Introduction to Dry Bulk
Back to the eighteen hundreds, we could find what’s considered the first dry bulk ship ever built. Prior to that, indeed dry cargoes such cotton, logs or even some grains were carried by sea, but not on bulk carriers rather than on any conventional existing floating ships available out there. MV ‘John Bowes’ saw the light in Tyne (England, 1852) and she was initially allocated into the (at the time) what supposed to be a profitable emerging commodity trading market: coal.
Much larger ships, of course, been built since then. Just take a look at the Valemax type (+400,000 dwt), the largest bulker at sea and surprisingly – or not – rarely mentioned out there & not sure if duly considered on the widely blasted in the marketplace iron ore analysis.
Moreover, please note dear reader that more commodities than ever are indeed carried on bulk carriers nowadays. Cargoes such as Iron Ore, Coal, Agriproducts, Steels, Cement related products ([1]), Bauxite and various minerals like Manganese Ore, Ilmenite and other minor bulks are daily loaded and/or discharged globally. Honourable industry academia might consider up to 50 different dry cargo types suitable to be carried by sea on board bulkers. And indeed, they are!
Bulk carriers are considered technically simple vessels to build ([2]). Ships type vary depend on their dead weight (dwt). From the small 1,500 dwt ([3]), key in certain trades such Skaw-Gibraltar / Mediterranean Sea / intra-Black Sea / South East Asia, up to the ‘gigantes do mar’, the Valemax with over +400,000 dwt.
Not difficult to imagine the brains behind the Valemax (68 ships) concept. The idea looks straight forward: build massive cargo intake ships, ergo adding significant offer into the marketplace and then you might bring freight rates down to compensate the much longer voyage transit ex Brazil and then, only then, you might try to compete with your main competitors who enjoy a much shorter sea passage loading ex Australia (Aussie now onwards). Not rocket science, right? Well, that’s the good thing about Shipping: you don’t need to be a genius to do well.
Worth to mention that the main horses of this Shipping segment are the Handysize ships (20,000-39,000 dwt) up to the Capesize (170,000-210,000 dwt). Capes mainly carrying iron ore and coals, but nobody said can’t bring you grains too if needed and freight good enough (money talks lads!).
Important: kindly note than the larger tonnages (ie Capes onwards) are strongly dependent on certain commodities (ie iron ore) and certain markets (ie China, as the biggest iron player with about 70% market share). Volatility and profitability walk together here as a lovely couple through the Brazil/China and Aussie/China ore trades for Capes-Valemaxes sole cargo ore employments ([4]).
That’s not all though. Between the versatile Handies and the iron ore-dependent Capes, we’ve got a wide and flexible geared type of ships that trade anywhere and everything from fertilizers to scrap and even trade parcelling. These are the Handymax 40-49,000 dwt ([5]), but am referring mainly to Supramax and Ultramax ships (50,000-69,000 dwt).
Have to admit that above dead weight distinction isn’t set in stone but indeed makes our life bit easier, right? These ships are not so dependent on any specific trade & commodity or market. Never take anything granted in Shipping except the fact that Greeks shall remain in domain. Needless to say, fleet flexibility might pay off during turbulent times where no clear scenario on China yet
No worries, am here still: another important bulker is the Panamax (74,000 dwt, standard index), name given as she’s suitable to transit Panama Canal locks. Usually gearless ([6]) and fixed for coal, grains, ores and on the interesting parcelling business too. Hold on, you mentioned this earlier with no explanation. What’s parcelling? Well, basically to load on every hold a different cargo (parcel) which not to be mixed or segregated with the other parcels loaded on board ([7]).
Hence, to sum up, different bulker sizes (Coasters up to Valemaxes, 1,500 up to +400,000 deadweight) are fixed and perform on specific, different & very much fragmented markets both in terms of (i) tonnage control and basis on (ii) what are the relevant cargoes and trades to be performed. Interesting and a bit messy, right? Yeah sure, gotcha but gimme just few minutes more and let’s all calm down here since no doubt all above could only make our life more difficult in order to ascertain where are we and what’s next in the industry. Well, nobody said this would be so easy.
