Dry Bulk Shipping Report 2015-16

Andrew Hampson of Tufton Oceanic

Limited, a fund management firm

specialising in the maritime industry,

stated in November 2015 that,

“Currently charter rates are at an

all-time low and prices at levels only

seen on two occasions over the last 35

years. Whilst we might not quite be at

the bottom of the market, the current

entry price level is clearly de-risked

from levels witnessed over the last five

years. With such limited downside, if a

regular employment can be found to

cover costs then there could be some

attractive asset plays in the right sub-

sector”. Nevertheless, he is also clear

that, “The Dry Bulk sector today faces

a major challenge with both supply

and demand side economics working

against it” and the following section

looks at risks and mitigating factors

which are associated with investment in

Dry Bulk shipping.

GENERAL MARKET

CONDITIONS

The correlation between general market

conditions and Dry Bulk shipping, with

its strong links to GDP and complex

economic and political circumstances

is clear and consequently, any

recessionary events in the wider market

are likely to have a negative effect on

Dry Bulk shipping. This has been the

case in the last few years, with very

low global shipping rates and ship

values, general market conditions

under pressure from factors such

as the Chinese economic slow-down

and continuing struggles in Europe

with economic conditions, it is hard to

predict if or when improvements will

take hold. So just relying on a rising

market, within any pre-set investment

horizon, is far from guaranteed. Of

course, this does not mean that all Dry

Bulk shipping would simply stop, as

essential foods such as grains and fuel

for electricity generation would still be

required in nations and regions that

do not produce them and the overall

growth patterns expected for world

populations and economies, as well

as the historic performance of the Dry

Bulk shipping sector, supports strong

medium to long term general market

conditions. Additionally, insurance is

available against loss of hire/revenue

and certain types of charter and

strategy may be considered to be

mitigated more than others against

sudden general market shifts, including

time charters where there is a fixed

revenue stream for a known period of

time that will be paid irrespective of

fluctuations in the economy.

VOLATILITY

Longer term trends do not mask the

high volatility of charter prices and

vessel values in the Dry Bulk shipping

market. The Baltic Dry Index hit a

record high of 11,793 points on 20

May 2008. By 5 December 2008 the

BDI had collapsed to 663 points and

by November 2015 it had hit a low

of 498. Even in the last few months

this is evident with the August 2015

figure of 1,066 being more than

double that of November

. This kind

of unpredictability over where the

market will bottom out is particularly

difficult for those not experienced in

this sector and has tested the most

experienced companies in recent times.

That said, some partial mitigations are

available, with time charter rates being

more stable than spot rates which are

more representative of short term

movements in demand and market

sentiment

. Moreover, there is good

availability of current and historical data

and indices providing various industry

benchmarks. Such information is of

great importance to experts looking to

chart the rise and fall of the Dry Bulk

market and to judge the best times for

investment entry and exit.

MARKET COMPLEXITY

The complex nature of predicting

factors affecting the Dry Bulk shipping

market makes judgements on its cycle

particularly difficult. Geopolitical and

macroeconomic issues have already

been widely discussed in this report,

but other items which can have a major

and potentially unexpected effect on

forecasts, both good and bad, include;

weather patterns – from seasonal

pressures impacting on the size of

harvests to ice in ports and river levels

- and market sentiment where market

opinion affects the freight market just as

much as the actual supply and demand

of ships and cargos because much of the

demand side is simply not known in a

timely fashion

. The use of time charters

in excess of 12 months again provides

ship owners with some security against

unforeseen circumstances since pricing

is generally agreed for the entire period,

insulating owners against negative

consequences of inaccurate projections

in the short term.

POLITICAL RISK

Since Dry Bulk shipping is an

international industry, changes in

government policy in one or more

regions could affect it. Recent examples

of this include the Chinese policy of

focusing on greener energy, resulting

in a drop in its coal imports and the

Indonesian Government’s decision in

2014 that it was not in the country’s best

interests to continue exporting bauxite

and nickel ore, thereby substantially

reducing global volumes available for

shipping. The more versatile vessels in

the Dry Bulk fleet, such as Handymax

and Supramax, are equipped to mitigate

such risks by having the ability to switch

between different trade routes and

commodities; for example, they could

be on a Chinese iron ore voyage and

then move to a Russia-Africa grain trip.

VESSEL SURPLUS/

COMPETITION

Whilst world and regional economic

conditions have a significant role to

play in demand for Dry Bulk shipping,

the number of vessels available to ship

commodities is an important factor on

the other side of the supply and demand

equation. Some research has suggested

that individual firms underestimate the

ability of the competition, leading to

excessive industry investment during

booms and low subsequent returns

on capital as an over-supply of vessels

eventually depresses charter prices

and ship value

. Moreover, too much

competition is likely to lead to under-

RISKS & DUE DILIGENCE