Exit 2008

Since July 2007, some 18 months ago, we have told our clients that 2008 would become another excellent year in the dry bulk market, but that the freight market, as well as 2nd hand values, would plummet in 2009, starting sometime in the first half of the year. Well, at the end of 2008 we have to admit that we were partly right and partly wrong. According to the BDI the dry bulk market was only about 10% lower in 2008 than it was in 2007, e.g., average Capesize earnings in 2008 ended at 106,000 USD/day compared to 116,000 USD/day in 2007. The 2008 result is the second best ever! Nonetheless, the freight market collapsed during the 2nd half of 2008 which was about six moths earlier than we anticipated. The financial crisis resulting in, amongst others, the inability to finance commodity sales combined with plummeting commodity prices, high inventories, etc. resulted in a great deal of market activity coming to a crashing halt. Freight was reduced to levels unable to cover OPEX and inflated asset values started dropping. At the end of the year bulk carrier values seem to have stabilized, at least temporarily, but that is after a fall of some 65%-70% from the peak (measured by five-year old vessels).

Is there any light at the end of the tunnel? We fear not. Our analysis, resulting in a prediction of a downturn in 2009, was based on excessive fleet growth and not a collapse in the financial markets and subsequently greatly reduced economic growth rates. The problem is, however, that fleet growth in 2009 will still be extremely high. In our optimistic case scenario (non-deliveries of newbuildings amounting to about 10% of the 2009 order book and about 4% of the existing fleet demolished) we expected a net fleet growth of about 10% in 2009. With contracting demand and the highest net fleet growth in decades, one does not have to be the proverbial rocket scientist to see that the market is repairing to the south for the foreseeable future.

As we wrote in our last Monthly Report we believe the financial crisis could be a blessing in disguise as it may result in massive non-deliveries of bulkers in 2010/11. As a result, one might avoid a chronic over-supply situation which otherwise could have resulted in poor freight markets for maybe as long as a decade.

The situation in the tanker market exhibits some similarities to that seen in the dry bulk market, but also some important differences. The order books are substantial for both crude carriers and product carriers. Demand, measured by “global oil demand" is weakening and some pundits expect a substantial contraction in oil demand in 2009. Oil prices are at their lowest level since mid-2004 and OPEC is cutting quotas. We agree that global oil demand in 2009 is going to contract, or in a best case we will see zero growth, but we are still quite optimistic for the crude carrier market as global oil demand growth is not really the best yardstick of freight market development. The structure, or change in structure, of seaborne trading patterns is much more important. As an example, crude oil imports to the US, Japan, Korea, and China combined grew some 2.2% in the first 9 months of 2008 compared to the same period in 2007. Taking China out of the group, results in zero growth for the three other countries. But measured in tonne-miles the growth in the first 9 months was a staggering 6.4%! Hence, we do not worry much about changes in imported volumes as long as we can see structural changes in trading patterns. This is what matters in the tanker market.

At the end of 2008 we see several positive signals indicating a continued change in trading patterns for crude tankers resulting in increased tonne-mile generation despite a decline in global oil demand.  In addition, we expect to see the exodus of single hull tankers starting in earnest next year. Despite the large order books, we expect to see net fleet growth rates at levels that are manageable, but we expect to see on average lower, and very volatile, freight markets in 2009.

So, at the end of 2008 we are afraid that we cannot offer much optimism for the dry bulk market in the coming year,  For tankers, and especially for crude oil tankers, we expect much better market conditions. And with our expectations for both crude oil and product tankers in the period beyond 2009 in mind; dare we say that 2009 will become the year of opportunities…? Yes, we do!

Happy New Year to all our readers!