*Have a break and check this graph out please: bulk carriers’ type (not perfect, but might work)
As mentioned earlier, we need to bear in mind the intrinsic dynamics and fundamentals of the Dry Bulk segment both on regards to:-
- Cargo interest players: who are controlling the cargoes? and;
- Tonnage providers: who are controlling the ships/fleet?
Let’s start with cargo interest players first if you don’t mind. These are Charterers, Shippers, Sellers, Buyers, Receivers, Consignees and/or any other party who sells and/or buys at some point during the chain the relevant cargo carried by sea on board the ships. Dry bulk players who, by the way, may differ significantly in their form and role compare to the other shipping segments: for example, cargo interest in the container segment are usually referred as ‘Shippers’ and Freight Forwarders have a strong say as big customers for liners. Moreover, dry bulk cargo interest players might also differ compare to the Gas world, where few state or public controlled player handles a significant stake on the business (ie Qatar) on a very concentrated marketplace ([8]).
In dry bulk, cargo interest predominance appears in the form of commodity traders (ie trading houses), mining giants or industrial conglomerates alike. Am referring to players such as Cargill, Koch, Glencore, Vale, Trafigura, Mercuria, Rio Tinto, BHP Billiton and so forth who’re controlling significant cargo volumes. Trading houses, mining and industrial conglomerates are the main Charterers on the dry bulk world. As you can see at this stage, on regards to cargo interest players, it’s a pretty different landscape compare to the containers and gas segments but we might see some similarities to the oil world. Not a coincidence that predominant dry bulk players such as Glencore, Trafigura, Mercuria and even Vitol ([9]) during specific periods of time, are active dry bulk lads ([10]), while do also trade big time oil and refined products: the so called ‘wet’ cargoes as opposite to ‘dry’ ones. In fact, in some of these cases (clearly Vitol is one) it’s the other way around: some of these dry guys are primarily oil & refined products players instead. However, it’s not so easy to see them loading containers (sure, they do some though!) or even gas which has become a very few seats in the table market.
Need to stop here as you might wonder why am using the word ‘players’ rather than ‘traders’ most of the time. Well, the reply was given long ago by Marc Rich and his best-in-class successors: pure trading times are gone ([11]), hence you need to have either a strong position on supply (ie the mining approach, Glencore) or a strong position on demand (crushing plants, aluminium production etc…).
Flip the coin and let’s check out what’s the deal on the other side. On regards to tonnage providers, here we have both Ship Owners and Operators ([12]) who for several years now have been going through an interesting competition between them. On one side of the ring, the traditional Ship Owners such as the well-known Oldendorffs, the usual Dens ([13]), of course the Greeks ([14]) and last but not least the Chinese like Cosco; and on the other side of the ring, some of their previous considered ‘customers’ not so while ago: am referring to the trading houses like Cargill and the ones mentioned above (plus others, of course, no hard feelings) who are indeed controlling a significant share of tonnage/fleet in the marketplace and, as some might say, been aggressively selling freight to third parties as carriers ie as Ship Owner vis a vis their counterparty, the Charterer ([15]). Hold on, stop here cos it’s getting bit confusing. Sure, let me explain further with an example. Take Cargill, which might control +600 ships (yes, no typo) at
any given time as we speak ([16]). And then, for comparation purposes only, take a big traditional ship owner such as Norden who, as per its 2022 flashy annual report last year controlled about +450 ships ([17]) both bulkers and tankers (remember Norden plays the 2 markets, wet and dry).
Hence, what you’re saying is that there are trading houses wearing the Shipowner’ hat controlling more ships than the so-called traditional Ship Owners? Yes, that’s correct – you get it right! And this is something to bear in mind to try to understand this market dynamics, more when some of these big players are not public listed companies (Cargill, Vitol, Trafi etc are all private enterprises, keep it in mind please ladies and gentlemen). Hmmm Again, this looks interesting isn’t? Yeah, but let’s have a break. Am exhausted, guess you too!
