Is it Golden if it glitters?

By: | at 08:46 AM | Channel(s): Maritime  Bulk  

The orderbook for dry bulk carriers is as dry as the Mojave. With demand rising and an empty orderbook, the future looks golden but is it just glitter?

Golden Ocean owns 77 vessels, totaling about 10.6 million dwt. Another six vessels are on order.
Golden Ocean owns 77 vessels, totaling about 10.6 million dwt. Another six vessels are on order.

In a company presentation, last month, dry bulk shipping company Golden Ocean offered its case for a market recovery, and its own place in that resurgence.
The comeback is predicated on everything from grain exports to Chinese steel consumption. But one indicator stands out: New vessel order book. According to Golden Ocean analysis, the industry’s order book as a percentage of global fleet may fall to as low as 4.5% by the end of this year. That would mark a steep drop from the already paltry 8% order book for the first four months of this year. It would mark the lowest point at least in the past three-and-a-half decades. And it may dip even lower.

“It seems unlikely that we have reached the bottom of the current [shipbuilding] cycle, and pressure to remove capacity remains,” wrote Clarksons Research in a note at the end of June.

That’s bad news for shipbuilders, good news for vessel operators like Golden Ocean.

In its presentation, Golden Ocean added a cautionary note even on what new orders are out there. Some 25%, or 3.8 million dwt, of orders scheduled for delivery during the second quarter of 2017 haven’t even commenced construction yet. Construction has yet to begin as well on an additional 3.7 million dwt scheduled for delivery the second half of this year and 8.4 million dwt scheduled for delivery in 2018.

“Further delays of deliveries are likely based on progress in production,” the company said.

Just how quickly shipyards can reverse their current misfortune is also a matter of huge speculation. “The shipyards are empty right now. There’s no backlog,” said Basil Karatzas, CEO of Karatzas Marine Advisors, a New York-based shipping brokerage and advisory service. “But if everyone begins to order ships. It doesn’t mean a thing. It could go the other direction in a matter of months.”

Golden Ocean’s relatively strong balance sheet enabled it to take advantage of the marketplace by acquiring in March two fleets of dry bulk vessels: 14 slightly used ships from Quintana Shipping for the assumption of $262 million in debt and the issuance of shares; and two newbuilds from Hemen through issuance of shares and a buyer’s credit of $22.5 million. Following these two acquisitions, Golden Ocean is now the largest publicly traded dry bulk carrier. It owns 77 vessels, totaling about 10.6 million dwt. Another six vessels are on order.

As did other dry bulk carriers in recent presentations, Golden Ocean cited evidence of what is hoped to be a resurgence in commodity demand. That jump, the rationale goes, will boost freight rates. According to analytics Golden Ocean cited, seaborne trade of dry bulk commodities showed a strong start during the first quarter of this year. Iron ore exports, especially from Australia, are rising once more. Coal is holding its own, despite a drop in Chinese imports. Grain exports from the US and Australia were up at the beginning of the year.

Just about everyone is focused on China and Golden Ocean is no exception. It cited steel consumption in China as evidence of strong demand. Chinese steel production increases tapered during the first quarter of this year. However, Chinese steel companies appear to have gained better margins on their production, especially compared to the end of last year, when producers made a loss using Australian coking coal and iron ore. Also, according to figures cited by Arctic Securities, in its own recent presentation of the dry bulk market, steel rebar inventories in China have dropped dramatically this year, triggering an equally steep rise in price.

Strong electricity consumption in China supports coal demand, Golden Ocean said.

Reduced domestic extraction of coal and iron ore in China also bodes well for dry bulk shippers, Golden Ocean said. That’s because China will be more dependent on these imported commodities.

All this, of course, should add up to increased freight rates. Golden Ocean said that a $1,000/day increase in spot rates translates into a gain of $28 million in cash flow for the company.

Golden Ocean, however, cited another industry statistic that illustrates just how far dry bulk shipping companies need to crawl back: utilization rates. They improved a bit during the first quarter of this year, but they’re still at historic lows, the company cautioned.

“Expect rate volatility in the near term as supply/demand balance is still fragile and single events will impact the market,” Golden Ocean concluded.

“Longer term fundamentals [are] stronger as long as new ordering is minimal.”

American Journal of Transportation