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Dry bulk asset values may continue to fall, more scrapping needed: Bimco

The asset values of dry bulk vessels could potentially sink further amid the battered market, which continues to be badly in need of more scrapping activities to clear the severe oversupply of vessel tonnage, according to Peter Sand, chief shipping analyst at Bimco.

The recent financial results season has seen several companies took into account huge impairment charges on vessel assets as they try to “reset their cost level to a lower base”, Sand noted.

Data from Clarksons and DNB Markets revealed that 15-year-old capesizes are valued at just $7m as at 11 March 2016, slipping further from $11m in 2015 and $21m in 2014. A five-year-old capesize is seen valued at $24m in present times, compared to $33m in 2015 and $47m in 2014.

“Is asset prices going down further? Potentially yes,” Sand told Seatrade Maritime News. “If we go back to mid-2015 the market was actually on the rise but come Q3-Q4 the market turned sour and the start of 2016 was catastrophic,” he said, pointing out that the BDI has stayed below 400 points.

“It is highly likely that we may see some owners and operators breakdown simply due to a lack of working capital. If you are bleeding dollars on a daily basis, there is a limit as to how long more you can stay in business,” he said.

The severely depressed and supply-heavy bulk market has pushed owners to send more than 10m dwt of tonnage for demolition over the course of this year, which is a positive development. But the global fleet has welcomed 12m dwt in new deliveries this year.

For 2016, Bimco estimates that a record total of 40m dwt of tonnage will be sold for demolition, while 50m dwt of new capacity will be delivered despite extensive postponements, delays and rescheduling.

“We need record dry bulk demolition several years in a row in order to bring the market back to a utilisation rate of around 85-90% where money will start to grow in a nice way for the industry again,” Sand said.

The decision to send vessels to the scrapyards, however, does not solely lie with the owners themselves but partly with the financing banks as well. “Banks are not shipping experts. They look at their own balance sheet and money that owners owe them, and they are not necessarily ready to take huge losses,” Sand said.

“But scrapping is still the most relevant tool for owners because it is a permanent measure for improving the market. It is not enough to just lay-up the ships because they are still part of the fleet,” he said.

Sand added that while slow steaming has been effective in mitigating the oversupply problem, there is only so much that this measure can help as there is a limit that ships can slow down, not to mention that charterers play a part in deciding on the speed of the vessels.

And with supply outpacing demolition, demand has not caught up due to tumbling need from China, a country that remains a key driver for bulk shipping trade. With the country’s current slowdown in economic growth, increase in hydropower generation and a different take on its economic development, its appetite for major dry bulk commodities has stalled, Sand noted.

“Demand has somewhat turned negative although supply growth has slowed. It would be easier for everybody if the demand side is constantly growing but this is not the case. The crunch time now for the market is that demand is slowing,” Sand said.

“There are no quick fixes. The industry needs to realise there is a long way back in order to balance supply-demand due to excessive ordering in past years where they are not matched by demand.”

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