Capesize dry bulker “Berge Atlantic” of 172,704 DWT was built 1998 and is owned/operated by Bergesen d.y. in Oslo. The vessel is strengthened for heavy cargoes like iron ore.

No repeat performance is likely

Wet and dry bulk owners must be wondering if 2005 will present anything like the earnings opportunities which prevailed last year, when the market was better than even the most optimistic operators had hoped for. We are unlikely to get a repeat performance this year, not least because new tonnage supply in both wet and dry will exceed expected demand by a good margin. Questions are now asked if the shipping markets for wet and dry bulk have changed materially from the latter half of 2003, or if trading patterns have altered and shipping is just catching up. Apparent geographical changes in the export/import patterns for both wet and dry bulk commodities, some more freight sensitive than others, have added another dimension to any analysis. However, demand for wet tonnage will largely depend on OPEC’s share of oil exports and several new producers, while dry bulk remains reliant on China at least for the time being.

The snag is that these parameters are difficult to convert into tonnage demand in tonnes miles, especially if demand patterns continue to change, particularly for oil products.

A consensus opinion among analysts seems to be that freight will not fall much further until the second half of this year. But is it only guesswork or is it based on the assumption that a sufficient number of commodities, both wet and dry, are sufficiently freight sensitive to affect demand? Oil demand has certainly not suffered by high prices and Chinese hunger for iron ore appears insatiable for the foreseeable future.

Tanker demand good, for now
A few weeks into the New Year tanker demand remains good, but hardly sufficient to make good the downturn since November/December last year. Fundamentals are beginning to change, and above all in the estimates for economic growth. For, while the world saw the highest rate of economic growth for twenty years since mid-2003, the pace is now slowing. This is what OPEC calls “convergence towards fundamentals”.

The weaker dollar, while not sufficient on its own to bring back equilibrium in the world economy, is an important component in the set of developments in the past four months to bring back balance. With lower economic growth comes lower incremental demand for oil, perhaps by just over 3.0 per cent.

This is a sort of growth oil producers can cope with, even though OPEC has cut back by 1.0 million barrels per day. The growth is 1.5 per cent lower that those used by most analysts when assessing the 2005 oil imports. Easing oil prices will not necessarily increase demand, as stock levels are well above the five-year running average. The result could be lower overall tanker demand.

Steady increase in supply
When owners order new tonnage they have to assess the prospect. At least that is what they should do. Current tanker orders stand at nearly 90.0 million DWT, against the prospects of lower demand. Around 32.0 million DWT is for delivery this year and will increase the available fleet by nearly 10 per cent. The rest of the orderbook is scheduled for 2006 and onwards.

However, these numbers must be regarded on the basis of our notes in the introduction. Physical demand for tankers could be higher than economic growth might imply.

What is certain is that there will be some sort of fallout when economic growth eases off after a strong period.

Dry bulk hinges on China
In 2003 China surpassed Japan as the world’s biggest importer of iron ore, and the development continued last year to reach over 200 million tonnes, up 57 million tonnes from 2003.

	Aframax tanker “Nordpacific” of 105,344 DWT was delivered to Danish owners/operators Norden last in 2003.

By the end of this year imports may reach 250 million tonnes. Australia and Brazil were equally big in iron ore exports last year with between 220 and 230 million tonnes each.

The forecast for thermal coal is also good with imports up a good 25 million tonnes, or around 5.0 per cent. Grain, which are important for panamax vessels and smaller, is not likely to add much to demand, except for soybeans, where crops are good for the 2004/2005 season.

In all respects, sustained dry bulk demand depends on China maintaining growth. Perhaps not at the rate seen in 2003 and into 2004 when crude steel production increased by around 20 per cent per year, but very close.

With increased steel production come higher steel exports, which will generate demand for panamax and downwards. All in all, Asia will remain the main mover in the dry bulk freight market.

China could change tack
The Chinese government has already reigned in the economy and slowed down investments in infrastructure. As a result Chinese steel demand is down.

Production must follow down unless the surplus production can be exported.
At today’s prices it is a tempting proposition, but a more likely scenario is that imports of iron ore is cut.

There are already indications that crude steel production is down to adjust for demand. If so, dry bulk owners are in for a rough ride this year.

New deliveries may spoil it
The total dry bulk fleet increased by nearly 6.0 per cent from 2003 to 2004 to 322 million DWT of which 106 million DWT were capsize vessels. However, the current orderbook may spoil the market for dry bulk owners. It stands at 66.8 million DWT, or 21 per cent of the current fleet. 22.1 million DWT is for delivery this year. No amount of congestion, which is likely to increase with heavier iron ore shipments, can make up for this fleet increase. A worst-case scenario with less congestion and lower Chinese import of iron ore, could see owners queuing at the shipyards to cancel orders or, alternatively, we may see lay-up to reduce supply or older bulkers could be sold for demolition at good prices.

//Petter Arentz