One month ago, when looking at the unprecedented, record collapse in the Blatic Dry Index for the latest time, a move which many have brushed away as simply a function of too much supply, we showed a chart by Capital Economics showing the disturbing correlation between the change in the BDIY and global trade volumes, the one metric which we have claimed for over a year is far more imporant to the global economy than anything central banks can spawn.
Fast forward to today when in the latest update on Dry Bulk shipping fundamentals by Deutsche Bank we find some good news: according to analyst Amit Mehrotra, the "total dry bulk capacity declined by almost 1M tons (net) last week as the pace of deliveries slowed and scrapping remained elevated."
DB's assessment of this surge in scrappage is favorable: the weekly decline is the first of the year and marks an important psychological milestone given stubbornly persistent supply growth in the face of historically weak rates.
The bank adds that it estimates 16 ships were sold for scrap last week totaling 1.6M tons (avg. 100k tons per vessel). This more than offset 9 new deliveries that added 730k tons to the fleet (avg size 81k), translating to a net reduction of 7 vessels (~1M tons). Last week’s scrapping activity represents a nice acceleration from previous weeks and when looked at by itself would represent an annualized pace of 11% of installed capacity, which is almost double the all-time high of 6.3% set in 1986.
That's the good news: the bad news is that scrappage has no hope to offset the tremendous orderbook currently being installed in Chinese ship yards.
According to DB, with the vast majority of orders placed w/Chinese ship yards (where upfront payment terms are highly attractive to ship owners), the current market provides incentive (and maybe even increased scope) for owners to more aggressively pursue cancellations ahead of keel laying.
The problem is that the latest order book data shows a whopping 360 dry bulk vessels over 60k tons on order at Chinese ship yards (net of typical non-deliveries). This equates to 37M tons of new capacity or 5% of the fleet!
Worse, the vast majority (80%) of this is expected to be delivered this year- likely limiting the scope for cancelations- with only about 20% (65 vessels/6.5M tons) scheduled to be delivered in 2017 and beyond. Assuming an unrealistic scenario of total order book scrappage, it would only translate to 0.8% of the installed fleet.
However that won't happen: the DB analysts writes that "while we have seen some one-off examples of newbuilding cancellations in recent months, they have been few and far between."
What this means is that while demand will likely drift lower, the fleet may see as much as 60k tons of ships and 37M tons of new capacity come online: capacity which will manifest itself in another major leg lower in BDIY pricing.
As DB concludes, "As such we continue to believe the supply-side has much more leverage to scrapping than any (plausible) restructuring of the order book. That ship has sailed, so-to-speak."
In other words, the already record low Baltic Dry has only one direction to go in the coming months: down.