A sea of red ink washed across the dry bulk carrier sector for much of the past decade. But ships that carry loose commodities such as coal and iron ore are again in high demand. That might prove temporary: a post-recession recovery rather than a new supercycle. But so long as the industry holds back from overbuilding, it should stay on course.
The Baltic Dry index, which tracks rates, is up fivefold over the past year to a decade high. Quoted owners such as Eagle Bulk Shipping of the US, Star Bulk Carriers of Greece and Golden Ocean Group of Norway have delivered average returns to investors of more than 200 per cent. The surge follows a commodity buying spree by China, which accounts for 45 per cent of the entire bulk market.
Higher freight costs — now $40,000 a day — are painful for buyers, compounding the price increases of the commodities being shipped. But current rates are well below historic highs of $100,000 a day, according to shipping organisation Bimco. That was before the financial crisis, when fleet utilisation was nearly 100 per cent. The squeeze triggered a spate of new orders, encouraged by private equity groups pouring cash into the sector. The resulting overcapacity was a significant drag on the industry. That has started to come back into balance, with utilisation rates now at 80 per cent.
There is a risk that the shipping industry will revert to its normal pattern of over-ordering when times are good. The dry bulk sector is vulnerable to this, because it does not have the system of alliances that control capacity in the container market.
But uncertainty over the energy transition is holding back new orders. It is unclear whether ammonia, hydrogen or another candidate will prove the best low-carbon fuel. The order book-to-fleet ratio has fallen from nearly 80 per cent at the time of the financial crisis to under 10 per cent. That should smooth the passage ahead.
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