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Dry bulk shipping industry’s negative performance is cause for alarm

One of the most watched commodities these days is the Baltic Dry Index. The Index has fallen by 90% since reaching a high in 2008, and in February 2015 we saw the worse performance in three decades.Many ships and yachts in the  Phuket harbor.

In 2008, shipping vessels were earning around $200,000 daily. Today, shipping companies are earning less than half the total amount of their costs. Consider this: capesize rates equate to approximately $4,300 per day, while the daily operating costs are averaging at $6,500. Once all the additional operating costs are included, owners are spending $13,000 each day. Just four months into the year, eight shipping companies have filed for bankruptcy and under present circumstances, more could follow. The question is: why and will things turn around?

Slowing global economy

It is true that the overall global economy has been slow to recover, and some of the shipping industry’s strongest markets, such as China, have actually reversed direction, resulting in less demand for shipments. Many docks are already oversupplied with coal and iron ore, for instance, reducing demand.

Over-abundance of shipping vessels

However, the majority opinion of shipping industry analysts is that the true culprit is an enormous over-supply of shipping vessels. Favorable investment cash from Wall Street and others anxious to get in on the good fortunes of the shipping industry have been doling out roughly $5 billion to ship owners each year. The result has been a constant flurry of shipbuilding activity. The dry bulk shipping fleet has been increasing by an average of around 5% annually since 2009. At the same time, the quantity of commodities to be shipped is increasing by only 3-4% each year.

Even ship owners are alarmed at the rate of vessel construction and its negative drag on the fortunes of the entire industry. The CEO of Tsakos Energy Navigation, Nikolas Tsakos, implored investors, especially private equity funds, to curtail their huge investments in ship building, pointing out the dramatic negative effect that the oversupply of vessels is having on the health of the dry bulk shipping industry.

Is there hope?

There is room for hope, but it requires some tough choices and the jury is out as to whether shipping company owners have the fortitude and willingness to make the necessary sacrifices. Some reduction in fleet sizes is already happening on its own. To date in 2015, 4.6 million metric tons of Capesize vessels were sold for scrap, according to data from Clarkson Research Services. This represents an increase of 368% over last year’s demolition rates.