Market Review

Freight Market Summary

Handysize and Supramax spot market rates averaged US$4,950 and US$5,920 per day net respectively in 2016, representing a 3% and 10% decline in earnings year on year.

Baltic dry bulk freight market indices at the start of 2016 continued to decline to 45-year lows in mid- February, undermined by a general seasonal and Chinese New Year slowdown in demand and lingering oversupply of dry bulk tonnage.

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. Chinese industrial activity was significantly down at the start of the year, but improvements from March onwards drove a revival in Chinese imports of coal, iron ore, logs, copper concentrates and other key minor bulks in the remainder of the year.

The Atlantic freight market was markedly stronger than the Pacific in the fourth quarter owing primarily to strong Atlantic grain and coal volumes.

2016 ended with the BDI over 100% up compared to the start of the year. Nevertheless, the market continues to be oversupplied and freight earnings are still below breakeven for many shipowners. Dry bulk indices have followed their typical seasonal decline in early 2017 but remain well above levels of one year ago.

Key Supply Developments

The global fleet of 25,000-40,000dwt Handysize and 40,000-65,000dwt Handymax ships grew 2.8% net and 4.7% net respectively in 2016 (2015: +2.7% and +7.1%), and the dry bulk fleet overall grew 2.3%.

New ship deliveries represented 5.9% of existing dry bulk capacity, which was down compared to 2015 and short of the scheduled orderbook for the year by a record 49%. Deliveries of new vessels were partly offset by increased scrapping, resulting in continued net growth in the global fleet.

All-time low freight earnings encouraged record scrapping in the first quarter, but scrapping activity reduced thereafter on improved freight market conditions resulting in the deletion of 3.6% of total dry bulk capacity and 3.1% of Handysize capacity in the year overall.

The larger vessels withdrawn from the market for idling or lay-up in the first half of the year were largely reactivated as the freight market improved.

The general oversupply was partly compounded by an increase in ship operating speeds as the market improved from mid-February, However, higher oil prices were positive for the freight market in the second half of the year as increased fuel prices encouraged slower ship speeds even when freight rates increased.

Ship values

Declining dry bulk ship values stabilised at the end of the first quarter and have since increased on improved freight market conditions. Sale activity has returned.

Clarksons Platou currently value a benchmark five-year old secondhand Handysize at US$13.5 million, which is up 42% since a year ago. Despite the increase, secondhand values remain well below the estimated US$19.5 million benchmark newbuilding price, although no newbuildings have recently been contracted to support this. This gap continues to discourage new ship ordering which will benefit freight market fundamentals in the future.

Key Demand Developments

Clarksons Platou estimate global dry bulk cargo volumes in 2016 grew by 1.2% year on year, or 2% on a tonnemile basis – as compared to net fleet growth of 2.3%.

The main positive drivers of this demand growth included a 4% increase in iron ore trade volumes mainly into China which continues to switch away from domestic iron ore sources.

Similarly, cuts in China’s domestic coal output resulted in a 21% increase in Chinese coal imports. This was fully offset by coal import reductions in other markets (principally the EU area), but still contributed to improving freight market conditions in the second half of the year.

Overall minor bulk trade growth was flat in 2016. Soybean and wheat/grain trade volumes both grew 4% during the year. Cement trades grew 6% and forest products (including logs) grew 2%, but these solid improvements were offset by reductions of 1% in steel products, 3% in fertiliser, as well as an 8% reduction in bauxite and nickel ore volumes which remain impacted by Indonesian and Filipino export controls.

Seasonally strong US grain and soybean exports were key contributors to improved market conditions for our mid-sized vessels in the second half, driving Atlantic earnings to their highest levels since early 2014 and significantly outperforming Pacific earnings.



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