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Nothing will describe the pathetic state of the global dry bulk shipping industry more tellingly than three shippers filing for bankruptcy last month. Freight rates staying for long in deficit of ship operating expenses for most vessel owners first claimed a victim of privately owned Danish group Copenship and then China's Winland Ocean Shipping, which filed for bankruptcy protection in the US under Chapter 11.
Filing with a US federal bankruptcy court under the chapter for protection allows a debtor to reorganise the business. South Korea's Daebo International Shipping has also filed for debt rehabilitation. The Baltic Dry Index, an aggregate of indices for Capesize, Panamax and Supramax size vessels for tracking dry bulk shipping and trading costs, is staying at an all-time low, despite recent improvements in freight rates.
Whatever rates improvement is happening is, however, solely due to rises in bunker prices. Supply of dry bulk tonnage remains much in excess of demand, as world trade growth has remained well below the two-decadal average of 5.3 per cent. Even after providing for routine New Year-related distortions in foreign trade data for January and February, when the Chinese economy virtually takes a two-week break, nearly 20 per cent fall in imports in January by the world's second largest economy did not bode well for the shipping industry.
The super size Capesize and Panamax vessels took a hit last year, as the amount of coal burnt in China fell for the first time this century, leading to lesser coal import. The 2014 fall in coal use, caused by increasingly greater reliance on electricity generated by hydel and other renewable sources, contrasts with a 5 to 10 per cent annual fossil fuel use growth rate for most of a century. Less burning of coal by China is good for the environment. But that leaves dry bulk shipping capacity idle. A rise in Indian coal imports could only partly compensate for shrinkage in Chinese imports. No wonder, so many more Capesizes and Panamaxes are employed to ship ore from Brazil and Australia to China, which taking advantage of a nearly 50 per cent collapse in ore prices and low freight lifted imports of steel making ingredient by 112.2 million tonnes (mt) to 932.5 mt. China's January steel production fall by 4.7 per cent to 65.5 mt on a year-on-year basis and remains a concern for ore exporters. But January is seen as a 'silly month' for the Chinese business, setting no trend for the rest of the year.
Hasn't China Iron and Steel Association said the country's ore imports will climb to a record one billion tonnes this year, with Australia and Brazil, claiming a share of 80 per cent? Ore inventories in Chinese ports have been used up to a point which should give a push to import. This will bring some relief to shipping lines. "Capacity overhang in the dry bulk segment is so deep that freight rates will continue to remain under pressure for at least next couple of years," according to Peter Cremers, chief executive officer of ship management major Anglo-Eastern Group. Weather-beaten shipowners have finally made a spirited beginning in cutting over-capacity. They are consigning vessels to scrapyards at one of the busiest paces in recent decades. Demolition activity is most pronounced in the dry bulk segment of the industry. In January, the number of Capsizes sold for scrapping nearly totalled the number decommissioned in the whole of 2014. Even then, it will not be too soon before demand catches up with shipping tonnage.
A year ahead of the 2008 global financial crisis, investment in shipbuilding was a staggering $226 billion. Since the crisis triggered by Lehman Brothers filing for bankruptcy happened in September, orders for new ships claimed another large investment of $178 billion in 2008. Then, battered by a collapse in the commodities market and freight rates, investment in new ships in 2009 fell drastically to $44 billion. Clarksons Research informs that since then, investment in the range of $91 billion and $131 billion was made annually. But banks are not any longer comfortable in financing new ship construction. This explains why some contracted dry projects are being swapped to wet ones, meaning postponement in new ship deliveries. Abundance of capacity has translated into world cargo fleet productivity declining from a peak of 9.1 tonnes of cargo per deadweight tonnage (DWT) in 2004 to 6.5 tonnes per DWT in 2014. The productivity fall is due to global seaborne trade growing by 44 per cent during this period in the face of a 102 per cent fleet capacity expansion.
