The dry bulk shipping outlook for the remainder of 2016 remains extremely negative with an unbalanced supply-and-demand equation preventing any meaningful rebound in pricing as too many vessels chase too few shiploads, according to a new report by AlixPartners.

The consultancy said uncertainties about overall global economic activity and trade, coupled with surplus capacity and reduced demand for iron ore and coal from both China and India had placed every company in the dry bulk shipping industry at risk. “Although vessel demolitions in 2016 are expected to hit a record high of 40 million dwt, that won’t offset the 50 million new dwt expected to enter the fleet,” AlixPartners said in its 2016 Dry Bulk Shipping Outlook report. “Despite a modest bounce in pricing at the end of the first quarter, the outlook for the remainder of the year remains extremely negative.”
After a stable 2013–14, the dry bulk shipping industry began a deep downturn in 2015. Industry financial performance declined markedly from 2014, and compared with 2013, the drop in operating performance has been staggering, the report said. “By 2014, the dry bulk sector appeared to have stabilised, and it looked like companies had positioned themselves to take advantage of any market rebound, protecting themselves against further market erosion. Unfortunately, that stable state broke down in 2015, when four companies filed for protection and many others sought out-of-court restructuring. “Market pricing – reflected in the Baltic Dry Index, which charts the costs of shipping raw materials globally – sank once again as increased industry supply met diminished global demand. These unbalanced fundamentals continue to hobble the industry in 2016 and show no signs of abating anytime in the near future.
The report said the industry-wide decline could be explained by a fairly straight-forward equation that few companies have managed to solve: Weak Pricing + Costly Operations + High Debt Loads = Distress. Shipowners’ financial performance in the past few years reflects the harsh proof of that. Even companies that were restructured a few years ago were struggling, and Alix Partners said the majority of companies surveyed for its dry bulk shipping outlook were at risk of bankruptcy.

The first part of the equation – weak pricing and costly operations – showed that industry revenues fell by more than a third from 2014 to 2015, with less than 15% of the companies surveyed in an AlixPartners study showing revenue growth during the period. Bottom-line operating performance was even worse, as overall EBITDA turned negative. “The declines in EBITDA margins and operating cash flow are especially troubling because few companies have been able to sustain positive results for either,” the report noted. “A majority of companies surveyed had negative EBITDA last year compared with less than 15% in 2013. In addition, two-thirds of companies in our study had negative operating cash flows compared with just over one-third in 2013.”

AlixPartners said the severity of the slide was best shown by comparing 2015 results with those of 2013, when dry bulk new ship contracting was on the rise. Industry revenue dropped 15%, but EBITDA slid 120% into negative territory. Income losses went from USD542 million in 2013 to USD2.8 billion in 2015. “The grim numbers illustrate the collapse and pinpoint the challenges the industry faces in projecting demand accurately enough to pace supply,” according to the shipping outlook.

The consultant’s report said China’s economic slowdown was the cause of reduced demand for dry bulk shipping because it makes about half the world’s steel, and iron ore and coal make up a majority of dry bulk shipping. The mix of larger stockpiles and reduced production mean it’s unlikely Chinese iron ore imports will grow enough in the near-term to make a material difference for dry bulk shipowners. Outside of core bulk steel inputs, the picture looks equally dim. The China Coastal Bulk Freight Index, a broad proxy for the country’s maritime shipping activity, is at all-time lows and even well off its 2011–15 average. This affects Capsize vessel operators more than other dry bulk shipowners with spot rates falling by between 65-80% between 2010 and 2016.

Valuations have been driven to all-time lows in the first quarter of 2016 by sales of distressed assets and a five-year-old Capesize vessel is currently priced at a discount of almost 50% of a newbuilding. Although ship recycler GMS said some of the numbers seen on ships sold recently suggested a cash buyer confidence was returning to the market. “While supply has slowed over this past month, certain owners have been compelled to sell their respective units at lower overall rates, unable or unwilling to pass surveys or even lay up their vessels in wait of the anticipated fourth-quarter resurgence,” GMS said in a note.

That resurgence may still be some way off with shipowners often their own worst enemies. Oversupply remained the greatest industry-wide problem and AlixPartners said it was a real-life application of the prisoner’s dilemma game theory problem: “The best outcome for the group as a whole is achieved when no one entity acts in its own self-interest, but it will happen only if everyone acts selflessly, with owners scrapping or at least idling a proportion of their individual fleets to rebalance supply so as to boost demand.” But shipowners would also have to stop building because even though new vessels may be more efficient and more desirable from a marketing perspective, the economics of adding capacity remained counterproductive in the current market.

“Practically speaking, we think it’s unlikely that enough owners will, of their own volitions, behave in the industry’s broadest interests to make a meaningful impact.” This gloomy prediction led to the report’s conclusion: “Three years from now, demand may come back, but shipowners should focus on the next 36 months and act as though depressed demand is here to stay.”