Forecast Dry Bulk Shipping

Of course everyone stares into the crystal ball to try and see the future for shipping. The bulk ships have seen quite an improvement, but there are new ships coming out of the yards, with 2012 being a critical year, perhaps creating overcapacity once again.

Some say shipping will be what pulls the Greek economy out of the mess it's in.

Hellenic Shipping News has a lengthy report on Dry Bulk market.
This is just one part.

N.Cotzias Shipping Group examined the potential overcapacity of dry bulk tonnage and how it will impact the freight markets. According to Cotzias, the expected ships until the end of 2010 are alarming, with 6 VLOC’s of 1.8 million tons, 61 Capes of 11 million tons, 21 Post Panamaxes of 2.1 million tons, 74 Panamaxes of 6 million tons, 153 Supramaxes of 9 million tons, 7 Handymaxes of 300,000 tons, 201 Handies of 6 million tons and 221 bullkers (between 10,000 and 20,000 dwt) of 2 million tons, not to mention an additional smaller dry bulk carriers (including MPP, General Cargo) of 400,000 tons. In total until the end of the year, the additional carrying capacity of the global dry bulk fleet, based on the expected deliveries should be 38.6 million tons, a figure difficult to be offset by the increased cargo demand. Of course, the economies of the developed world haven’t to contribute to global shipping trades, with China still ruling the fortunes of rates.

click here for complete article

Baltic Dry Index

Following comment was posted today

Question-What was going on with the Baltic Dry Index this summer? It kept rising monthly all the way through to Nov. and is now falling like a rock?

I remember when it went up dramatically. I thought it was a bit crazy, but didn't say anything. It was when China was stocking up on commodities.

Honestly, I am getting a little concerned about the integrity of the BDI in general. It's a bit of an art, getting comparable rates, as there can be so many variables.

Anyway, I started to do some research, and ran across this in the blog section of Lloyd's List (which is free).

A two-day conference on dry bulk shipping was almost entirely dominated the topic of how much iron ore would China import next year. With China’s huge spike in iron ore demand this year seen as almost entirely responsible for the unexpected recovery in dry bulk shipping rates, the hope is the country’s appetite for iron ore will continue to grow to keep the industry buoyant.

click here for link to complete article. It's worth the read.

BDI is up, but for how long?

The BDI (Baltic Dry Index) closed over 1300 on Feb. 4, 2009. This is certainly up from a low in the 800's just a month ago or so.

However, this may be short lived.

Norwegian broker Lorentzen & Stemoco said yesterday that an estimated 100 capesize vessels from the global fleet of 821 were at anchor, propping up chartering rates on the spot market.

If the owners are smart they will keep those ships laid up so they can make some money.

But then, shipowners are not always smart.

We shall have to wait and see.

More downgrades for Dry Bulk Carriers

I've been harping about how bad it is and will be for dry bulk carriers, but the stock prices have gone up, which made start to wonder if I was correct.

Oppenheimer has just downgraded their forecast for this sector, so I guess I'm not alone. Not that being alone would bother me, I don't generally agree with the crowd.

“ANAEMIC” demand will see dry bulk spot rates only rise slightly above break-even levels in the first half of 2009, according to US investment bank Oppenheimer & Co which has downgraded forecasts for the troubled sector

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Mr Burk also said bankruptcy risks were greater in the dry bulk sector with the potential for listed dry bulk companies to face charter renegotiations and the “violation of collateral coverage loan agreements”.

“Management teams on the dry bulk side may begin considering the potential implications of one or two years of day rates at cash break-even levels,” he said, urging them to cancel or delay newbuilding orders and repay debt if possible.

He cited anecdotal evidence that between 100-200 larger bulk carriers were currently anchored without employment, and a further 500 smaller ships also idle and awaiting better charter rates.

Maybe we can retrain the Somali Pirates from capturing ships for ransom, to maintaining them during lay-ups.

Looking at the BDI (Baltic Dry Index)

The Baltic Dry Index (BDI) closed at 774 on Dec. 24th. I expect this will be the last figure for the year. This is bad, but it was worse in early Dec., somewhere around 660 if I remember correctly.

I took a look at the 5 year chart on Bloomberg It's pretty bad. We are at the low point in 5 years.

I think I read when it went below 800, that was the lowest since 1986, but I can't find stats to back that up.

Well, ships are being layed up, and probably the owners are realizing maybe nothing really is better than something, especially if they have to pay extra P & I (insurance) premiums for all the pirate business in the Gulf of Aden.

