In an indication of the sorry state of the dry bulk shipping business, even though it is chronically oversupplied, rising demand for iron ore and coal from China could be bad news for the struggling sector. China’s iron ore imports are up 9% in the first eight months of the year and coal imports have grown 12% compared to the same period of 2015, and steel exports have risen 6% year on year. This has raised hopes that the industry is recovering, but there are still too many ships chasing too little cargo.

However, Precious Shipping managing director Khalid Hashim said equilibrium in the dry bulk market depended on the supply side shrinking its numbers. “The orderbook is going to flatten out in 2018 and 2019, but shipowners are like unsupervised children who are already on a candy high being shown more candy from the shipyards and will not be able to resist the temptation,” he warned. “As soon as the market shows additional signs of stabilisation, not only will scrapping be consigned to the dustbin of history, but new orders will be placed galore at the dying/bankrupt shipyards, giving them another lease on their wretched lives.”

In the first quarter, Hashim said about 14 million dwt of dry bulk ships were scrapped. That dropped to 9 million dwt in the second quarter with the third quarter scrapping volume looking to be half that of the second quarter. He said that if shipping pundits are correct in predicting the BDI will remain strong for the rest of this year, that could be a problem. “The shipowners will make sure that the upturn is extremely short-lived by stopping the scrapping of their older ships and ordering new ones from the shipyards, who could only bless their good fortune that there are so many stupid shipowners out there,” he said.

Pacific Basin CEO Mats Berglund said strong grain shipments and a rebound in Chinese coal imports have contributed to stronger rates since the lows in the first quarter, but he pointed out that the rates remain at historically low levels. This dragged the carrier down to a first half loss of USD49.5 million. “There is a high inverse correlation between freight rates and scrapping volumes. Over the last few months, the scrapping rate has slowed down given the higher freight rates that we have seen and also, we have seen less scrapping activities over the last few months because of the monsoon climate in the region,” Berglund said. “We would like to see more scrapping in the industry and owners should take the opportunity to trade up to younger better second-hand ships or re-sales as this can help provide a better supply demand balance.” Berglund urged shipowners to be patient and said Pacific Basin was continuing to manage for a weak market in the medium term.

The two shipping executives also highlighted the IMO’s Ballast Water Management convention that will be enforced from 8 September 2017. Both Hashim and Berglund expect this will have a significant impact on dry bulk capacity. A coalition of maritime groups is trying to convince the IMO to put back deadlines under the convention so owners can install second-generation cleaning systems. The World Shipping Council (WSC) is proposing a filing that it claims will prevent shipowners investing billions on treatment systems that may fail the treaty’s requirements for killing or rendering harmless invasive species. Berglund said the recently ratified IMO rules requiring the installation of the ballast water treatment systems in ships would contribute to higher scrapping levels.

Hashim said, “With the Ballast Water Management convention coming into force on the 8 September 2017, all existing ships will have to retrofit a ballast water system by their next drydock after 8 September 2017. “Any ship that is older than 15 years of age would then become a scrapping candidate when it’s next drydock became due after the effective date, as the cost benefit to retrofit an extremely expensive – and as yet largely untried – system would be too great a risk to run. It will make the ‘to scrap’ decision much easier.”

Axia Capital analyst Robert Perri noted in a sector outlook, “The market remains volatile and we will see pockets of strength, like the one we are currently in, and people will begin to get excited; however, the recovery is not there yet.”