The Baltic Exchange’s main sea freight index, which tracks rates for ships carrying industrial commodities, slipped to another record low on Thursday. This is a clear indication that the dry bulk ships are in oversupply and not much cargo as there is a slowing global demand.
The overall index, which gauges the cost of shipping dry bulk including iron ore, cement, grain, coal and fertiliser, fell five points or 1.65 percent to 298 points. The index has yet to register a single session of gains this year.
A slowdown in the Chinese economy, which grew at its slowest pace in a quarter of a century in 2015 and a huge over-capacity in vessels has hit the index hard. The capesize index fell one point or 0.48 percent to 208 points.
What the Dry Bulk Shipping Has to do?
Dry bulk shipping is facing a perfect storm and requires drastic supply side measures if the industry is to return on course to profitability in the medium term, according to Drewry. Drewry estimates that if dry bulk ship-owners collectively removed half of all capesize ships over 12 years old, equating to around 20 million dwt of capacity, it would enable earnings to return to profitability by 2018. If they were to remove all old capsize vessels the recovery would occur even sooner (see chart below). This could be achieved through a combination of scraping and temporary vessel idling. While the proposed adjustments may seem harsh, there is now a need for industry wide action otherwise the market will remain loss making for the foreseeable future.
The economic slowdown in China continues to negatively impact demand for iron ore and coal shipments while the fleet carries on rising. This week the Baltic Dry Index reached an all-time low of 345 points and today it is at 298 points. Drewry expects earnings to deteriorate further through 2016 as more vessels are fixed at rates well below operating costs. Indian coal import demand is expected to wane as domestic extraction ramps up and ports remain congested. Meanwhile, vessel capacity growth continues to outstrip demand and the orderbook represents a threatening 16% of the global fleet. These factors have caused Drewry to further downgrade its outlook for the sector. In the absence of radical action, Drewry expects dry bulk shipping freight rates to deteriorate further through the course of the year and to remain weak in 2017. Any recovery will be pushed out further with little near term prospect of a return to profitability.