I expect it will be quite bad through 2009, but I really think this is probably the bottom, as far as the BDI goes. That doesn't mean carriers are making money at these rates. I'm quite sure they are not. That's why I expect this to be the bottom for the BDI.

Oh, and I completely forgot about the forward contracts (FFA). I don't know if anyone has the guts to get involved in these right now, unless they are already holding futures.

Happy New Year.

Dry Bulk carrier Atlas Shipping goes Bankrupt

Atlas Shipping is a Danish dry bulk carrier. They started out in 1996 and have used chartered tonnage to date, but have orders with ship yards for new buildings.

The market has collapsed, and they realize they will not be able to withstand it, even though their bank would probably give them more money.


From Lloyd's List, Dec. 18, 2008

Mr Moller denied that the company had lost the confidence of its bank, Den Danske Bank. “No that’s not the issue. The issue is we have been run over by the market.”

He also recognised that the vessel owners will be hit by the company’s bankruptcy. “Others will be hurt, that is the unfortunate truth,” he admitted.

“We have 41 vessels under our control right now and we want to do something positive with the owners. All the vessels are chartered in, so the owners will be hit, or the operator in between,” he confirmed.

The role of Atlas as a major charter was also underscored by a leading London broker.

“I think it will very much have an effect on the market as they are a major player. I don’t think it will affect rates but I expect quite a few ships will be delivered back to head owners.”

He said he couldn't be specific but Atlas would probably be two or three down a chain.

Guess maybe I should start a score card of the bankrupt steamship lines.
This could also very well cause a drop in the BDI (Bulk Dry Index).

Things are getting ugly in the world of international shipping. Well, for that matter, I guess in most industries. I guess maybe the repo guys are doing well.

Fallout from the drop in BDI (Bulker Dry Index)

As I mentioned before, companies are defaulting on their contracts to ship cargo.

When the charter rates were going up dramatically as seen by the BDI Index, companies started locking in futures (FFA's) on the assumption the rates would continue to increase. Much the same as airlines and ocean carriers who bought future bunker (oil) contracts.

Just as the price of bunkers has decreased, so too has the price of charter hire.

An example is Fortescue Metals, who bought contracts for the future. They quoted including the freight (CFR - cost plus freight), and these orders did not materialize, or were cancelled (I guess). They have orders, but only the ones where they quoted just the cost of the product loaded onboard the ship (FOB - freight on board).

From Lloyd's List

This came after it suspended all its long-term CFR contracts due to “unforeseen circumstances” which it did not explain but were related to the dramatic collapse of bulk charter rates. Fortescue Metals contracted its CFR business at much higher rates than current spot prices.

The firm said about 66% of its iron ore sales have been on CFR terms “but this is likely to reduce to around one third of sales”.

Fortescue’s FOB contracts are unaffected.

In general the demand for international shipping has decreased dramatically, and will probably stay close to these levels for the next year (in my humble opinion). Well, not just me. There are some saying we won't see any improvement until 2011.

More on that later.

Baltic Dry Index - Nov. 19 report

Here is the report from the Baltic Exchange for Nov. 19 (I am not allowed to publish the ones from the 20th yet).


Baltic Indices 19/11/2008 BDI 859 (-6) BCI 989 (-5) BPI 978 (-34) BSI 606 (+17) BHSI 310 (+4)

So, the rates for Capesize ships went down a little, Panamax are down a lot, but the good news is both the Supramax and HandySize are up.

I don't really know if that is a blip or a trend. Could be the market is hitting it's bottom.

I suppose there is a chance the Capesize ships are not down as much as the Panamax if owners have decided to route their ships via the Capes anyway, due to all the pirate problems. Or,it could be because of insurance. I don't know the rates, but would guess if you are transiting the Gulf of Aden, the insurance costs have gone up considerable.

click here for previous post explaining categories of the Baltic Exchange

So much for Baltic Exchange motto "Our word our bond"

I won't say panic is setting in amongst owners of bulk carriers. It's more like they are really, really mad.

They had a cozy little club for a couple of hundred years, everything being done on a handshake. The motto of the Baltic Exchange is "our word our bond", but in today's Lloyds List article it incorrectly (or maybe more correctly) calls it "my word is your bond".

This is my take on this problem.

Companies involved in chartering ships normally acted on behalf of the owners of cargoes, or perhaps a carrier. Generally they would have some cargo in mind to transport. Sometimes they would speculate and take ship on long term charters, depending on if they thought they could make some money. Some companies were in the business of ship management, and maintained owned and chartered ships in their fleet.

