Chief Executive' s Review

Staying on course

Our CEO Mats Berglund reports on our performance in 2016 and reflects on the Company's position and strategy


Record low dry bulk market conditions significantly undermined our ability to generate satisfactory results in 2016. Nevertheless, successful cost-reduction initiatives and the high proportion of time that our ships carry cargo helped maximise our daily earnings and margins.

We made a net loss of US$86.5 million in 2016 (2015: US$18.5 million net loss) and positive operating cash flows of US$49.5 million (2015: US$98.6 million). Basic EPS was a negative HK20.4 cents.


Dry bulk freight market indices weakened at the start of the year and, in mid- February, registered their lowest levels since Baltic indices began in 1985. Market conditions were as poor as those of the early 1970s. The Supramax segment was especially hard hit, with market rates temporarily lower than in the Handysize segment.

Freight rates were undermined at the start of the year by the general seasonal slowdown in demand, lingering oversupply of dry bulk tonnage and reduced movements of coal. Freight earnings then improved over the remainder of the year benefitting from increased South American grain exports in the second quarter and stronger US grain exports in the second half, and growth in trades such as cement into North America. Chinese industrial activity was significantly down at the start of the year, but improvements from March onwards drove a revival in the iron ore and coal trades and minor bulks such as logs, cement and copper concentrates in the remainder of the year. However freight rates remained historically low, and conditions challenging for shipowners overall.

Handysize Market Spot Rates in 2015 – 2017

In this difficult environment, we generated average Handysize and Supramax daily TCE earnings of US$6,630 and US$6,740 per day net, outperforming the BHSI and BSI indices by 34% and 14% respectively.

With spot market rates at such depressed levels, we have been using more short-term inward-chartered ships to supplement our owned fleet, rather than adding ships on more expensive long-term charters. Our business model and ability to source cargoes enable us to generate profits on short-term ships irrespective of whether the market is high or low.

Our TCE premium and operating margins are driven by our ability to draw on our experienced teams, global office network, strong cargo support and large fleet of high-quality substitutable ships in a way that optimises ship and cargo combinations for maximum utilisation.

Positive Initiatives

The protracted weakness in the industry has called for actions to stay strong and competitive. Our divestment of non-core businesses in recent years has enabled us to generate cash, streamline ourselves into a leaner company, and fully focus on our world-leading Handysize and Supramax dry bulk business. We have grown our owned fleet approximately threefold over the past five years as part of that refocus on dry bulk, and we are very happy with the quality and composition of the fleet we now have.

We generated sale proceeds of US$22 million for towage and other noncore assets in 2016 and have sold two further towage vessels so far in 2017. Our remaining towage assets have a net book value of approximately US$3 million and we continue to market them for sale. Our exit from the towage sector is substantially complete.

We have used the weak market to purchase a 7-year old Supramax and sell a 12-year old smaller Supramax, thereby trading up to a vessel of better design and longer life at an attractive price. We will continue to look for opportunities to purchase quality vessels and to assess attractive fleet renewal opportunities.

In May 2017, we will be relocating our headquarters from Hong Kong’s central business district to Wong Chuk Hang, a newly revitalised part of Hong Kong Island. The move will result in significant cost savings while also allowing us to create a more energetic, collaborative and productive working environment. We have recently established a new commercial office in Rio de Janeiro to help grow our cargo volumes and support our many customers on the east coast of South America while enabling us to more fully cover all regions in the Atlantic.

In June we raised US$143 million (net) through a one-for-one rights issue of new shares. This served to strengthen our balance sheet and liquidity position, negate the impact of the October convertible bonds repayment and give us additional flexibility for vessel purchases.

In October, we reached an innovative agreement with ten shipowners to whom we issued US$13 million of new Pacific Basin shares as payment of existing long-term charter-hire obligations in 2017 and 2018, thereby reducing our cash outlay in these two years. We do not currently foresee doing any further such equity-linked deals.


As at 31 December 2016, we had cash and deposits of US$269 million, net borrowings of US$570 million and net gearing of 34%. We remain in compliance with our loan covenants. We also had US$158 million of committed but undrawn loan facilities – mainly attractive Japanese export credit – which exceeds the US$119 million of payments due on our remaining seven Japanese newbuildings delivering in the first half of 2017.

