Expectations that fortunes will improve in the bulk carrier sector this year are supported by an IHS Markit analysis, which concluded that the outlook provides owners with a “great opportunity to go long”.

IHS Markit principal trade analyst Luciana Salles predicted that 2017 will be a transitional year for the bulker market as demand rebounds, vessel deliveries slow as compared with previous years’ boom, and vessel scrapping gathers pace, leading to three years of growth.

Market balance will be achieved through the double action of higher demand globally and particularly from China’s increasing imports of iron ore and coal during from 2017–20, the analysis said.

Growth in grain exports from the Atlantic Basin was seen pushing up tonne-miles further for the bulker sector as populations, principally in the Pacific Basin, also grow, fuelling further demand.

Global growth was expected to firm up during 2017, reaching 2.8% this year, from 2.5% in 2016. Both GDP and industrial production were seen increasing 3%, and exports up 4%, pushing dry bulk growth up on average by 2.5%/year over the three-year period.

According to IHS Markit analysis, Beijing’s supply-side reform has targeted a reduction of 500 million tonnes of coal mine capacity within 3–5 years, of which 250 million tonnes shut down last year. In addition, China has targeted a reduction of 100-150 million tonnes of steel production capacity by 2020.

However, Salles believes that of the 45 million tonnes of production capacity reportedly closed last year, just half actually ceased trading, as the vast majority of the so-called of eliminated capacity had already been closed down or idled.

Even with these efforts to reduce capacity, China’s steel production still increased by 10 million tonnes last year, reaching 808 million tonnes, which is a 1% year-on-year (y/y) increase.

Amid curbing policies and expected stronger demand ahead, Chinese steel prices rose, helping to boost Australian and Brazilian imports, which both increased 8% y/y in 2016, with a further increase expected in 2017.

Grain growth is also expected to support overall demand for dry cargoes, even though coal is expected to face continued challenges from alternative energy sources.

Over the next three years, net bulker fleet growth will stand at just 1% but capacity will increase 14 million dwt in 2017, growth of 1.8%, before declining in the two subsequent years, the analysis found.

About 10% of the current fleet, 70 million tonnes in total, is currently on order, with about half of those vessels, an aggregate 34 million tonnes, in the Capesize sector.

However, Salles pointed out that scrapping will be limited, given the age profile of the bulker fleet, in which about 88% of ships are 15 years old or younger. That means opportunities for scrapping – due to the high cost of meeting regulations, such as the Ballast Water Management Convention and the sulphur cap – will be limited to a small segment of the total fleet.

Nevertheless, balance could be achieved through a more disciplined approach to capacity and a boost in seaborne trade, causing a positive effect on timecharter rates, which are set to increase by about 50% y/y.

Broken down into four key segments, IHS Markit data forecast that Capesize vessels will see yearly average timecharter rates rise from USD7,374/day to USD11,000/day on the Baltic Exchange’s 5TC scale.

Similarly, Panamax 4TC and Supramax 6TC rates are both expected to average about USD8,500/day, which would represent a significant rise over 2016 figures. Steady increases are expected on all three scales through to 2020, by which time rates are expected to have doubled from 2016 average daily rates for all vessel types.

The three-year outlook for the dry bulk sector looks positive, with the supply/demand balance pushing freight rates up to more sustainable levels.

What happens after 2020 could well depend on how disciplined owners are during this period of relative profit. Some brokers have reported rumours that bulker owners are already asking yards about newbuildings.

Yard prices at rock bottom and overcapacity in the shipbuilding market are luring owners to the low prices. However, a new bout of ordering could kill the market’s rebound and lead to another period of depression.