*Let me just put here few self-explanatory graphs and let’s breathe deeply before moving on.
Back on track! Therefore, as you can see, we’ve a pretty unique frame work at this beautiful dry bulk world both in terms of its supply/offer and demand’ side where gigantic cargo interest players (ie Cargill and alikes – see above) play at the same time both roles and, not only that, are in fact controlling a significant offer stake in the market place obviously not only to perform their huge in-house cargo books but mainly (and this is where the competition arises with the traditional ship owners) to grab third party businesses which in some cases accounts nowadays up to 75% of their Shipping fixing machine activity ([18]). Unparallel financial muscle, best-in-class commodities and shipping intelligence sourcing and algorithms plus lots of IQ talent around – Ivy League Phds/MBAs and so forth makes a player like the Minnesota beast difficult to beat on large contracts of affreightment (COAs) and no chance for other (traditional or not) Owners when from the top might be instructed to the Geneva/Singapore lads just to make it happen for strategical and/or various reasons: West Africa COAs inbounds are a good example of feet reposition taken at whatever-it-takes mode and making competitors look like needing urgently a Korean calculator to be sent for Christmas. Jokes aside, sure there are lots of reasons for Cargill not having decided on becoming a listed company, but no doubt these sorts of strategic bets are easier to take remaining private and no bothering shareholders having the floor at lunch time.
Current Dry Bulk market status
Let’s go few years back and see this graph. Upps…
Year 2015: anyone there fancy a ship or getting in any way to get involved into Dry Bulk Shipping? ([19]) Thanks, but no thanks bud. This is what it looked to be the case when asking investors for capital raise or any sort of appetite for the sector. No blame though as shown on above self-explanatory graph. Remember this one? ‘Correction as euphemism to losing lots of money rapidly’. Brilliant.
Indeed, no surprise dry bulk Shipping has suffered of capital access constrains for years after the last severe recession as this graph clearly showing. Tech and other sectors being the cool ones, very limited investment has been made during the last decade on building ships hence diminishing supply to a +25 years period lows as we speak.
Therefore, visibility on this side looks clear and promising, despite the 2021-2022 peaks that have been mostly used by Shipowners and Operators to do some balance sheets cleaning work and bring their financials to a good shape for what might be the right time (finally!) seen for more than two decades. Ready to take off lads! Well, not so fast. Let me elaborate.
The good thing about Shipping as a cyclical industry ([20]) is that some relevant graphs (ie firm Shipbuilding order book) show no much difference for different times. No doubt human impulses play its role and horses are unleashed during the healthy rates usual happy gatherings ([21]), where the tendency to order ships has been the norm. Not this time though. Why is that? Well, Container ships, LNG, LPG and Tankers have been very kind on booking most of the slots available at an already concentrated Shipyard’ capacity in China, South Korea and Japan for the next 18-24 months I’d say (no need to take the figures exactly, am just trying to explain myself here!) Supply looks as good as it could, isn’t? Premium: add demolition, scrapping, slippage expected in the short-medium run together with the new IMO environmental regulations combo just landed and in full enforcement – CII/EEXI/SEEMP ([22]) – into the already positive supply equation and et voilá! Feeling better now? Good.
([1]) The Energy Efficiency Existing Ship Index (EEXI); The annual operational Carbon Intensity Indicator (CII).; the enhanced Ship Energy Efficiency Management Plan (SEEMP). As you can see not only Wall Street, the FED and economists create uncomprehensive expressions for seafarers not to even try to understand same. Back to the flipping coin thing. Let’s check out how demand looks like then and all comes to the bottom question on what’s going to happen with China as the main dry bulk driver. Where do we stand on this regard as of today? Well, we’ve just been told by the Chinese government a 5% GDP growth for 2023 and surprise, Shipping stocks falling like stone – are we so predictable? Yeah, and that’s the catch! Is this long time low expected GDP bad news for bulkers? Well, yes and no. I know, let me explain. It all depends who you are and what’s your preferring hat. As a Cape (or larger fleet size) Owner/Operator, no doubt you might consider this as bad as a terrible joke since spot rates are very much dependant on your bread & butter’ iron ore trade which China accounting for 70% on same as aforementioned bla bla bla. Steel output reduction, iron ore discharged to decrease etc…too bad. Moreover, it also depends on your spot exposure and whether part of your fleet has been (or not been) chartered out for short period or longer (1/2 years nowadays the norm). What might worry more is not the GDP forecast disclosed by the Chinese authorities, but the clear signals given by the regulator to prevent at any case whatsoever a construction – real state too fast (re)flourishment given the structural tensions that it might provoke internally and externally ([23]).
