The first quarter of 2022 has again seen a low level of dry bulk ordering. With supply set to remain tight, we look at why contracting still hasn’t grown despite positive rates over the past 12 months.

Current trends

As Q1 has come to an end, ordering in the newbuilding market has remained at historically low levels. Despite a strong rate environment in 2021, many owners have been reluctant to order new vessels amid high prices, low yard availability and regulation uncertainty. Bulk carrier contracting slowed for the third quarter in a row to 8m dwt, equating to 112 vessels, in the first quarter of this year. Breaking this down across the four sectors, the Capesizes have been the least popular, at just 8 vessels amounting to 1.5m dwt. The other sectors have been more robust with Supramax ordering in Q1 growing by 1.2m dwt YoY and Panamax and Handy contracting marginally lower.

Yard availability continues to be an issue in the newbuilding market for bulkers, with buyers looking for prompt slots required to pay high premiums. Yard capacity continues to fill up with containerships and gas carriers occupying most slots in 2023 and 2024. Their price compared to bulkers makes these vessels more attractive to yards which face growing costs due to rising energy and steel prices. Containership ordering in Q1 totaled 164 vessels, increasing by 84.3% Q/Q, indicating any slowdown in contracting for these vessels has yet to occur. Meanwhile, orders for gas carriers are at all-time highs, totaling 40 vessels in Q1. Understandably the ongoing natural gas crisis, particularly in Europe, which is moving away from pipeline gas from Russia, requires increased seaborne volumes to haul supplies. This is also coinciding with many gas projects coming online in the next couple of years which need vessels to transport product. The absolute minimum lead time for an LNG carrier is approximately 20-22 months, compared to 13-14 months for a dry bulk vessel. As gas prices remain elevated and demand for newbuilds continues to increase, these vessels will carry on keeping bulkers out of yards in the coming years, particularly the larger sizes.

Rising prices

The continual price increases for bulk carriers have also deterred many buyers in the newbuilding market from making any purchases, speculating on the prospect of lower quotes later in the year. Prices across the vessel categories are at their highest levels since 2009, with Ultramaxes the highest on record. As prices remain firm, payback periods are extended and any uncertainty on the direction of the market drives risk to buyers higher. Capesize prices have especially risen due to the competition from the larger containerships and gas carriers which continue to see high demand.

Higher prices have kept the orderbook at historically low levels in 2022. For the entire fleet, this currently lies at 7.6% in dwt terms, falling from 7.9% in January but still 140bps above the most recent low in March last year. Dissecting this by sector, the Handy orderbook remains the most subdued at just 3.8% of its current fleet. While Handy rates have continued to perform strongly in 2022, the price differential for the smaller ship versus the Ultramax has led to more interest in its larger compatriot. Meanwhile, the orderbook lies at 7.1%, 9.8% and 8.5% of the trading fleets for the Capes, Panamaxes and Supramaxes, respectively.

Ultramax interest outperforms

As previously mentioned, buying interest in the Ultra/Supramax vessels has continued to largely outpace its counterparts. In Q1, 3.4m dwt was ordered in this sector, higher than any other in dwt terms and the highest level since Q1 2014. When comparing ordering activity across the four major ship types, the Supramaxes have gained their largest share over the past 5 years, accounting for 41.9% of total dry bulk orders in Q1. This could be a result of these vessels outperforming their peers so far in 2022, averaging $25,156/day.

In the secondhand market, interest in the older Supramaxes has also remained robust, as Chinese buyers use the older vessels for short-haul coal trades and ultimately coastal stems. Also, pricing on the secondhand market for Tier III compliant ships has increased to approximately $37m. For this reason, most buyers have opted to go down the newbuilding route instead. This trend has not carried over into the other sectors, leaving buyers for these vessels mostly in the secondhand market for the time being. With just over 9% of the Supramax fleet aged 20 or higher and demand for older ships strong at current prices, this could incentivize continued renewals in this sector in 2022.

Alternative fuel uncertainty

Another trend emerging in bulker contracting is uncertainty over which vessel to order and whether it will comply with future EEXI and CII regulation, set to commence on 1 January 2023. As these measures will get stricter each year, it will be important to order a ship that can maintain compliance over its lifecycle. So far, the extent of the penalties for non-compliance are unclear. Only when this is revealed, will there be more clarity over the necessity of ordering a dual-fuel vessel over a conventionally powered ship for example.

Dual-fuel vessel ordering in 2021 totaled 8.5m dwt, with the majority being Capes and a handful of Panamaxes. In Q1, however, only 802k dwt of all orders have been dual fuel. At present, the only dual-fuel dry bulk vessels being ordered are LNG, with 5 currently trading and 60 on order. LNG is largely seen as a transition fuel in anticipation of cleaner fuels such as ammonia, methanol and ultimately hydrogen entering the market. At current newbuilding prices, ordering an LNG dual-fuel vessel, which commands a significant premium to a standard ship, is a large commitment when taking natural gas forward prices into account. Although these vessels can still burn fuel oil, the aim of ordering one is to use LNG and reduce emissions, implying high bunker costs. Further, fees are higher for LNG bunkering compared to traditional fuels, and these could increase if costs continue to rise.

Some owners have also stated they will be surpassing the LNG (or biofuel) route as a transition fuel and looking towards future fuels such as methanol and ammonia. However, operating these vessels will not be possible until 2025/6 at the earliest, so buyers are taking a wait-and-see approach to ensure they select the optimum fuel for a vessel. Supply chains are currently in development for these fuels, but it will take years for supplies to meet the demands of a bulk carrier, particularly as they will face competition from vessels in other shipping markets. Further, there will be a time lag as yards develop the expertise to build these new types of bulker, which require different components to accommodate new types of engines and fuel tanks.

Outlook muted

The historically low orderbook in the dry bulk market remains a theme in 2022 and will continue to support the outlook for freight rates going forward. High pricing for a newbuild has kept many owners unwilling to order this year. Hesitancy in the dry bulk market over which vessel to order will increasingly see slots allocated to the gas and container markets, particularly the larger sizes, as ordering for these vessels shows no signs of slowing down. As the timeframe of yard availability and the feasibility of more eco-friendly fuels align relatively well, this may keep newbuilding buyers on the sidelines a little longer as these technologies continue to develop. Growing uncertainty will also play a role in keeping ordering down this year because of the Russia-Ukraine war, leaving high vessel prices potentially unjustifiable for some buyers. Finally, the prospect of higher interest rates means capital is set to become more expensive and thus will require strong returns to breakeven at these vessel prices.