Dry bulk freight rates are in a prolonged trough. Will the cycle break before the year is out? Where will the investment in ships come from? The BDI (Baltic Dry Index) is in a trough with few overt indications of a quick recovery. Back in December 2013 the BDI hit 2337, not a number to be confused with the 2008 crest of over 11,790 but a reasonable tally for uncertain times. At this writing the BDI is 723, lower than even the June 25, 2013 dip at 1,092. Confidence and contracts have waned in recent months, and a prolonged shipping slump is the result: too many ships, chasing too little freight, with the future looking shaky. China is the dry bulk linchpin. The demand in China is the key to whether the dry cargo sector fares well or poorly. A considerable factor is China’s import of steel producing commodities and the export of steel related products. Normally, when China’s furnaces are running hot, so is the dry bulk market. A robust GDP growth in the PRC is usually a key indicator that the BDI will rise, but in recent years there is a greater disconnect between GDP growth in China (which has fallen significantly since the days of regularly bumping 20%) and the performance of the BDI. For example, although the good news (relative to what was expected) is that China’s GDP is clipping along at 7.5%. The performance has had little positive impact on the BDI. Beijing’s gaze has turned inward and the emphasis on domestic economic issues has dampened demand for imports. Cutbacks in steel scrap imports (as domestic sources increase) give pause for thought on just what influence China will have in the market going forward. As China transitions into a service-oriented economy, what country will be the next big generator of commodity seaborne freight? In the case of scrap steel, not only has the flow of scrap slowed, some steel pundits believe China will become a net exporter of steel scrap by 2020.  China also cancelled a number of soybean contracts and demand for grains has also been weak, depressing freight rates for Panamax and smaller dry bulk carriers. Although the grain movements were slow in the first half of the year, there are expectations that the second half of this year and early first quarter should be stronger. There are indications that China (and Vietnam) have already dipped back into the market and this soon could help bolster freight rates. While global turmoil is contributing mightily to the sea-to-sea economic unease, there are signs suggesting an upturn in the BDI might not be that far away.  A Penny for Thoughts on Supply Since the collapse in 2008, finding the money for investment in new buildings has been problematical – after all a ship isn’t much more than a house that can sink, and the part of international banks and financial institutions that is “bad” often contained loans on ships. But the tide might be turning. The low freight and charter rates of the last year have subdued the dry bulk ship owners appetite for over ordering. Generally the cost of building tonnage has run in lockstep with the BDI. The BDI goes up, like in 2007/8, shipbuilding prices soar. Conversely, when the BDI goes down, so do ship prices on newbuildings. But that hasn’t really been the case over the last couple of years as other factors have come into play.  Until recently shipyard construction costs were also high, making investment in more bottoms less palatable. But a number of factors could be signaling a change in philosophy. Analysts feel that because of the investment in mining and other large bulk commodities, supply and demand will be in balance in late 2014 or at least by the end of 2015. While this largely pertains to the larger vessels over 150,000 dwt, there is something of a trickle down as the cross over in sizes tends to poach into the next. Equally, in steel making with its various commodities a bulk sector tends to lift demand for nearly all sizes. That ship owning philosophy begins with the notion that whatever is down will go up. Secondly, there has to be the money to back up the conviction.  There seems to be the conviction that the market will turn upward in a number of recent transactions. Star Bulk Carriers merged with Oceanbulk to create a fleet of 32 bulk carriers with 37 newbuilds on order. The total fleet will be 69 ships of 8.7 million dwt. The interesting feature of the merger is that venture capital firm Oaktree Capital Management, arguably the shipping sector’s largest private equity partner, now owns over 61% of the combined company.  Institutional money is now flowing into the bulk sector. Dryships secured a commitment from Nordea Bank for up to $170 million following a bridge loan from ABN AMRO for $350 million. The  $170 million is for nine dry bulk carriers. Similarly Malaysian Bulk Carriers received a bridging loan of over $100 million from RHB Bank for “capital expenditures”. Probably the most significant move was by year-old Scorpio Bulkers that received a loan from two unnamed European financial groups for up to $540 million to help finance a massive 24 ship newbuilding program. The ship order includes six ultramax, nine kamsarmax, and nine capsize vessels. The group has an incredible 79 newbuildings on order. Given the fragmented nature of the dry bulk sector and the stress that many of the owners have experienced with the fall in rates since 2008, it would not be surprising to see a consolidation process take hold and a reorganization of the sector take place over the next few years. Certainly, the venture capital firms have their eyes on the sector.