Dry Bulk Poised for Further Gains

With rare exceptions the supply side typically dictates the tone of the market in a segment like dry bulk, where demand-side fluctuations represent far less volatility than vessel supply shifts.

Of course, there are exceptions such as the early 2000s when insatiable Chinese commodity demand propelled the market to previously unimagined highs, but those are rare circumstances. More on that in my next report.

The supply side will continue to exercise an enormous amount of market influence going forward, which for the first time in years, is a wonderful thing. Let’s take a look at the capesize class to see exactly why that is true.

The capesize class has a total of 108 vessels scheduled for delivery through the end of 2023.

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

To put things in perspective, 2020’s total deliveries numbered 108 vessels. However, this future delivery schedule is set to take place over the course of 33 months, instead of 12.

In short, we are now expected to be on pace for the slowest fleet expansion growth, in both percentage and likely absolute vessel terms, since the Great Recession. This window is likely secure for the next 18 months but likely longer given the lack of newbuild activity as of late, which is more heavily focused on the container segment.

In fact, since our January 2021 report, the capesize orderbook has contracted by 1.6% (vessel numbers), indicating that deliveries are occurring faster than newbuild orders for this class.

This has left us with an astonishingly thin 5.4% orderbook. To once again put things in context, in the past 25 years the market did not see a sub-8% orderbook until this past January.

Source: Clarksons SIN

So, while the deliveries keep coming the lack of newbuild contracts will likely continue to shrink the orderbook as they have been doing for several quarters now.

In fact, this downturn in newbuild orders is shaping up to be one of the longest streaks of lackluster activity in recent memory.

Source: Clarksons SIN

The record setting and historic downturn of 2016 led to a massive reduction in newbuild activity as rates were at loss making levels while the known supply-side glut loomed on the horizon. Four quarters of dismal activity punctuated this downturn.

But now, in the face of a record thin orderbook and with optimistic forecasts (at least by me) since min-2020 regarding the 2021 and beyond outlook, we have witnessed the fifth quarter of ongoing sub-par newbuild activity.

The longer this continues the stronger future markets become.

This doesn’t just apply to rates, but also to asset prices, which despite their latest jump, are still likely to experience further increases. Once again, some perspective should help.

Source: Clarksons SIN

That little bump there at the end, that’s up to date as of April 6 and aligns with valuations also reported by VesselsValue at that same time.

Even with that bump in value, asset prices are still right around where they were toward the end of 2015 when I published a public report calling for historic lows in the BDI. Now, instead of a historic bear market ahead we face the most promising outlook in two decades.

Personally, I would be very surprised if we didn’t see further significant increases over the next two years for both rates and asset values.