Market Review

Freight Market Summary

Dry bulk market indices fell to record lows in February and December 2015, framing one of the worst years overall for dry bulk shipping. The Baltic Dry Index (BDI) fell 38% over the year and registered its weakest average since 1986.

Average Handysize and Supramax spot market rates were approximately 30% lower year on year at US$5,110 and US$6,620 per day net respectively.

Spot rates were undermined by flat iron ore demand and the significant reduction in Chinese coal imports, leading to reduced dry bulk demand overall. However, solid growth was recorded in Chinese grain imports, and the minor bulk trades in which Pacific Basin is focused grew overall.

Deliveries of new vessels were largely offset by increased scrapping, resulting in reduced net growth in the global fleet.

However, the market continued to be oversupplied and low fuel prices drove increased ship operating speeds in the third quarter, thus increasing effective shipping supply.

Dry bulk indices have declined and posted new record lows in early 2016. Sentiment in the industry is very weak and, while the current six-year downturn has lasted longer than the shipping bear markets of the 1970s and 1980s, current market rates are below industry operating cash costs, which is unsustainable and is leading to increased scrapping, a shortfall in scheduled newbuildings, and very little new ship ordering, which will contribute to a healthier market in time.

Key Supply Developments

The global fleet of 25,000-40,000 dwt Handysize ships grew 2.6% net during the year (2014: 2.7%).

New Handysize ship deliveries represented 8.5% of existing Handysize capacity reflecting a larger than normal shortfall in scheduled deliveries, and shipowners opted to scrap about 6% of capacity rather than continue to trade their older ships in such depressed conditions.

The overall dry bulk fleet grew 2.4% net (2014: 4.4%) representing the smallest growth since 2003 due to increased scrapping at 4% and deliveries falling well short of scheduled deliveries.

However, low fuel prices drove up ship operating speeds in the third quarter thus further increasing effective shipping supply.

Dry Bulk Scrapping

Ship Values

Ship values declined over the year and Clarksons Platou now value a benchmark secondhand Handysize at US$9.5 million (down 34% since a year ago) and a newbuilding at US$20.5 million (down 7%).

While there have been some forced sales, sale activity has been very limited and it is difficult to establish fair market values. The gap between secondhand and newbuilding ship values is at an historic high, discouraging new ship ordering.

Key Demand Developments

Clarksons Platou estimate dry bulk shipping demand in 2015 to have contracted by 0.8% year on year, representing the first reduction in demand since 2009 and only the second since the start of Clarksons Platou’s data records in 1991.

The main driver of this contraction was substantially flat iron ore demand and a 3% reduction in coal. Chinese imports of iron ore grew by a reduced 2% and Chinese coal imports declined 30% or 87 million tonnes due to slower economic growth, increasing use of hydro-electric power and actions to protect China’s domestic coal industry.

Conversely, imports of seven key minor bulks grew by 5%, Chinese steel exports grew 33%, and cereals and soybean imports grew 68% and 14% respectively. While these stronger Chinese grain trades support demand for smaller craned ships like ours, global grain trades increased only 1%.

Indian thermal coal imports showed promising growth in the first half of the year, but India has recently reduced its DEMAND DRIVERS need for foreign coal by increasing its domestic supply.

A stronger US Dollar supported a strong third-quarter South American agricultural exports season thus capturing market share from the US and undermining the US export season that otherwise typically supports a stronger freight market towards the year end

Orderbook

The dry bulk orderbook has reduced to a 13-year low of 15% but remains an obstacle to restoring a healthier supply and demand balance.

New ship ordering in 2015 amounted to 2.3% of existing capacity, its lowest in 18 years as secondhand ships represented better investment value than newbuildings. Shipbuilders face difficulty as they cannot feasibly reduce their prices especially as new environmental regulations require more costly ship equipment. We expect current market pressures to result in actual deliveries continuing to fall well short of the orderbook schedule and this may lead to a reduction in shipbuilding capacity.

My Annual Report

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