At a time when the dry bulk market is still saturated with too many ships, not many operators thoughts will be on acquiring brand new tonnage. A brief flurry of investment in dry bulk newbuildings in the first quarter turned out to be a knee jerk reaction to low prices and a market that had started to show the first signs of life in more than 18 months. But it demonstrated that there is at least some appetite for ordering despite the market woes. However, the business model behind many tonnage suppliers approach to newbuilding investment may well have to change as operators who got their fingers burnt on newbuildings in the past are opting to reduce their risk profile by shortening their time charter commitments.

The typical dry bulk newbuilding investment model, especially in the supramax and panamax sectors, from Japanese tonnage suppliers has been structured around five year charter contracts with both domestic and foreign ship operators. Mitsui OSK Lines, Nippon Yusen Kaisha and K Line built their giant chartered fleets around such deals, which have also become increasingly popular outside of the country. European owners such as Norden have used a similar model to take on new tonnage. But the collapse of Sanko and Daiichi Chuo Kisen demonstrated the dangers of taking on such long-term commitments as the financial losses can be catastrophically high if the market slumps. In Europe, the likes of Western Bulk Shipholding and Grieg Shipping also got caught out with expensive long-term charters.

The indications in Japan are that operators are now seeking shorter charters of two to three years with options to extend. Shorter charters protect operators from paying compensation on cancelled charters when trading turns against them, while the option to extend provides an opportunity to trade on without increasing longer term risk. While shorter charters insulate operators from risk, they pose a problem for banks and yards, limiting their funding options for newbuildings in a tight credit market. In the past, up to 80% financing — or in some cases even more — could be secured on the back of a five-year charters from blue chip operators. But on shorter charters, banks and yards are looking to owners to stump up more equity to spread the risk.

One positive under the new investment model is that it should prevent highly-geared newbuilding deals from once gain swamping the market. One broker said: “If there is now less chance of highly-leveraged newbuilding deals being done, then that will hopefully prevent the market from being over-ordered again.”

Although the market is chronically overtonnaged and will continue to see a large number of bulkers delivered this year, the orderbook is dwindling. Around 60 capesize, 108 panamax and 386 handymax bulkers will sail out of shipyards this year, according to figures from Maritime Strategies International (MSI). But after that deliveries will slump, with only 36 capesize, 26 panamax and 84 handymax bulkers entering the trading fleet in 2018. The figures fall even further for deliveries from 2019 onwards.

Lower delivery levels will eventually push up demand for fleet renewal, particularly in the handymax sector, where 12% of the fleet is more than 20 years old. And there could even be accelerated scrapping of relatively young tonnage as the dry bulk sector faces the costs of complying with ballast water regulation that kicks in from September.