Trade wars impact dismissed in optimistic dry bulk outlook

Pacific Basin Tiawai Point
Dirty tankers and dry bulk vessels to benefit most from reductions in Excess of Loss rates

Hong Kong-based minor bulks specialist Pacific Basin addressed the US-China trade wars directly in its first quarter review, stating: “dry bulk cargo flows threatened by these protectionist measures account for only a small fraction of the trades in which Pacific Basin is engaged and we do not expect them to have a material impact on the overall dry bulk market”.

Whilst a cautiously optimistic outlook to the market, which Pacific Basin first expressed at the end of 2017, was still in place three months later, confidence must have been boosted by the first quarter improvement. “The upward trend in market freight rates during the quarter was driven by further improvements in both demand and supply side factors,’’ the company said.

Spot markets on the Pacific surged 31% year on year to its highest quarterly average for 4 years as Atlantic market rates rose 26% year on year.

Pacific Basin’s favoured tonnage, handysize and supramax ships, averaged US$8,070 and US$10,190 per day respectively in the first quarter of 2018, representing a 28% and 32% improvement over the same period last year.

Pacific Basin generated average Handysize and Supramax daily TCE earnings of US$9,360 and US$11,250 per day net in the first quarter, representing a 25% and 40% improvement compared to the same period in 2017 and outperforming the BHSI and BSI spot market indices by 16% and 10% respectively

China led the demand growth with a strong 9% increase in imports of dry bulk commodities in January and February. A slowing supply side also contributed to a brighter outlook. Newbuilding deliveries reduced significantly year on year resulting in just 0.8% growth in the global dry bulk fleet compared to 1.7% during the same period in 2017.

Pacific Basin said it was on the look out for good quality second hand tonnage in the wake of increased sale and purchase activity prompted by the improved freight market conditions where bargains can still be had compared to newbuildings. Clarksons Research currently values a benchmark five year old Handysize bulk carrier at US$15.5m, up from US$14m at the end of 2017. Newbuilding prices have increased to US$22.5m from US$22m at the end of 2017.

Pacific Basin’s view that “first-quarter improvement in the market for minor bulk shipping is encouraging and, with the all-important supply fundamentals looking more positive, we are cautiously optimistic for a continued market recovery, although with some volatility along the way, was endorsed elsewhere in Hong Kong.

At the Marine Money Forum Thursday, Clarkson Asia managing director, Martin Rowe, as part of a dry bulk panel, said: “Clarkson sees iron ore demand remaining relatively robust over the next couple of years or so. Base case scenario for demand growth is at 3.5%. Today we think seaborne demand dry bulk growth in 2018 will be nearer to 3.8%.” He predicted that similarly robust demand growth was likely to continue into 2019.

Mr Rowe declared the current period a buying opportunity, particularly for larger tonnage.

“From a historical perspective we still see second hand prices 30% to 50% below where they normally are at this point in the cycle, primarily as a result of a lack of ship finance at the present moment.

“We think as the market improves more tools will become available to shipowners to source debt at cheaper levels. As that happens the second hand prices will go up. So we certainly see this as a buy side opportunity for shipowners. We remain positive for all bulk carriers by and large because newbuilding contracting remains relatively benign,” he added.

On Donald Trump and the mooted trade wars, Mr Rowe said: “I think he likes short wars and he likes Xi Jiping. I think he would prefer to be with him on the golf course throwing brickbats at each other….Once this is all over hopefully we will see more trade rather than less,” he concluded.

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