A Blessing in Disguise

The order book represents about 64% of the current existing bulk carrier fleet and before adjustment for scrapping, delays, and non-deliveries the fleet is set to expand by 14%, 20%, and 11% annually over the next three years. Even with strong economic growth during this period, our considered view since mid-2007 has been that there’s no chance whatsoever that the market could absorb such strong fleet growth. For the past year we have predicted that the dry bulk market would remain very high throughout 2008 but that freight and values would decline rapidly to very low levels starting sometime during 1H09. Well, we were wrong. The market crashed about 6 months earlier than we anticipated, and for different reasons. The freight market fell more than 90% and second-hand values fell by some 65%-70%. Both of these decreases can be attributed to the financial crisis. However, the challenge ahead is still a looming oversupply situation as we see little probability of any significant reduction in newbuilding deliveries. At least in the short term (2009), this will worsen the already hyper-depressed situation.

About 60 mdwt of bulk carriers is scheduled for delivery next year and assuming relatively evenly spread deliveries, one should expect about 15 mdwt per quarter. This implies that some 15 mdwt of bulkers are already launched, or are close to launching, for delivery during 1Q09. Out of the next 15 mdwt due for delivery in 2Q09, keels have been laid for most. Moving on to 3rd and 4th quarter deliveries, most of these vessels are in various stages of steel cutting and block building. One could contemplate cancellations of these orders; however one must bear in mind that virtually all equipment for these vessels is ordered, and to a large extent paid for, and to a certain degree already delivered. In addition to this, shipyards are all tuned in for a construction programme with allocation of resources and timetables set for next year’s activities. In short, it will be extremely difficult to cancel newbuilding contracts with delivery anticipated in 2009. The exceptions are bankruptcies and delays beyond contracted grace periods. However, most vessels due for delivery during 1H09 are well underway in the construction process, and we believe that they will be completed regardless of bankruptcies or substantial delays. Therefore, we think it is prudent to assume that most of next year’s deliveries will take place.

Beyond 2009 the situation is quite different, and that’s why we consider the financial crisis to be a blessing in disguise. It is never an easy task to cancel a newbuilding contract as such a contract is a complex legal document that could potentially include more than one jurisdiction. But considering the nature of a newbuilding project and the timeline for actual construction, it is much easier to cancel a project for which the steel material is not yet ordered and only key equipment is ordered but none is delivered. For the latter most probably deposits are lodged, but the financial implications of a potential cancellation are still of a relatively minor magnitude. As a consequence, we believe that cancellations of newbuilding contracts with deliveries beyond 2009 are possible, and with the current financial situation, we think it is likely that we will see massive cancellations.

The current freight market is extremely low and with the prevailing global economic outlook and the excessive fleet growth coming in 2009, we are of the opinion that freight markets will stay low for quite some time. This will result in increased scrapping of old vessels. Currently, about 63 mdwt of the bulk carrier fleet is 25 years of age or older. There is a huge potential for scrapping. In our opinion, scrapping in combination with massive cancellations will pave the way for a balanced fleet growth in the longer term. If it hadn’t been for the financial crisis, the downturn in freight would have occurred much later, and this would have reduced the possibility of cancellations.  As a result, we could have found ourselves in a 1980s-like situation with a structural oversupply of tonnage lasting for….maybe a decade?

Hence, the financial crisis is surely a blessing in disguise.