Stronger demand than expected for dry bulk commodities in 2016’s second half (2H16) is not a panacea for the shipping industry’s problems. And if recent form is anything to go by, it could in fact worsen the overcapacity that is such a drag on profitability.

Since October, the market has improved, but as shipowners association BIMCO pointed out, this was not because of hard work carried out by shipowners scrapping excess capacity, but rather due to demand growing more strongly in the third and fourth quarters than was projected in April and May.

“In 2017, BIMCO expects the supply side to grow by 0.5%. This is simply due to the devastatingly low level of scrapping in diehard markets,” said Peter Sand, its chief analyst, adding that year-to-date scrapping of 27.8 million dwt was significantly lower than BIMCO’s expectation of 40 million dwt for all of 2016.

China’s iron ore imports in September were the highest on record, while its coal imports grew 12% in the first eight months year on year (y/y) from the 2015 period and steel exports rose 6%.

Khalid Hashim, managing director of Precious Shipping, has been an outspoken critic of the shipowner practice of slowing down on scrapping whenever demand for dry bulk shipping increases. He said 2016 had not proceeded as planned and characterised shipowners as acting like “unsupervised children on a candy high” whenever the market picked up.

“Things have not gone as well as expected on the supply side,” he said. “The forecast for the year was for a flat-to-negative growth rate for the world fleet, i.e. scrapping would be equal to or slightly greater than the expected new supply for the year, based on the record 14.09 million dwt scrapped in first quarter.

“Scrapping in second quarter at 8.65 million dwt was good, but a much slower rate compared with the first quarter. However, the third quarter, at 3.24 million dwt, is a truly disappointing number,” noted Hashim, who also noted that new orders were hovering at near zero, with all existing orders being delayed because of financial pressure either on the buyers or at shipyards.

“All of this has helped reduce the pressure from the supply side of the equation,” he pointed out, but if scrapping failed to pick up in 4Q16, the market might drop back sharply in 1Q17 because of the January impact on the supply side – “more ships are delivered in this one month than any other” – and the expected demand slowing as Chinese New Year approaches.

Pacific Basin CEO Mats Berglund said strong grain shipments and a rebound in Chinese coal imports had contributed to stronger rates since the lows of 1Q16, but he pointed out that the rates had remained at historically low levels.

“There is a high inverse correlation between freight rates and scrapping volumes,” he said. “Over the past few months, the scrapping rate has slowed down, given the higher freight rates we have seen, and we have seen less scrapping activity over the past few months because of the monsoon climate in the region.
“We would like to see more scrapping in the industry, and owners should take the opportunity to trade up to younger, better, secondhand ships or resales, as this can help provide a better supply-demand balance,” Berglund explained.
China is the world’s main importer of coal, which is, in general, on a long-term decline across the globe. Rising Chinese seaborne imports in 4Q16 cushioned these effects, including 20.03 million tonnes imported in October.

BIMCO said the 2016 coal revival came on the back of Beijing’s decision in April to limit production. What level of imports the government will now target “is not a matter of free market forces. BIMCO expects Chinese coal imports to stay a critical swing factor in the dry bulk market for 2017,” Sand said.

Hashim expressed concern about Beijing’s production curb. “China has reversed policy on the number of days that Chinese coal mines can operate and hence coal imports into China may not show any growth, and likely will actually show a fall during 2017. This is not good news for the market,” he declared.

The International Energy Agency (IEA) said in its latest Medium-Term Coal Market Report for 2016 that 73% of all the coal consumed in the world was still in Asia. The IEA expected China’s demand to flatten out from now to 2021, although not without significant uncertainty, and also said India and ASEAN would generate the most demand over the next five years.

Shifting demand patterns and moves toward cleaner fuels have seen the dry bulk shipping industry slowly coming around to the idea that the double-digit growth machine that once was China is gone. But rather than be depressed, BIMCO’s Sand cited positives. “There is oversupply, but we are constantly seeing growing demand levels, so this is a situation we can handle by ourselves within the industry and with the tools we already have available,” he assured.

“The future may be dull, but it could also be profitable.”