The prolonged and deep recession facing dry bulk shipping is so severe that the industry will not return to profitability until 2019, and then only if there is zero growth on the ship supply side and trade growth increases by 2% a year.

This grim assessment of the dry bulk business is made by BIMCO in its latest Road to Recovery report that outlines a sector in crisis and requiring a change in business model before profitability can be achieved.

The report found that even if trade did manage to achieve 2% growth – regarded as optimistic – shipowners still needed to scrap ships in far greater numbers than has been seen to date. The other key metric to the recovery in 2019 was keeping supply-side growth to zero, which if not achieved would delay the recovery into the 2020s.

Dry bulk shipping is awash in excess capacity and the fleet continues to grow despite record levels of scrapping. This year there has been capacity growth of more than 30 million dwt, while 25 million dwt has been demolished.

Peter Sand, chief shipping analyst for BIMCO, said the fleet growth had to be neutralised in future, and fortunately the prolonged low freight rates were pushing the industry to be more responsible on the supply side.

“What we have seen this year was the all-time low level of the Baltic Dry Index, so it is highly relevant to continuously advocate for high levels of scrapping because this is a supply side matter more than anything else,” he told IHS Fairplay.

However, the dry bulk shipping industry has only achieved zero supply-side growth in three of the last 35 years, so having ship demolition at equal or greater levels than deliveries for the next three years – basically scrapping its way to profitability – would be no easy task. Timecharter equivalent earnings (TCE), a standard shipping industry performance measure, fell to 1970s levels in the early part of 2016, and even increasing activity in the dry bulk market in the months after could not raise rates to break-even levels.

The Handysize spot market rates averaged USD3,900/day in the first half of 2016, a 22% decline, and Supramax spot rates averaged USD4,570/day, down 27% compared to the first half of 2015.

This prolonged crisis is likely to have a significant impact on how the dry bulk shipping business is conducted in the future, and many of the changes are likely to spill over to other shipping sectors as well, the BIMCO report found.

However, what sets the dry bulk business apart is its incredibly fragmented nature. There are 10,800 ships in the global fleet, but only four companies own more than 100 dry bulk ships, and on a dwt basis, the largest-owned fleet represents less than 4% of the total fleet.

Angus Frew, secretary general and CEO of BIMCO, said this meant the market was basically all small companies. “The problem is that everyone looks over their shoulder and thinks someone else will scrap their ships. But everyone needs to do their bit because the oversupply will only go away with concerted action of all shipowners,” he said.

The BIMCO executives said there had to be a new industry model with consolidation creating bigger companies running larger fleets and operating on a more sophisticated level. In the future, there would be many larger dry bulk shipowning companies operating as logistics providers to the commodity giants with a focus on risk management and Return on Capital Employed (ROCE). The asset play would be a subsidiary benefit to these businesses rather than the number one business goal.

For instance, there have been 34 giant Valemax ships launched since 2011 (around 380,000 dwt). Then in March 2016, a further 30 Valemax ships were ordered for delivery in 2018 by three Chinese owners for a combined USD2.5 billion with back-to-back 25-plus year contracts of affreightment (COA) with Brazilian mining giant Vale. Once these orders have been delivered, the Valemax fleet will be able to carry over 50% of Brazil’s current iron ore export volume, eating into the business currently carried by the existing Capesize fleet.

“Vale is already developing major relationships with the Chinese shipowners,” Frew said. “You will see more of these direct relationships and the commodity giants will ultimately want to deal with fewer suppliers that are able to provide a bigger portion of their transport requirements. We have just seen China Shipping and Cosco put their fleets together and we will see more and more of this activity in the years ahead.”

BIMCO said the changing structure of the shipping business was having wide-reaching impact across the dry bulk shipping system. The direct relationships between carriers and shippers on major dry bulk routes would place shipbrokers under pressure to widen the services they offer. Shipyards were facing a stark choice of close or consolidate, and a reluctance by traditional banks to provide ship finance was placing constraints on shipowners.

Yet even though the BIMCO report concluded that it was difficult to have an optimistic outlook for the dry bulk shipping industry in the next few years, chief shipping analyst Sand said there were positives to be found in the depressed business.

“There is oversupply, but we are constantly seeing growing demand levels, so this is a situation we can handle ourselves within the industry and with the tools we already have available,” he said.

“The future may be dull but it could also be profitable, and that is what matters for the industry – bringing back profitability and facing the fact that there is no new China around the corner. We need to adapt to this lower level of demand while addressing the supply side. If the industry can do that, I think there is a brighter future ahead for dry bulk business.”