Then the freight derivatives and freight forwarding contracts started. The first FFA was established in 1997. I remember at the time these were established I thought it was rather strange. But, it's a bit like someone buying or selling future contracts of commodities. If someone knows they will need a ship at a particular time, it's a good way to guarantee the price.

Then the speculators got involved. I recall one comment by a ship owner. There were something like 20 contracts after the initial one, driving up the price 10 times. The ship owner did not benefit from the price increases, and in the end some of the in between parties defaulted and the ship owner was left holding the bag. Not very fair. Or nice. Certainly not in the spirit of "our word our bond".

Now the ship owners want to put a stop to all this speculation. There is some talk of no longer publishing the index of charter rates for dry bulk ships, the BDI. That would take it back to the owners doing business with only those they trusted, and only those who really were in the business.

The owners blame all the outside speculation for wrecking their market, and I can't say I blame them. Owners needed the huge profits in order to weather the upcoming down years.

I am guessing some hedge funds got involved, looking at this as a quick way to make some money. I do not know this for certain.

And, if you haven't figured it out by now, this market is not regulated.

Understanding the BDI (Baltic Dry Index) Part II

I started working on this project in a blog last week. I'll try to get a bit more done today.

First off, someone pointed out the article I referenced from Slate was from 2003. I thought it was from 2008. Guess it's time to get my eyes checked.

Also, in my last blog I included the BDTI and BCTI as part of the BDI, but as this is the dry index, and BDTI and BCTI covers tankers, they should not be in the mix.

Here is what makes up the BDI - (Baltic Exchange Dry Index)

It's daily assessments from various selected charter brokers of the previous days "fixtures" (chartering contracts), for 4 sizes of dry bulk ships (listed below). Bulk, meaning the cargo is not in containers. Generally it's coal, ores or grains.

Capesize BCI (Baltic Cape Index)

Vessels which must transit via the Capes. (Time to get out the world map).
Either the Cape of Good Hope, which is at the tip of Africa, or Cape Horn, which is at the tip of South America. These ships are considered too big to fit through the canals. Some may be able to transit the Suez, depending on their draft (meaning, how deep of water they require), which varies depending on how much cargo they have onboard.

Panamax BPI (Baltic Panamax Index)

Vessels which can just fit through the Panama Canal. Actually, I find this term misleading, as it would seem to mean they are too big for the canal.

Supramax BSI (Baltic Supramax Index)

These vessels use to be called Handymax, but for some reason in 2005/2006 the Baltic Exchange changed the term to Supramax (I do not know why). These vessels are smaller
than Panamax, but bigger than Handysize.

Handysize BHSI (Baltic HandySize Index)

These are the smallest of the dry bulk vessels and are very versatile. They are small enough as to be able to get into any port.


Here is a link to Vessel Size Groups which gives more detailed information. However it based on categories from 2000, and therefore does not have the Supramax category.

Understanding the BDI (Baltic Dry Index)

Recently, Slate had an article entitled The Shipping News, The best economic indicator you've never heard of. It is referring to the Baltic Dry Index.

DryShips always gives the Daily Market Report of the Baltic Exchange indexes.

The origin of the Baltic Exchange can be traced to the Virginia and Baltick coffeehouse in London's financial district in 1744.

The Baltic Market

Baltic Exchange members are at the heart of world trade, arranging for the ocean transportation of industrial bulk commodities from producer to end user. The bulk freight market relies on the co-operation of shipbrokers, shipowners and charterers to ensure the free flow of trade.

Baltic Exchange shipbrokers undertake to abide by a code of business conduct based on the motto “Our Word Our Bond” and those who breach the code are disciplined or expelled.

Fixtures

Each working day the Baltic produces a dry cargo fixture list. Each fixture is carefully checked and verified and our report is regarded as the most comprehensive and independent such list available. This site also contains a database of over 25,000 fixtures.

A fixture is the agreement to charter a ship.

Index Summary

A summary of the Baltic Dry Index (BDI), Baltic Capesize Index (BCI), Baltic Panamax Index (BPI), Baltic Supramax Index (BSI), Baltic Handysize Index (BHSI) and Baltic International Tanker Routes (BITR).

OK, that's enough boring stuff for today. Tomorrow I will (hopefully) make a post regarding what makes up the various indexes.

