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Capesize bulk carrier Cape Elise

Capesize Market Getting Some Encouragement – but how long-lived can it be?

The Capesize Market report from the week ending September 16, 2016 shows rates improving, but no one quite seems to know why, and there is even less certainty about how long it can last. In fact, experts can’t even say why the market fell to such disastrous lows earlier this year in the first place. Therefore, while the improvement in rates is very welcome, it is also met with a great deal of very cautious optimism.

The August fleet statistics report did not give cause for celebration, with cape deliveries standing at only seven, but looking ahead we see that there are still 84 deliveries scheduled for the remainder of 2016. Calendar year 2017 looks better, with 48 scheduled deliveries and 2018 with 24, but these numbers are more sanguine than reality since the 2018/19 deliveries have a healthy dose of 400,000MT Valemaxes being delivered.

Environmental Issues and Costs of Retrofitting Impacting Scrapping

The IMO Convention of Ballast Water Treatment has finally been signed by Finland, triggering enforcement in 2017. Retro-fitting tonnage to bring vessels into compliance is estimated to cost from $1 million to as much as $5 million, depending upon which report accept never mind which system one chooses or the ships’ original design, etc. Adding the cost of BWT retrofitting will cause most fleet owners to reconsider the worthiness of continuing to trade their vessels. Therefore, even though the purpose of BWT is to protect the environment, an additional outcome will most likely be increased scrap opportunities as the additional investment will not be to make sense in today’s market environment.

The story is even less sanguine for new vessel construction. Even though spot freight is recovering, the period to amortize tonnage is still insufficient to ameliorate the costs. Therefore, we can expect to see cape tonnage purchases remaining in resales and tonnage that already exists on the market.

Cargo Flows Are Predicted to Increase in the Coming Years but Scrapping Remains Key

Analysts offer a number of reasons to explain why cargo flows will continue to improve. One example is the Brazilian S11D. Another is the drop in coal consumption in Europe, which will require Colombia to shift its focus and increase sales to Asia. But these cannot occur immediately. The bottom line, then, is of course supply and demand, and with a situation of excess tonnage, the only way a true long-term recovery can be sustained is if scrapping continues. Reduced capacity and yard consolidation will also play a positive role in keeping the market moving forward. Optimism in the market will also be key to maintaining improvement.

Will Coal Shipments Be Impacted by Hinkley Point C?

For more than ten years, the British government has been debating the issue of nuclear energy and construction of a nuclear energy plant. Finally, at the end of September, the UK approved construction of Hinkley Point C, opening the way for nuclear energy consumption and a lessening of dependence upon coal and fossil fuels. Of course, there is still a long way to go between approval and opening day, with plenty of opportunity for derailments along the way. How this play out will no doubt be followed closely.