As a ‘minor bulk’
industry, transporting industrial minerals often involves using
the smallest ships in the dry bulk vessel range.
Although the biggest vessels - the
Panamax and Capesize ships - are sometimes used for shipping
industrial minerals, the boom in seaborne iron ore and coal
trade over the last decade has meant that shipowners often
focus on these larger-volume dry bulk commodities instead,
leaving the smaller boats to deliver other commodities.
As a result, charter rates for
these smaller vessels have been steadily growing and are
expected to increase over the coming year.
The smallest two categories of
ships are the Handysize vessels, which have capacity of between
25,000-39,999 dead weight tonnes (dwt) and Handymax ships,
which have capacity of between 40,000-64,999 dwt.
These are usually used by the
industrial minerals industry, particularly in the phosphate,
potash, limestone, gypsum, finished fertiliser products and
cement markets which tend to see significant volumes of
seaborne trade.
Shipowners also indicate that large
quantities of the refractory minerals, bauxite and alumina, are
transported on Handysize vessels, as well as anthracite which
is used to make synthetic graphite.
At the larger end of the dry bulk
shipping scale, the Panamax vessels have 65,000-119,999 dwt
capacity, while Capesize ships have capacities of over 120,000
dwt.
Along with Handysize and Handy max,
these four categories of ship make up the Baltic Dry Index
(BDI).
Handysize capacity
tightening
While all sectors of the dry bulk
shipping market have seen rates increasing in 2013, higher
rates for Handysize vessels can be attributed largely to a
steady fleet size and growing demand for smaller ships from the
minor bulk sector.
Chartering a Handysize vessel in
the Atlantic basin for a round voyage cost around $14,000/day
at the end of October 2013, up from $8,700/day at the beginning
of the year, according to ship broker Fearnleys, equating to a
jump of 60.9%.
In the Pacific basin, charter rates
have also climbed to $11,500/day from $7,000/day over the same
period, representing an increase of 64.3%.
For the first three quarters of
2013, the Handysize fleet grew by just 0.95%, compared with
5.6% for the whole dry bulk fleet, according the Hong Kong
based shipper, Pacific Basin.
The Handysize order book for the
period was 350 vessels with a total capacity of 12.4m dwt, but
only 7.4m dwt of this has been delivered. This means around
4.5m dwt has been delayed or cancelled.
Handysize has also had the highest
scrapping rate in the BDI this year, at 7% of the fleet. This
compares with Capesize at 2%, Panamax at 1% and Handymax at 3%.
This is partly due to the age of the Handysize fleet, around
17% of which is over 25 years old, compared with 8% for the
whole dry bulk fleet.
This has kept shipping capacity in
the Handysize sector tighter than in other sectors, according
to shippers, with elevated rates expected to continue into
2014.
“We expect seasonally stronger
demand combined with reduced newbuilding deliveries late in the
year to support a stronger Handysize and Handymax spot market
in the fourth quarter of 2013, before the typical January rush
of new ship deliveries and Chinese holiday and weather-related
disruptions cause rates to soften early in the new year,”
Pacific Basin said.
Minor bulks, major
gains
Another factor driving up shipping
rates is that industrial minerals shippers have to compete with
other minor bulk commodities, including forest products such as
timber and wood chip, nickel ore and other raw materials, for
seaborne transport.
In the last 10 years, minor bulk
trade volumes have increased by 52% from 1.1bn tonnes in 2003
to an estimated 1.6bn tonnes in 2013, according to ship broker
and consultancy Clarksons.
This is less than the growth seen
in the iron ore trade, which grew by 659m tonnes over the same
period, but higher than thermal coal which grew by 512m
tonnes.
The outlook for continued growth in
minor bulk volumes is bullish. Research published by financial
group Jefferies forecasts dry bulk demand will grow to 4.64bn
tonnes in 2014. This is a 45.4% increase since the financial
crisis in 2009.
Within this, phosphate volumes are
set to grow 60% to 32m tonnes in 2014 compared with 2009,
bouncing back to pre-financial crisis levels. Bauxite and
alumina combined are predicted to climb 59.5% to 118m tonnes
over the same five years, although the research does not
distinguish between metallic and nonmetallic ores.
Other minor bulk demand is expected
to rise 39.2% to 1.54bn tonnes.
“Over 3bn tonnes of cargo have
been added to world seaborne trade in the last decade, and 17%
of it has been minor bulk,” Trevor Crowe, market analyst
at Clarksons said.
“Whilst other cargoes have
grabbed headlines, volumes in a range of minor bulks have
pushed on,”he added.
The threat of
overcapacity
With the prospect of higher
shipping rates comes the danger of overcapacity, however. While
Handysize deliveries this year have been small, the order book
for the next few years looks higher than other dry bulk
shipping sectors.
Clarksons data showed the Handysize
order book in 2015 to be 5.7% of the fleet. This is higher than
the whole dry bulk fleet average of 4.3%. In 2016, the
Handysize order book is 1.4%, again higher than the dry bulk
fleet average of 1.2%.
“The scheduled orderbook for
2015 and 2016 deliveries remains relatively small (...) but
continued ordering at this pace would be a concern,”
Pacific Basin said.
And if shipowners see sustained
rate increases, then the number of Handysize vessels being
scrapped may also decrease as shippers seek to make the most of
higher rates.
Overall, the Handysize market seems to have recovered well
after the 2009 financial crisis, however, with higher rates
expected in the medium to short term into next year.
The importance of ship orders
The number of ships on order reflects managers’
expectations of future supply and demand differences.
When they expect future supply to
increase more than demand, managers will refrain from
purchasing new ships.
However, when they expect demand to
outpace supply growth, companies return to shipyards to place
new orders, on the condition that they expect to generate
profits with the new vessels. So rising or high levels of ship
orders often indicate that shipping rates will rise.
Since dry bulk ships usually take
one to two years to construct, the indicator is often more
relevant to long-term investment horizons, but this means
trying to second guess the industry’s characteristic boom
and bust cycle.
“You can’t just go and
pick a ship off the shelf,” explains Kenneth McLeod,
chairman of Stena Line UK and president of the UK Chamber of
Shipping.
“These [cargo ships] are
sometimes three years in the planning,” he adds, noting
that while there is presently overcapacity in most sectors of
the shipping market, the industry is getting better at dealing
with the busting side of the cycle each time it comes
around.
There is much debate over whether
demand will outpace supply growth in 2014 as the shipping
industry begins to recover.
The steadier decline in orders from
shipowners, point towards lower supply growth ahead, and
suggests that the industry return should normalise over the
next few years, according to analysts.
This is long-term positive for dry bulk shippers