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THE INVESTMENT CASE
A fundamental
part of world
trade, Dry Bulk
Shipping’s growth
potential is
strongly linked to
the global supply
and demand of
commodities and
other shipped
goods.
SUPPLY AND DEMAND
CRITICAL SECTOR OF GLOBAL
ECONOMY
In just a few decades, Dry Bulk shipping
has become a critical sector within not
only the wider shipping market, but
also in world industry, something not
underestimated by Intercargo; “The
importance of the Dry Bulk industry
is that without the estimated 500
million deadweight tonnes of Dry Bulk
shipping, global trade, industry and
ultimately our current lifestyles, could
not be maintained. The international
steel industry, for example, could not
function without an efficient and cost
effective maritime industry transporting
the raw materials, coal and iron ore, as
well as the means to ship the finished
product around the world.”
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The international movement of large
volumes of commodities carried by
Dry Bulk vessels is essential, with
Australian, American, South American
and Russian grains now feeding the
world and Indonesian, Australian and
South African coal supplying many of
the world’s power stations
7
. In fact,
Dry Bulk shipping has enabled free
market forces to play out on a global
scale, giving international consumers
access to the best value commodities,
however painful that may be for some
producers. Most notably, there have
been recent issues in the UK steel
market where Chinese imports have
undercut UK pricing and led to the
closure of much of the UK’s remaining
steel industry.
MACROECONOMIC DRIVERS
The strong long-term historical growth
in the market has been driven by
powerful underlying global drivers
that have created sustained and
ongoing demand; there is certainly no
suggestion of the world’s population
growth stopping anytime soon,
virtually guaranteeing the continuing
and increasing requirements for
the movement of food and building
materials. The expanding middle
classes establishing themselves in
developing economies are also forecast
to stimulate a greater demand for
electricity and the fuel that produces it.
This means that, in spite of the short-
term effects of maturing markets such
as China, where growth rates have
slowed, the general trend is for rising
demand. It should be noted that in
October 2015 China announced that it
was relaxing its one-child policy rules to
allow couples to have two children, with
90 million couples becoming eligible for
the new two-child policy
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.
LOW ENVIRONMENTAL IMPACT
Environmental factors also place
Dry Bulk shipping at the forefront
of demand for the transportation of
essential commodities as a result of its
low environmental impact compared
with other transportation methods
such as road and air. In an increasingly
carbon footprint aware world, thanks
partly to economies of scale, the World
Shipping Council has stated that, “there
is little if any dispute about the fact that
shipping is the most carbon-efficient
mode of transportation. According to a
recent report of an IMO [International
Maritime Organisation] expert working
group, international maritime shipping
accounts for just 2.7% of annual global
greenhouse gas emissions. According
to analysis by the Swedish Network
for Transport and the Environment,
shipping also produces fewer exhaust
gas emissions - including nitrogen
oxides, hydrocarbons, particulates,
carbon monoxide and sulphur dioxide
- for each tonne transported one
kilometer than air or road transport.”
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CYCLICAL MARKET
Such over-arching demand factors do
not escape underlying fluctuations in
international, national and regional
economies, and it is this which leads to
fluctuations in the supply of vessels to
meet the requirements of charterers
looking to move their commodities.
High demand for shipping can result in
there being an under-supply of vessels
available to transport goods, leading to
higher charter prices and giving existing
ships, whether new or second hand,
greater value. This increase in income
and asset value encourages ship owners
to acquire more ships to take advantage
of the beneficial market. However,
new ships take two years to deliver, by
which time market conditions may have
changed, particularly if more ships have
flooded into the market from earlier
orders, having the effect of shifting the
supply and demand balance back in
favour of charterers, reducing charter
prices, income and vessel values.
Nevertheless, this cyclical process
can be particularly profitable to those
who have the expertise to assess it
correctly as it can provide windows of
opportunity thanks to the presence
of undervalued vessels because of
over-supply of tonnage at the current
stage of the sector cycle. This can lead
ship owners to scrap more vessels that
are no longer as economically viable
at current income rates and to delay
or cancel new ship orders, weakening
both new and second hand ship prices.
Those that time market entry well, so
that ship acquisition coincides with low
prices, whilst delivery (two years later
for new ships) coincides with lower
tonnage availability in comparison to an
upturn in demand factors, are likely to
benefit from a lucrative positive price
volatility, which could be significant.