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What the New Year will bring for the shipping industry? Will 2011 be one more erratic year with inv

At the end of 2008 when the financial tsunami outburst and the BDI was hovering at the low levels of 2001, below the 1,000 points mark, forecasts suggesting that the shipping market will experience a period of dreadful rates as the demand growth was sluggish and the fleet supply was overwhelming.

However, 2009 ended with positive impressions and a remarkable rebound of the market as the BDI closed at 3,005 points and despite analysts’ fears for a difficult 2010, the market alleviated the difficulties and reached its peak once more at the end of May surpassing the 4,000 points. At the fourth quarter of 2010, the dry sector has been on a downward spiral with the BDI closing on December below 2,000 points and a negative trend for 2011 as the New Year begun with the BDI standing even below the 1,500 points mark revoking the memories of the period 2000-2002 when the BDI averaged no more than 1,700 points.

Uncertainty surrounds the market till the Chinese New Year. The period 2004-2008 was more than welcomed for the shipping industry as the BDI was trading at irrational levels not seen ever before in the history of shipping cycles. The index broke the barrier of 10,000 points on May 2008 before its free fall during the last quarter of the year closing on December 2008 at 774 points. The year of 2010 resembles a similar picture of 2009 with an upward trend in the first half but weather conditions along with Christmas festivities surged the market on December at levels seen in the first quarter of 2009 similar with the levels of 2003. Going back in the last ten years in an attempt to envisage the future of 2011, the question is: “Whether the New Year will follow the trend of 2009 which begun trading at the low levels of 2003 but recovered significantly after the first half of the year trading at levels more than 3,000 points” or its picture will resemble more the period of 2000-2003 when the index averaged below the 2,000 points breaking even the barrier of 1,000 points.

On the demand side, iron ore cargo activity has been hampered by restrictions on exports from India. India’s largest iron ore producing state Orissa in the east has limited availability owing to a drive against illegal mining since last year, while the second largest state Karnataka in the south banned exports in July, citing its own drive against illegal mining. In addition, the severe flooding in Australia’s Queensland and the lack of available coal cargoes depress further the dry bulk rates damaging the earnings of large size vessels, capesizes and panamaxes. The unprecedented flooding paralyzed the exports of iron ore and coal with capesize earnings falling to below $10,000/day from $27,000/day at the end of November of 2010 and panamax earnings below $15,600/day from $19,000/day.

The halt in shipments from Australia’s Queensland spurred speculations that reduced supplies would boost Chinese coal demand. However, China has grown less dependent on Australian coal with Chinese charterers rejecting new capesize orders to import coal as the country’s winter stockpile remains ample. China uses coal imports mainly for power generation and power plants have been building inventories since early September in line with predictions of a cold weather. Despite seasonal factors the demand could not be blamed for the downward spiral of the market since the supply growth is irresistible.

Tonnage oversupply and natural catastrophes caused the freefall of the market throughout December of 2010 till the early days of New Year. According to BIMCO’s Market Report, the worldwide orderbook for bulk carriers ended 2010 a fraction higher than a year earlier standing at 277million dwt and predicts that the fleet will grow by 14% in 2011. The ratio “orderbook to active fleet” for capesize vessels estimated to be 67% and the challenge of the industry for the future appears to be the supply growth rather than demand.

The supply side has been damaged during the period 2004-2008 with frenzy newbuilding activity in the years of 2007 and 2008 and the shipping market seems that still has not paid the sins of the past. China’s economy is the driving force behind demand growth but its shipbuilding industry distress the supply. Chinese yards stimulated the fall in newbuilding prices during 2009 and their output in the construction of bulk carriers has more than doubled in comparison with 2009. According to IHS Fairplay, Chinese yards have delivered 36million dwt of bulk carriers in 2010 in contrast with 17million dwt in 2009. Most of this growth reflects a surge in deliveries of Capesizes and VLOC’s while the ongoing newbuilding activity raises questions about the fleet growth in the following three years.

Will the pace of demolition activity absorb new vessels deliveries? There are fears that even if all the overaged vessels would be sent for scrap, the world orderbook could not be balanced with the demand side. Expectations for a strong demolition activity within 2011 are strong as scrap prices are standing at alluring levels and shipowners should start considering seriously the decision of sending their units for disposal.

The current levels of the freight market would be healing for the industry, even if the index fall below the 1,000 points, as demolition activity would be triggered at a high pace and new opportunities will arise in the secondhand market with seller’s price ideas being revised downwards. The market struggles to find its balance and after the Chinese New Year the direction of the index may be clearer than nowadays.

Will the newbuilding activity continue its pace from the previous year? Secondhand units should be more attractive than newbuilding after the new correction in asset prices, but if China set new lows in its pricing policy newbuilding business would be once more at the forefront. Combined with record newbuilding deliveries from Asian shipyards there will be a downward pressure on charter rates and the index may flirt with the 1,000 points mark.