Dry Bulk Market Crisis: Opportunity or Threat?

The shipping industry is experiencing the biggest dry bulk market recession since the 1980s, as uncertain global economic outlook and increased imbalance between supply and demand have lead to historically low freight rates .It seems the downturn will continue until 2017 if a viable equilibrium is not achieved. 

 

The recent measures in 2013 which promoted the replacement of older tonnage with newer, in combination with the Chinese financial backing, provided to shipowners resulted in a large orderbook that made freight market to perform at very low rate levels. In addition, there is strong disappointment for private equity funds which invested large amounts because their expectations failed to materialize.

 

The limited growth on key trades in 2015 has made average bulk carrier earnings drop to around $6,500 per day. China, the world’s biggest dry bulk market, has decreased its coal imports at a significant level that cannot be recovered by other positive trades such as iron ore. Some shipowners have converted their new building orders to tankers while others turned to pooling strategies in order to minimize their exposure.

 

As a result, the prices of second hand vessels and new build orders have dropped by nearly 40 percent and 95 percent, respectively. It is worth noting that a five-year-old Capesize costs around $32 million, while only 35 new ship orders have been placed from January to May 2015. The demolition activity counts for 262 ships or 17.3 million in terms of dwt until May.

 

The positive news is that the Baltic Dry Index has started to move upward during June, and the rate of demolition will limit dry bulk fleet growth up to 2.4 percent this year. This makes investors wonder if it is the right time to get in the dry sector. The market risk of such an investment is at its lowest point, and therefore it might be the right time to get involved in the game. The market is going to recover for sure, but the question is when.