Minor bulks, major gains: industrial minerals boost handysize ship market

Published: Monday, 25 November 2013

Rates for smaller dry bulk vessels are continuing to grow as the fleet size remains tight and demand from the minor bulk sector generates more orders for shippers, Wayne Yamada explains.

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