Beware owners giving glowing reports

I haven't really followed DryShips stock. All of the dry bulk companies are having problems with the BDI recently loosing 90%.

This is why it bothers me when an owner/chairman says "everything is OK" in this article from Lloyds List, Economou allays fears as DryShips shares fall.

DRYSHIPS boss George Economou has confirmed that his Nasdaq-listed company is in good health after a warning-laden share prospectus filing spooked the market, already jittery from the dry bulk crash.

This is what he is referring to:

DryShips ... register up to 25m new shares in a prospectus filed with the Securities and Exchange Commission.

Among risk factors included in Thursday’s filing, DryShips said that even with a hefty injection of fresh equity from the sale of the new shares it “cannot be assured” that operating and capital needs would be satisfied, or that it would remain in compliance with debt covenants “if the low charter rates in the dry bulk market continue”.

Conjuring up a possible doomsday scenario, the company said: “If we are not able to comply with our loan covenants and our lenders chose to accelerate our indebtedness and foreclose their liens, we could be required to sell vessels in our fleet and our ability to continue to conduct our business would be impaired.”

However, Mr Economou told Lloyd’s List a day later that the grim tone that arguably could be discerned in the filing was a normal one for prospectuses.

“The underwriters put in a lot of risk factors to safeguard our back against litigation,” he said. “We are not breaching any covenants and we are not at risk of breaching covenants. Nor are we planning on breaching them.”

He said an analyst who downgraded the company’s stock had over-reacted.

Hum. Over-reacted. Those nasty SEC requirements to protect investors.

I'll keep an eye on this one. But, who knows. Maybe they will be one of the survivors.

Britannia Bulk in financial difficulties

Here is an example of the problems with one bulk carrier, which has caused the BDI (discussed in my Oct 27 post) to plummet.

From Reuters (click here for complete article)

An unexpectedly sharp drop in dry bulk shipping demand and the subsequent decline in rates charged for shipping services caused "a significant net loss" for the quarter. In addition, the company paid more to retain shipping vessels than it received for chartering them to customers, Britannia said in a release.

The company, which transports goods in and out of the Baltic region, said that there was a "very high risk" of default for its loan facility with Lloyds TSB Bank Plc and Nordea Bank Denmark A/S.

Okay, now get this. They did not OWN all of their vessels. So, they thought the charter market would stay on it's wild ride, paid a huge amount to keep vessels on charter, and then guess what? They couldn't find cargo which would pay enough to offset what they were paying for the charters.

By the way, this company had it's IPO in June of 2008. That's right - just 4 months ago.

Close look at the BDI, Baltic Dry Index

The Baltic Dry Index tracks charter rates for dry bulk ships. These ships carry mainly ores and grains, not liquids carried by tankers, hence the term "dry". And in bulk, not in containers.

The demand for bulk ships increased significantly when the container carriers began increasing the prices (presumably) or, at the very least, not making containers available for, commodity cargoes. This came about in the U.S. when exports began booming.

Because of this demand, charter rates on bulk ships surged from around 10,000 per day to over 100,000 per day. Absolutely crazy. Much worse than what was seen with charter rates for container ships.

In an October 24 article in American Shipper, Khalid Hashim, CEO of Thailand-based Precious Shipping, explained the reasons, as he saw them, for the dramatic decline in the Baltic Dry Index, the measuring stick for dry bulk rates.

“The deteriorating credit line led to the collapse of the BDI over the past few months, while little has changed in terms of fundamental demand and supply for dry bulk shipping,” according to notes from the JP Morgan-organized call, which took place Oct. 17. “Hashim thinks urbanization and economic advancement, which have been driving the demand for dry bulk shipping, remain unchanged. However, due to lack of trade credit, real demand is converting into potential demand and disappearing from the market.”

Today, October 28, the BDI hit a 6 year low.

Out of Barron's,

The Baltic Dry Index slid below the 1000-point mark, the first time it’s been south of four digits since August 2002, as the prices shippers are willing to pay for marine transport fall close to the costs of putting a vessel in the water and staffing it. The Baltic Dry Index has fallen 89% this year, as the credit crisis has robbed shippers of the ability to finance cargo movements. Shipowners have taken steps to reduce costs - for instance, trimming vessel speeds to save on fuel costs - but may begin to simply refuse to move cargo if pricing doesn’t show some improvement.

A lot of the bulk carriers went public in the last couple of years. The stocks were interesting as they were paying great dividends. But this is a wild, wild business, much like trading pork bellies.

It will be interesting to follow.