Our cash position, the successful rights issue, our robust business model and our solid track record are all attributes that contribute to the solid balance sheet and strong corporate profile that sets us apart as a preferred, strong, reliable and safe partner for customers and other stakeholders in these weak market conditions.


Our strategy is to be the best operator in our minor bulk shipping sphere, and to achieve premium TCE earnings through the high utilisation of quality vessels by efficiently combining minor bulk cargo trades.

This is an operationally demanding business model for which skilled and experienced staff and efficient ships really makes a difference. Minor bulk demand has more diversified geographical, cargo and customer profiles compared to the larger dry bulk segments (which are heavily dependent on iron ore shipments to China), and we leverage that diversity in our segment to achieve a laden utilisation rate of over 90% of our vessel days at sea. The cargoes we focus on – minor bulks and grain – together represent 48% of global dry bulk volumes and are expected to grow both in the short and longer term.

Many dry bulk shipowners act purely as tonnage providers by chartering out their ships on a longer-term time-charter basis. This business model is struggling as continued weak market rates have practically eliminated the demand for long-term charters and, consequently, we face more competition for cargoes from other shipowners who are trying to become ship operators. Similarly, asset-light ship operator business models are under threat from higher cost long-term inward charters, and recent bankruptcies have resulted in shippers looking increasingly closely at the creditworthiness of ship owners and operators.

We welcome such closer scrutiny and selectivity by customers, as our solid track record, balance sheet strength, cargo focus and passion for service continue to set us apart as the first choice partner for customers looking for freight cover.

Well positioned for further volatility

2017 has started stronger than last year, and we believe the worst of the current market cycle is behind us and that supply-side corrections have begun to lay the foundations for an eventual market improvement. We believe 2017 will be better than 2016. Through our cost-savings and fundraising, we have positioned ourselves to capitalise on improving market conditions ahead, but we must remain patient.

A market recovery needs lower net growth in the global dry bulk fleet. Negligible new minor bulk ship ordering and non-delivery of some existing newbuilding orders should mean significantly reduced deliveries which will help cap supply in the next few years.

Scrapping of older vessels also helps, and the enforcement of new ballast water treatment regulations from September 2017 (requiring the costly retrofit of ballast water treatment systems) may encourage ship scrapping at a time when many shipowners still find it difficult to generate breakeven earnings.

We will be complying with the ballast water management convention, and have an installation plan in place that ensures our fleet follows the implementation schedule of the new regulations. We are installing test units on two of our ships in 2017 and 2018.

In a low freight rate environment in which the global fleet is sailing at slower than normal operating speeds, increasing oil prices are a positive factor for the freight market. Higher fuel costs discourage shipowners from increasing vessel speeds when freight rates increase.

Infrastructure investment is back on the agenda in China and the USA which also bodes well for dry bulk shipping. Positive as these potential developments are, both supply and demand factors remain uncertain – especially in view of recent and ongoing political developments in the US and Europe. We expect continued uncertain markets in 2017 and will continue to conduct our business efficiently and safely while astutely combining ships and cargoes to maximise our margins.

We have a robust business model, experienced staff, a quality fleet and strong balance sheet that position us well to navigate continued challenging market conditions, and to benefit from a market recovery. We thank you for your continued support.

Mats Berglund

Chief Executive Officer


Possible market drivers in the medium term


  • Costly new environmental regulations encouraging increased ship scrapping
  • Continued negligible new ship ordering and shrinking orderbook driven by the large gap between newbuilding and secondhand prices
  • Periods of higher fuel oil prices encouraging continued slower ship operating speeds even when freight rates increase
  • Increasing government stimulus driving greater infrastructure investment
  • Environmental concerns in China encouraging shift from domestic to imported supply of resources


  • Reduction in Chinese industrial growth impacting demand for dry bulk shipping
  • Increased protectionism dampening trade by favouring domestic supplies over foreign imports
  • Increased new ship ordering if subsidies support shipbuilding at loss-making prices
  • Insufficient scrapping to offset new ship deliveries and weaker demand
  • Periods of low fuel prices supporting faster ship operating speeds which increases supply

We’re moving!

With effect from 4 May 2017, our headquarters will be relocated to Wong Chuk Hang, approximately 15 minutes from Hong Kong’s Central business district. Our new address will be:

Pacific Basin Shipping (HK) Limited
31/F One Island South
2 Heung Yip Street
Wong Chuk Hang
Hong Kong


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