Dry Bulk Bottom Brings Relief – But Outlook Still Uncertain

Typically, supply side cycles set the tone for the medium to longer term market, with rare exceptions. However, as China expanded in the early 2000’s, the dry bulk shipping segment became dominated by demand side trends. The potency of that demand side strength has yet to be forgotten by bulker bulls. Many continue to look to demand side stimuli for exceptional long-term moves.

There could be some merit to that as the USA is rumored to be working out a trillion-dollar infrastructure plan and China has announced its own spending. But these government injections will likely be balanced against a struggling economic backdrop which will manifest in lackluster organic demand for dry bulk services.

The lack of clarity on the demand side has made the supply side outlook even more crucial for investors seeking guidance.

The good news here is that the orderbook for bulkers is at one of its lowest points in recent memory.

Source: Clarksons SIN

Currently at just 8.09%, the orderbook is a far cry from the 80% figure just over a decade ago.

The last time we saw this was in 2002, just before the dry bulk super cycle. But don’t get too excited just yet because we now face radically different demand side scenarios.

The thin orderbook is indeed welcome, but certain areas still present a bit of a hurdle right now.

For more on that hurdle let’s turn to the Capesize orderbooks.

Source: Data Courtesy of VesselsValue – Chart by Value Investor’s Edge

In terms of vessel numbers, the additions in 2020 are quite large but looking at it from a capacity standpoint reveals an even bigger challenge.

Source: Data Courtesy of VesselsValue – Chart by Value Investor’s Edge

2020 is set to receive the most capacity since 2012, measuring in at a full 7%, dwarfing the previous 7 years of deliveries. Meanwhile, 2021 is also set to see its fair share of deliveries as well.

Therefore, the low orderbook isn’t really due to near term prospects, but the fact that deliveries fall of a cliff in 2022.

Can we expect 2022 to remain that way? Probably not for quite a few reasons.

Most importantly, every owner out there sees this same orderbook. Remember, owners are reactionary, and this is one of those times where we can expect a bit of a reaction.

Here is a bit of a history lesson for how owners have routinely shot themselves in the foot.

Source: Clarksons SIN

Both times there was the slightest bit of speculation, or hint of a market recovery (late 2012 and late 2016), owners responded by flooding shipyards with orders, evidenced here by quarterly contracting numbers.

Build times for Capesize vessels usually average about two years, but they can be as short as a year. Meaning there is still plenty of time to add to 2022’s orderbook.

Also, as shipyard capacity becomes available, amid a less than spectacular charter market, newbuild prices will fall, and this will lure in buyers who favor a quick turnaround time and opportunistic pricing.

Speaking of prices, interest rates falling just increased purchasing power at a time when State linked yards are likely to extend more generous terms.

As discussed in recent ShipBrief and Value Investor’s Edge reports, organic (non-State sponsored/involved/induced) newbuild ordering may be slowed due to the current economic environment. But State involvement may bring about non-organic ordering of which dry bulk would be a prime target for China. Unlike many other segments/classes, the vast majority of Capesize and larger vessels on order are being built in China. Out of the 159 total vessels on order, 126 of those are being built in China.

Am I expecting a crippling onslaught of orders which will sink the entire segment? No, not quite yet. But I’m also not expecting just a dozen deliveries in 2022, that’s for sure.

The fact is we are not out of the woods yet with the bulker segment. But, if we can keep those orders for 2022 and beyond under control an increasingly hopeful and more certain dynamic emerges.