Dry bulk shipping companies are crossing their fingers that strong demand underpinning a recent increase in the Baltic Dry Index will hold, although a worrying slowdown in scrapping levels means it would not take much to drag the market straight back down.
The BDI rose past the psychologically significant 1,000 point mark, a level it has not seen since mid-December 2016, on the back of increased activity in iron ore trade and shipments of coal and steel products.

But in a vastly oversupplied dry bulk shipping market, demand will never be able to improve enough to absorb all the capacity currently available or coming online, so a significant level of scrapping is necessary before any supply-demand balance will be achieved.

Unfortunately, when demand increases, dry bulk shipowners immediately put the brakes on scrapping unnecessary tonnage and this threatens the fragile recovery.

Khalid Hashim, managing director for Precious Shipping, conceded that the increase in demand recently had been stronger than the net increase in supply, leading to the BDI “crashing through” the 1,000 point mark. But he warned that future trends in demand would continue to shape the BDI as the supply side has basically “given up” trying to influence the outcome with barely any scrapping taking place this year.
“So if demand were to slow down even a tad, you will see the BDI giving up all its gains very quickly indeed. We have to pray that demand doesn’t flatter to deceive as the irresponsible shipowners have already stopped scrapping, which is the only sustainable solution for a return to a decent market,” he said.

IHS Markit’s Sea-web data show that so far this year, just 43 bulk carriers of 3.66 million dwt have been scrapped, sharply down from the 116 bulk carriers of 8.44 million dwt that were demolished during the same period in 2016.

Pacific Basin CEO Mats Berglund said he was optimistic about 2017 following the record scrapping and new building cancellations that were driven by the weak spot market. “New orders in 2016 amounted to a record low – 1.7% of existing capacity. In the absence of new ordering and a reduced orderbook, this should result in reduced deliveries in the coming year,” he said in the bulker’s 2016 results announcement.

“Looking forward, market conditions have been improving since the worst market conditions in February 2016. [This year] has started stronger than 2016 and market sentiment is improving.”

However, a number of brokers have warned that there are significant numbers of vessels to be delivered, so although there has been some small improvement in the returns and the commodities markets have apparently changed, owners should hold off ordering new ships.

Brokers said that owners have started taking slightly longer positions this year and for some commodities there may be some optimism, particularly as China has banned coal from North Korea. Although it is uncertain how China will replace that coal, it is certain that it will increase tonne miles.

According to Allied Shipbrokers in Greece, the BDI rise has been driven by “increased activity having been seen in the iron ore trade, while the firm prices being noted in the price of steel are likely to continue to boost trade in both steel products and metallurgical coal”.

That increase in demand has consequently led to increased optimism and that in turn has seen rumours beginning to circulate that some owners are starting to talk to yards and, if that results in more vessel orders, “it will be a good party, but it won’t be a long one”, said one broker.