Don’t we see a paradox here? While most of the so-called western investing world might consider China as a non investible market ([24]), we’re witnessing how China absorbing into their industrial – economy veins a vastly cheap and discounted energy resources that guess could subsidise a much more favourable economic landscape that we could, at first glance, predict. Troubles? Sure, and many ([25]). However, any reliefs? Yes, and significant too. What about to bring cheap oil and gas into an already stressed by any means economy showing signs of fatigue? It doesn’t look a bad deal. Same applies to India and other buyers of Russian commodities, of course. Not the place here for such a discussions, however the fact of raising question marks on the table on regards to China no doubt it makes it much more unpredictable. And we All know well that investors flee from unpredictability at any case whatsoever. Period.
Aside China, demand looks steadily firm and positive trend to reach about 5.5 billion tons of dry bulk cargoes for 2023, where bauxite and manganese ores might give some good further news. What about the ton-mile increase due to the trade disruptions provoked by the Russian invasion of Ukraine? What about the speed reduction promised? Not forgotten here.
What’s next for bulkers?
Back to Shipping, sorry love is in the air. Given the uncertainty with China, the fleet sizes less dependent on China directly related trades (ie iron ore Brazil or Aussie/China) might prevail during uncertain times. Handies, Supra/Ultras and Panamax are the ones more flexible in terms of both cargoes and trading ports suitability due to their specifications (loa, beam, drafts etc). Geared ships, meaning the ones with their own gears on board (ship’ cranes) are able to self-load and, even most importantly, self-discharge if needed plus the fact that their medium size (20/69,000 dwt, Panamax are mainly ‘gearless’ ships) allows them to trade almost everywhere (hey, no need to fix this bagged cement business to Matadi though yet mate! Careful always with available drafts at the relevant terminal…).
New regulations and freight catalysts ahead? Please see below graphs.
In other words, having a dry bulk cargo demand of about 5.5 billion tons for this year 2023 (not much of a change on the last few years upward trend inch by inch though, except for the black swan covid of course) plus few additional considerations to make:
(i) Ukraine invasion has provoked, among other terrible consequences, a strong trade disruptions on coals, grains and fertilizers (no forget oil, products/refined and gas either) hence the ton-mile sea carriage percentage increase will indeed have a say on where the market heads to as blocking some supply in the market which should result on healthy spot rates (easy, right? Well, might be too easy to be true);
(ii) IMO environmental regulations CII/EEXI/SEEMP could only provoke 3 things in my opinion: (a) some tonnage will have to speed down to comply with (speed down more than what’s been done already the last few years to a current very low 11s knots about? Hmm, can’t see a wide margin on that unless you keen (no way!) to risk breaking down engines); (b) oldie tonnage above -still +20 years?- will need to suffer more costly & frequent face liftings stoppages (ie drydockings / Capex significant increasing); (c) the gap between the rusty buckets vs the modern eco / scrubber fitted fleets shall only widen and widen giving birth to two or even three different markets into an already very fragmented segment:
one for these fancy and efficient ladies (nickname ‘The 2020s’), another one for the nasty ones (nickname ‘The Cowboys’) and another one for the sanctioned members shadowed fleet out there trading on a switch-off mode (Russian, Iranian etc controlled fleet). The nickname for the last one I leave it to you or do you expect me do all the work! All right, leave me alone – I was only trying to clarify the picture for you and I’m trying to tell a story here.
