for iron ore and coal is expected to continue and also reflects the fact that production and consumption of coal is expanding rather than shrinking as might be expected given the pledges made under the Paris Agreement to reduce use of fossil fuels.

Although unsophisticated vessels, bulkers are subject to the same rules and new emissions regulations as other types. Innovation in bulkers has seen many improvements in efficiency in recent years but more may be needed for the future.

This year saw the delivery of the first LNG-fuelled ship when Hyundai Mipo handed over Ilshin Green Iris to Ilshin Shipping in February. To date this is the only LNG-fuelled bulk carrier in operation, but others are planned for the future. The current order book includes 46 ships that are being fitted with an engine capable of running on LNG and will be future candidates for retrofit of the necessary LNG fuel system. All of the vessels are VLOCs and with iron being a very dense cargo and the cargo hold space needed quite small in relative to the overall size of the vessel, accommodating the fuel storage system will not have the disadvantage that it does in other ship types.