This week we investigate the supply side of the smaller sizes and our expectations going forward.

Freight returns on the geared vessels have performed well in 2022, commanding a premium to the larger Capesizes and Panamaxes for most of the year. The smaller vessels ship a more-diverse range of commodities, thus a decline in trade of one is less impactful, compared to iron ore on the Capesizes for example. This sets the basis for a more positive outlook for these vessels, hence why ordering in the Ultramax segment has been more robust. In last week’s Big Picture, in which we covered the Capes and Panamaxes primarily, we are seeing ordering in the geared segments also being affected by higher prices. However, given their overage fleet sizes, we have increased our scrapping outlook for both the Supramaxes and Handies.

Of the 227 bulk carriers that have been ordered so far in 2022, 87 have been Ultramaxes, grabbing a 38.3% share of total dry bulk contracting across this period. In Q1, 56 vessels in this sector were ordered, the highest level since Q2 2014. Handysize ordering fell to a 1-year low in Q1, at just 16 vessels, the lowest since Q4 2020. Since then, 24 vessels have been ordered. For this reason, we don’t envisage a meaningful increase in Handysize ordering any time soon.

Supra/Ultramax

Supply in the Supramax sector has increased by 1.3% in 2022 on net additions of 50 vessels, with nearly all the growth coming from the Ultramax design.  The Ultramax fleet has grown by 3.3% in 2022, the highest level across all vessel categories and showing few signs of slowing down. With the 58k dwt Supramax fleet now aging considerably, almost all renewals have come in the form of an Ultramax. With 21% of the 40-70k dwt segment 20 years or older, we expect this renewal process to continue at these levels out to 2026. As we mentioned above, this is the main factor driving our increased expectation for scrapping on the 58k dwt vessels. As Ultramaxes continue to be ordered in the face of several restraints in the newbuilding market, we have kept our expectations for ordering flat from our previous round of forecasting. Therefore, the marginal reduction in supply growth is derived from increased removals, predominantly in the back end of our forecast. Like the larger ships, we have reduced our expectations for scrapping for this year given the relatively firm market environment at present but raised them for the years to follow. As a result, we forecast removals in the Supramax sector at 820k dwt in 2022, declining marginally from 2021. For these reasons, we see the Supramax sector growing at a compound annual growth rate (CAGR) of 2.5% out to 2026.

The Handies

Handysize fleet growth has been on a constant, but low, trajectory in recent years and given current ordering trends, we expect this to continue. In 2022, the Handy fleet has increased by 0.8% amounting to net additions of 19 ships. While fleet renewal is in full swing in the Supramax sector, the same can’t be said for the Handy fleet. Despite the overage fleet making up 22% of total Handy supply, contracting is still showing no signs of any material increase. Though Handysize rates have been firm in the past 12 months, these vessels, even when comparing to an Ultramax, are difficult to trade. Subsequently, owners looking for more exposure to the geared vessels are more likely to opt for the Ultramaxes, which don’t charge much of a premium. We expect removals to decline in 2022 to little over 200k dwt. Consistent with our thesis on the other sizes, we also see increased scrapping of the overage fleet post-2022 as IMO regulations take effect. Overall, we now forecast Handy supply to grow at a CAGR of 1.1% over the next 5 years, the lowest of all the dry bulk segments.

Newbuilding prices

Current prices for an Ultramax or Large Handysize, which see the bulk of the ordering in each sector, have risen in tandem with the larger vessels given the elevated steel and energy costs facing shipbuilders. Like the Capes and Panamaxes, yard availability is limited, driving hesitancy towards paying firm prices for less-prompt deliveries when market conditions are less certain. With 2024 essentially covered, most offers are now coming for 2025 delivery and beyond. In Japan, most Ultramax availability now lies in the second half of 2025. The greater relative price increase for an Ultramax in Japan versus China has simply been driven by a large difference in inquiry from owners to yards in both countries. Japanese-built Ultramaxes are now being quoted for $39m, the highest level on record. Although higher prices have discouraged buyers in other sectors, the recent ordering activity for these vessels suggests this has yet to be a deterrent on the Ultramaxes. Finally, while inflation mixed with heavy competition for yard slots has driven shipbuilders to raise offers for dry bulk vessels, we also believe central bank tightening is set to play a role in ordering going forward. With the US federal reserve raising interest rates by 75 bps on Wednesday, and many other countries following suit, capital is becoming more expensive. Along with the reasons outlined above, this may act as a further disincentive in contracting going forward.