Is that all? Not really am afraid…
How to play the current market situation in the dry bulk segment?
2020 Bulkers (2020.OL)
Haven’t you just said that no go with larger ships type of fleets due to their too strong dependency on the iron ore trades given the China complex purchasing scenario? Yes, you’re right and glad to see you’ve been following the story. Also mentioned that modern/eco/scrubber fitted fleets are the ones that in my opinion shall prevail in this market in the medium – long run due to the reasons explained above.
Well, can’t see any other more modern fleet than 2020 Bulkers in the market (aside Himalaya), which together with a shareholder-oriented Management (look at their dividend policy! My word, we like that – don’t we?), strong commercially with very experienced people at helm plus an efficient Operations/Execution Department and with, important, A1+ counterparties (Koch, Glencore etc).
Moreover, no see a fleet expansion mood in the air, which looks perfect to us as investors on having a small fleet (8 ships only! Well, who said that quantity means quality?) acquired at an excellent cycle value bottom timing (abouts 2016) and with their oldest vessel delivered last August 2019 ergo plenty of time to give good news to shareholders.
Is it trading at a good NAV discount, well don’t see that as of today but if you’re thinking to be long for not a short period of time on dry bulk, then this might not be a bad choice with a dividend to cover downside and assets value – stock potential increase upside. Attractive risk/reward? Well, do the homework.
Cons, a bit more spot fleet exposure might be preferred in the near future though doesn’t look this to be happening at least near-medium term (most probably never – did I just say ‘never’? Well, forget it then). Too much exposed to iron ore and China, yes and we’ve smashed this already. Can we see some other trades where these ships are fixable? Yes, indeed look at the sexy fronthauls (ie Atlantic to East destinations) with manganese ores and bauxites and also don’t discard please the backhauls with coals to Europe-Continent. How long to last this coal backhaul trade? Who knows, but as soon is there should bring some juice to these ships P&L voyage sheets.
Eagle Bulk (EGLE)
American Owner listed on the NASDAQ and phocused on the Supra/Ultramax space with a fleet of 53 ships (over 90% scrubber fitted).
As mentioned, another way to play this market might be with a player less dependent on China and its iron trade but at the same time taking advantage of the upside potential from increasing ton-miles both on coals and grains due to trade disruptions provoked by the terrible war.
Solid balance sheet (low net LTV 21%), high operational leverage and low cash breakeven rates just tick above $12,000 and experience management taking the right decisions for the coming years ahead. An example, scrubbers’ installation are indeed giving a great result to the company earnings thanks to the wide fuel spreads. Not reluctant on fixing in or out tonnage to optimize arbitrage if needed, also hedging with FFAs overall give an extra mile compare to peers.
To consider the convertible bond maturing by mid’24, but shouldn’t be an issue to refinance or even repaid with cash on hands.
Again, a shareholder-orientated company with a dividend policy of 30% of its net income and with Oaktree as the largest shareholder (+27% stake). Is this a guarantee of success? No. Again, let’s do the work. No short cuts am afraid.
Bonus: Another interesting player could be the latest Tor Olav Trøim’s shipping adventure, Himalaya Shipping (HSHIP.OL), with an order for 12 LNG-dual fuel Newcastlemaxes.
Disclaimer: This article is only for educational purposes and in any case can represent an investment advise
Note: Every week we publish investment thesis, macroeconomic articles and comment the market situation in the recently launched blog section. You can follow us to receive an email each Sunday with the publications of the week.
As always, thank you for reading
Author: Joel Grau @JoelGrauJG
COO & Partner at Hizone Group, Shanghai. Professor of Shipping (Chartering, Shipbroking and Carriage of goods by sea) at Deusto University and Faculty of Nautics (UPC) with over 2 decades of executive professional experience in the marketplace at top Shipping firms such as Clarksons and JP Morgan key Shipping subsidiary. Usual Speaker at the most influencial Shipping & Trading forums globally for years now. Private Investor
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References
([1]) Slags, clinker, cement – bulk & bagged -, gypsum, cokes, coal, fly ash and so forth among other products and by-products, which by the way and as curiosity some of them might have even a negative price given specific dynamics (currently applicable due to the energy crisis measures taken in Europe and some power plants resuming work).
