Illustrating with figures compiled by Howe Robinson, Kerr-Dinesen asserted that “the halving of the oil price in the second half of 2014 is a development of enormous significance”.
“It has had the most profound and significant negative impact on the dry bulk market,” he added. Kerr-Dinesen noted that this impact has been greatest and most easily seen in the capesize market.
Kerr-Dinesen said Howe Robinson had compiled figures for an average capesize on typical Brazil-China and Australia-China iron ore trade routes to see what speeds would produce the optimum time charter equivalent (TCE) rates. It was found that the ships did not trade up and down the speed scale but made sharp adjustments on either side of 11.5 knots and 13.5 knots.
Through its models how the market stayed depressed in the fourth quarter of last year despite new demand coming in that theoretically exceeded supply. In June 2014 when TCE rates were around $16,000 a day and bunkers were at $600 a tonne the optimum speed was 11.5 knots. But just four months later in October, when rates were just slightly higher at $17,000 but bunkers had fallen to $500 a tonne, the speed had increased to 13.5 knots.
A similar pattern occurred this year, Kerr-Dinesen said. Comparing the first half’s iron ore export figures with the second half, there has been a sharp rise however in the summer and early autumn capesize rates have collapsed. “So two plus two does not equal four, and yet again the culprit is oil,” he said.
This shows how a further collapse in bunkers has supported an increase in speed despite greatly reduced earnings. Illustrating further, he said in July, when bunkers averaged $300 a ton and charter earnings were only slightly more than $12,000, the optimum speed was 13.5 knots compared to February 2014 when TCE rate was at the same level and bunkers were higher and the optimum speed was 11.5 knots.
According to Kerr-Dinesen, this clearly shows the bunker price rather than charter rate is the key determinant of voyage speed and as result, has a dramatic effect on supply of tonnage, amounting to as much as 16% within just a few months.
“If all ships had a similar profile and if they all traded at the optimum speed, the shift up and down this speed curve would have the potential to increase or shrink the fleet by perhaps 13% to 16% in the space of one or two months, overriding in spades the fundamental tightening or weakening of the supply-demand balance,’ he said.
Kerr-Dinesen added that there is a “devastating” secondary means by which low oil prices affect the charter markets. Producing further figures to assess the productivity of the capesize fleet, he showed how the cost curve flattens as bunker prices decline.
“The effect of this is to reduce the floor of the market and limit the ability of fuel-efficient ships to extract a premium,” Kerr-Dinesen said. And ultimately this serves to extend the lifespan of fuel-inefficient ships, he said.
While this situation produces a generally negative effect, there could be a silver lining, Kerr-Dinesen said. “Plunging bunker prices have increased apparent supply, reduced the spread of the cost curve and softened the imperative to scrap, but the good news is that should the oil price recover, the market will receive an unexpected boost,” he concluded.
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