Today I will be discussing about the dynamics of a lesser-known industry. Dry Bulk shipping. The reason why I am bloggin about this is because understanding of this environment is a key factor in understanding how one of my stock, Courage Marine will perform in this industry.
To begin with, while most of Singaporeans associate shipping with containership, there is the less visible of shipping aspect known as bulk shipping. The bulk shipping forms a major aspect of the shipping industry and today my blog is to present an insider guide to the world of bulk shipping.
By definition, bulk shipping involves the carriage of cargo which constitutes raw materials for industrial purposes. The quantities involved are huge in nature so shipping them on bulk carriers present better economies of scale. Examples of bulk cargoes are iron ore, coal and grain for dry bulk.
To put things in perspectives, 70% of world's transported goods are seaborne. Drilling further into seaborne transportation, dry bulk and wet bulk each account for 40% of the total pie while the remaining 20% is made up of bread bulk, general and containerised caroges.
The components of the dry bulk comprises of:
50% iron ore, scrap iron, coking coal and steel products
20% steam coal
10% grain
20% minor bulk (minerals, forest and agricultural products and fertiliser)
Bulk shipping delivers practically all the raw materials to industrial and population centres of the world to feed manufacturing process and support production of food, infrastructure, building materials as well as deliver energy in the form of fuel. Though not commonly visible, these dry bulk cargoes affect the daily lives of everybody globally.
Pricing of dry bulk cargoes comes in the form of bulk shipping contracts that is determined on a daily basis and the rates contracted here are being watched as one of the leading barometer of the state of bulk shipping market.
The Baltic Dry Index which measures the demand of dry bulk shipping capacity versus the supply of dry bulk carriers has grown so much that the value of the index is being accepted as one of the world's leading economic indicator. The reason for the unprecedented rise in the BDI over the last couple of years can be attributed to the following factors:
a. Insufficient new ship deliveries to match growing demand
b. Severe port congestion in major dry bulk ports of loading and discharging. Resulted in extended occupancy, making them idle off the port and creating a severe artificial "shortage" of ships
c. Economic growth in Brazil, Russia, India and China
d. Changes in trade patterns involving longer distances between loading and discharging port, thus exacerbating the problem of artificial "shortage"
HOWEVER, the onset of the global financial crisis resulted in a steep decline in the BDI. Ever since, the industry has struggled to find its footing again. The challenges remain and the strategies adopted by the ship owners include:
a. Supply of ships Right now, there are too many ships chasing too little cargoes. It pays to reduce the supply of ship in order to strike a balance between supply and demand. Even so, the momentum of ship building has been rampant and it is not as easy to cancel the order. But some of the solutions to reduce the supply of ships will be: laying up of un-economical ships, scrapping of old ships and deferring the delivery of new ship building and worst case scenario is to cancel new ship building order if conditions remains bearish.
b. Cash Owing to the circumstances now, cash is King. All business owners are busy managing cash given its severe shortage due to tightening liquidity. Some strategies to manage cash include: heightening monitoring of counterparty risks, timely collection of freights and hires; tightening up on ship management procedures to curb waste; managing price volatility of their fuel oil exposure by purchasing forward contracts if opportunities permit; hedging on forward exposures and restructuring their capital base
c. Trading Pattern Due to changes in trading patterns, different bulk carriers are moving into new areas of carriage. Some ship owners are relocating their ships at their costs to other geographical areas in search of better value but such a move might reduce the comparative advantage after one factors in the cost of making such a transfer.
The best strategies at the moment is for ship-owners to identify the particular sector that offers the best promise and adopt strategies to extract value. The market is made up of pessismists and optimists. The pessimist group will remain long on cargo at current day levels as they hold the view that markets will ease. Correspondingly, the optimist camp would long on ships with the view that the market will turn bullish again.