([2]) Building a bulk carrier doesn’t bring the best profit margin for shipyards. Keep this in mind, will come back to it later on to understand current orderbook etc. Step by step buddy.
([3]) These small ships are also named as ‘small bulkers’ or ‘coasters’ or even ‘small handies’.
([4]) Please note that Newcastlemax 208,000 dwt trade same routes/cargoes as Capes but has a premium above 30% compare to them if/when modern/eco/scrubber fitted as 2020 Bulkers fleet rates have proved well.
([5]) Still there but less and less frequent seen, despite seen recently some orders at Japanese shipyard for 40-45,000 dwt allocated by Greeks.
([6]) Meaning that this type of ship mostly has no own gears (ie Ship’ cranes) on board, hence needs shore and/or floating means to both load & discharge. Very few geared Panamax available in the marketplace, hence asking a non-desired premium to Charterers.
([7]) ‘Rotation in Owners’ option’, sure Master! Parcelling has a story behind, but not the place here to develop. I don’t want you to throw this away.
([8]) Opposite to the fragmentation both sides (cargo / tonnage) inherent to dry bulk. Might this change in the medium-long term at the tonnage’ side resulting on some relevant fleet – supply concentration? Well, this might be the case as already seen during last years with the container ships alliances and overdone lately though bringing concerns on box rates in the long run.
([9]) Vitol worth a specific mention as they’ve been active both in coal & grains during specific periods of time, while off the radar after some not nice experiences on dry. Under Bob Finch’ leadership on their coal business great achievements for the big trader were acomplished indeed.
([10]) Mainly on minerals, coals and grains.
([11]) Due to various reasons, not the place here to expand on this matter subject to future kind requests of course.
([12]) Big difference between these two beasts monsieur! Similar hat, but indeed different colours, textures, prices and shopping mall locations.
([13]) Norden, Lauritzen, Clipper and lots of local small – medium Operators mainly Atlantic players but during last few years expanding reigns to Singapore-Indo/East-South Africa/Pacific markets. No chance to name them all, sorry. Norway, USA, UAE and other shipping hubs are also places where you can find traditional ship owners.
([14]) Navios, Star Bulk, Angelikoussis family and a long list.
([15]) The ‘Disponent Owner’ in the industry argot, but at the end of the day either the carrier shown in the BLs or the Ship Owner appearing on the relevant Charterparty. Easy: the party who provides the transport service in the contract.
([16]) Where are you getting such info man being a private co? Well, reading and listening interviews to Cargill executives.
([17]) Not talking here on the number of fixtures, which much more, but on the fleet actually controlled both as Ownership and as Chartered in on TC (Time Charter). No voyage relets considered for this exercise, though doubt being relevant to be honest.
([18]) Cargill but also another trading houses have been increasing their freight trading activity to 3rd parties during the last decade.
([19]) Same applies for energy – remember ‘solid fuels? arrggg – or in any sort of mining activity or alikes
([20]) Trust no doubt on that thus far.
([21]) Strongly suggest to avoid attendance on same during such times as too optimism in the air might make you lose money big time.
([22]) The Energy Efficiency Existing Ship Index (EEXI); The annual operational Carbon Intensity Indicator (CII).; the enhanced Ship Energy Efficiency Management Plan (SEEMP). As you can see not only Wall Street, the FED and economists create uncomprehensive expressions for seafarers not to even try to understand same.
([23]) Any news on what’s the deal with the international bond holders of Chinese real state – construction related cos? Go fish…
([24]) How you measure the risk of political intervention in a valuation model? Not an easy one.
([25]) Foreign capital exit; young people exacerbated unemployment rates; population decrease firm trend; real state bubble – Evergrande impact; Potential financial local institutions under compromise, by the way publicly – state wise controlled; Taiwan; increasing geopolitical tensions with US and their nervous neighbours and we can go on and on.
