Dry Bulk Shipping Report 2015-16

LONG-TERM OUTLOOK

Demographic and economic factors

are expected to increase international

demand for resources and underpin

longer term shipping demand. World

population growth is projected to reach

8 billion by 2030, with 96% of growth

coming from developing countries and

India overtaking China with the largest

population and the largest labour force

in the world. Most of these people will

live in cities: with massive shifts towards

urbanisation in China, Southeast Asia,

Bangladesh, Nigeria and Turkey, pushing

the world’s urbanisation to almost 60%.

Eight of the world’s 10 largest cities will

be port cities. Global GDP could grow

three times within 20 years. In 2030, the

largest economies, by a long way, will be

China, USA and India. The countries with

the largest growth in per capita GDP will

be China, Vietnam, India and Indonesia.

Purchasing power in developing Asia

will rise 8 times between 2010 and

2030. Massive growth in world GDP

brings enormous opportunities to the

marine industry and international trade

is projected to continue to rise in line

with economic expansion, leading to a

potential doubling of seaborne trade

to somewhere between 19bn and 24bn

tonnes. Energy demand could increase

by 40% by 2030 and China and India

will be the giants in the world’s coal

consumption, with India likely to see the

largest growth in steel consumption.

China’s steel consumption growth will

slow, but it will remain the biggest steel

consumer in 2030. India is also expected

to become a giant driver of global trade in

an order of magnitude similar to China

8 OF THE WORLD’S LARGEST

CITIES WILL BE PORT CITIES

For the UK, the outlook is positive,

with the Department for Transport’s

2015 Maritime Growth Study, finding

that, “The UK is ideally positioned

to exploit these conditions and drive

growth in the UK maritime sector. The

evidence collected during the study

demonstrates that the UK continues

to be seen by the international market

as a world-leading maritime centre. It

also shows that the UK remains highly

competitive.”

“With the Baltic Dry Shipping index hitting a new all-time low in November 2015 and ship prices falling to a level where an

EIS can purchase a ship without debt, this is a great opportunity for investors to enter a non-contentious sector that few have

previously had access to, whilst taking advantage of all the tax benefits an EIS can offer“

Stephen Daniels, Head of Tax Products at TIME

MARKET ACTIVITY

The sector has certainly tested its

owners/operators in the current Dry

Bulk market downturn and most of the

players in the Dry Bulk shipping space

have lost value since the beginning of

2015. Most recent financials generally

reflect the very difficult nature of the

current market: at 26 October 2015 the

share prices of most of the listed players

in the Dry Bulk shipping space had

fallen since the beginning of the year.

DryShips (DRYS) fell the most by 82%

YTD, Star Bulk Carriers (SBLK), returned

-68%, Navios Maritime Holdings (NM),

which forms 2% of the Guggenheim

Shipping ETF’s (SEA) holdings, and Safe

Bulkers (SB) had fallen by 44% and 18%,

respectively, YTD. Safe Bulkers took

an additional hit to its share value in

November 2015 when Deutsche Bank

downgraded it from “buy” to “hold.

Some corporate players, such as Scorpio

Bulkers, have raised additional funding

in order “to survive the toughest market

conditions”, with $74 million in retail

bonds raised in September 2014 and

$150 million in equity in November

2014 to withstand “the cyclicality of our

markets”

Additionally, Dry Bulk operator of

mainly Capesize and Handysize vessels,

Bocimar, owned by Compagnie Maritime

Belge, reached losses of over $100m

for the the first three quarters of 2015.

In 2014, Bocimar posted a net loss of

$24.9m for the first three quarters

Even more regrettable is the receivership

application of Japanese Dry Bulk giant

Daiichi Chuo and its approval by a

Tokyo court

. Bankruptcies can be

problematic for the market as they can

lead to banks flooding the market with

vessels to sell to recoup losses.

This does, however, provide affordable

assets for new market entrants, but

also points to the use of gearing/

borrowings by ship owners, which,

in these challenging times of very

depressed charter rates generating

such low income levels, makes some of

their businesses simply unsustainable.

Fitch’ s Angelina Valavina recently said

that small Dry Bulk lines look set to go

bankrupt, “because banks have slashed

their lending to the sector”, and “there

are few lines that could afford to take on

any more debt”.

That said, whilst some of the larger

players, as well as the small lines, have

clearly overstretched their gearing, other

companies have still managed to access

bank funding, with a more successful

story coming from Diana Shipping (DSX)

which gained 6.80% YTD at 21 August

2015

. The company has since signed a

$39.68m term loan facility with ING Bank

and a drawdown of $11.73m. The term

loan facility is designated to partially

finance the acquisition of Medusa, a

kamsarmax dry bulk vessel.

In fact, the share value of Diana Shipping

is a good indicator of the peaks and

troughs of the sector and if we assume

that the situation in late 2015 is near

or close to the bottom of the market,

there is certainly scope for appreciation.

In November 2010 the share price was

$13.16, by September 2012 it had dropped

to $6.46 and by March 2014 it had climbed

back up to $13.54. In early November

2015, it had dropped again to $5.92.

A Harvard Business School report which

considered Dry Bulk shipping between

1975 and 2011 concluded that, “The

annual returns to owning and operating

a ship vary massively over time, from a

low of -68% between December 2007

and December 2008 to a high of +87%

between June 1978 and June 1979.”

In terms of mergers and acquisitions,

the biggest market participants are

investment firms, particularly from

the USA. In 2013 they invested in over

75 vessels partnered with a number

of private shipping companies,

purchased significant amounts of debt

from traditional shipping banks and

participated in the five US shipping-

related IPOs.

This, perhaps, reflects the opportunities

which investors with sufficient funding

have identified within the sector.