Scrapping of dry bulk tonnage slowed dramatically between July and August, partly due to India’s monsoon season. Analysts say increasing owner optimism, particularly for capesizes, may keep even more of those ships off breaking beaches until the end of the year.

Speaking on condition of anonymity, a research director for a commodity trading firm says the capesize market remains “structurally oversupplied”. He estimates that between 100 and 120 capesizes would need to be scrapped for balance to be restored. “If we get to 100 [capesizes scrapped this year], that’s going to be an achievement,” he said. The number of capesizes scrapped is running below last year’s levels. Some 67 capesizes were recycled from January to 22 August this year, according to cash buyer GMS Dubai.

Deutsche Bank analyst Amit Mehrotra says 69 capesizes were scrapped between January and July 2015. Arctic Securities analyst Erik Nikolai Stavseth also notes that “scrapping in the capesize segment has disappointed”, with only two such vessels going to the breakers over the past two months. The slowdown in scrapping will result in net fleet growth of up to 3% for the year, Stavseth estimates.

The first half of the year showed better tonne-mile demand than had been originally forecast, which helped push freight rates off earlier lows. But further gains are in doubt as capesize owners face what Stavseth calls “their own ‘prisoners dilemma’ as the lack of scrapping holds the entire market hostage”. Capesize rates showed one of the strongest rebounds of the year, dipping below $2,000 per day in late March before rising to just over $9,000 per day a month later. Spot rates have averaged about $6,500 per day since May. The outlook is for more rate improvements. Freight futures markets are pricing capesizes to earn $9,000 to $10,000 per day during the fourth quarter.

With those rates more than covering operating expenses, it is more likely “owners are holding on to their ships in order not to miss out on the next rally”, says Seaport Global Securities analyst Magnus Fyhr. The next rally hinges on the always uncertain outlook for China’s coal and iron ore demand. Fyhr says low coal inventories at Chinese ports and strengthening prices could support rates into the fourth quarter. Cutbacks in China’s domestic coal output fuelled more cargo activity during much of the year. But with import prices on the rise, China’s government signalled that it would allow greater domestic production once again.

Likewise, Stifel says iron ore inventories at Chinese ports remain elevated, which may dampen further imports. But China is pushing steel producers to be cleaner – a step that would require higher-quality overseas iron ore in place of domestic iron ore. Deutsche Bank’s Mehrotra says seasonal patterns – if they hold true this year – also point to a slowdown in scrapping activity. Over the past five years, his research shows that roughly two-thirds of all scrapping activity takes place in the first half of the year, with those levels tapering in the second half. The fourth quarter of last year was unusual with 15 capesizes scrapped. But, on average, the final three months have only seen nine capesizes being scrapped over the past five years. Seasonal strengthening in capesize rates will further dissuade shipowners from scrapping. Mehrotra’s research shows that fourth-quarter capesize rates have risen 35% from August over 13 of the past 16 years.

If anyone were to scrap, Mehrotra says it is more likely to be smaller owners with five or fewer ships, especially older ones. The cost of special surveys on ships of 15 years or older may be the tipping point for some owners. “They don’t have deep pockets of larger owners,” Mehrotra said. “All the big guys, they hope the market stays weak to force more of the smaller players out.” But a slowdown in scrapping in the fourth quarter will likely take a toll on freight rates in the first quarter of next year. That period is typically weakest for cargo activity and, still, high vessel supply could make rates even worse. “The market could be really crappy in the first quarter because of the lack of scrapping,” Mehrotra said.