Dry Bulk Shipping Report 2015-16

utilisation of vessels. TIME research

suggests a 90% level of utilisation of the

vessel is the accepted standard in the

Dry Bulk sector, with some operators

reporting 95%, but under usage

from lack of charters would reduce

profitability for the vessel. Indeed,

Bimco stated in June 2015 that there is

reporting of 2015 levels of utilisation

being at around 70%

, although this will

vary between vessel types. Additionally,

in spite of the fragmentation of the

Dry Bulk shipping sector, there are

some very large companies as well as

significant private equity backing of

other entities in the market, with the

funding to acquire further ships when

they feel the time is right. That said, ship

owners are keenly aware of the dangers

of over-supply and this is demonstrated

by the very high rates of demolition and

delays in delivery of new ships in 2015,

partly aimed at reducing the fleet size

and addressing the current imbalance.

INDUSTRY REGULATIONS

AND CHANGES

Shipping is subject to a host of

international, national and local laws,

treaties, conventions and regulations

relating to health and safety and

environmental protection. Compliance

with these and other requirements

may entail significant expense,

including vessel modifications and

implementation of certain operating

procedures. Vessels are subject to

both scheduled and unscheduled

inspections and some of the inspection

entities require owners to obtain

permits, licenses, certificates and other

authorisations for the operation of their

vessels. Failure to maintain necessary

permits or approvals could require them

to incur substantial costs or result in the

operation of one or more of the vessels

being temporarily suspended

. As well

as the current cost of compliance, it

can be time consuming and costly, in

relative terms, to implement changes to

regulation in such a large industry, with

expensive hardware and high costs for

non-operation during modifications.

An example of this is the Harmonised

Common Structural Rules (HCSR) and

International Maritime Organisation

(IMO) Nitrogen Oxide (NOx) Tier III

requirements which could add up to an

extra $3m for a newbuild suezmax

The upcoming Ballast Water Treatment

regulations are also expected to impact

costs. In addition, regulation in specific

markets/sectors served by shipping

can have wide ranging effects, as was

demonstrated by the new Chinese

import regulations on coal quality

(sulphur and ash content) which were

introduced in early 2015 and which

contributed to the decline in imports to

China in January.

SAFETY FACTORS

Accidental damage and total loss of

vessels and cargo does occur either

through bad weather or other factors.

In the 2014 Intercargo Bulk Carrier

Casualty Report and the 2014 Intercargo

Bulk Carrier Casualty Report noted that

nine dry bulk vessels were either lost

or involved in a serious casualty and

that, to February 2015 there had been

one significant casualty, that of the

Bulk Jupiter, a vessel carrying bauxite

that was lost on 2 January off the coast

of Vietnam with the loss of all but one

crew member

. The ship, operated

by Gearbulk Norway, succumbed to

one of the known safety issues – cargo

liquefaction

. This demonstrates that

shipping is not without physical risk, but

whilst loss of life overrides any other

considerations, the owner will insure

the vessel as a standard precaution and

the charterer is responsible for insuring

the cargo, in order to limit financial loss.

Nevertheless, such incidences have the

potential to push up insurance costs and

come with the possibility, as do conflicts,

of affecting shipping routes, which may

be narrow and easily blocked.

Piracy is also a very real threat

to shipping in certain locations,

particularly in the Indian Ocean, with

vessels hijacked, crew taken hostage

and the entire cargo and ship potentially

lost. Again, insurance against this

type of eventuality is available, but in

addition, in October 2015 Intercargo

announced in response to the ongoing

containment of pirate attacks [through

international cooperation] in the Indian

Ocean that “the size of the High Risk

“The current entry price level is clearly de-risked from levels witnessed over the last five years ...

but the dry bulk sector today faces a major challenge with both supply and demand side economics

working against it”

Andrew Hampson, MD of Asset Backed Investments, Tufton Oceanic Limited

Area for piracy in the Indian Ocean has

been reduced and new advice has been

issued to merchant ship operators”

ONGOING COSTS

Operating expenses, including

insurance and maintenance must

be considered, otherwise expected

financial outcomes could be significantly

reduced. Standard marine perils such as

mechanical and structural risks should

be insured, with insurances including

Protection and Indemnity insurance

and hull and machinery insurance as

well as loss of cargo (although this is the

charterer’s concern rather than the ship

owner), pollution and damage to, or loss

to the vessel.

Maritime legislation also requires the

vessels to undergo a dry dock inspection

and repair process approximately every

two and a half years which carries

significant costs for both the inspection

and the resulting loss of revenue. That

said, a good dry dock record, much

like a good service record for a car,

will assist with vessel value. Other

operating expenses such as the crew,

monitoring of the vessel’s performance,

and supervision of the maintenance

and general efficiency of the vessel and

arranging the supply of stores, spares

and provisions are not insignificant.

However, year on year, opex has actually

decreased in 2015, has not suffered

extreme increases in the medium term

and is not forecast to be subject to

significant elevation in the near future

The cost of fuel is another consideration,

although this is likely to be more

problematic for spot charters than

time charters; under a time charter, the

charterers generally buy the bunkers

on-board, at market price, on delivery

of the vessel to them and would sell

the bunkers - normally more or less the

same quantity - back to the owners on

redelivery from the charter at that same

price regardless of the market cost of

bunkers. This is not the case for spot

charters, where the rate is offered by

the owner on the basis of a flat $/tonne

which would be calculated to include

margin for bunkers as well as insurance,

port charges and all other costs.