Wednesday, June 24, 2009

Bulk Shipping

Bulk shipping involves the carriage of cargo which constitiutes raw materials or feedstock for industrial purposes. The quantities involved are typically large, so shipping them on bulk carriers presents better economies of scale. Examples of bulk cargoes are iron ore, coal and grain (collectively known as major bulk cargoes) for dry bulk shipping and crude oil/petroleum products for wet bulk. When presented with the statistics, most of us will be surprised at the dominance of bulk shipping in relation to global transportation of goods. Close to 70 percent of the world's total transported goods are seaborne. The remaining 30 percent is taken up by a combination of land (road,rail) and air transportation.

Bulk shipping is by far the cheapest and most effective means for transportation of goods in large quantities and will therefore remain relevant in the transport chain for a long time to come. Drilling down into seaborne transportation, wet and dry bulk each account for 40 per cent of the total pie and the remaining 20 per cent is made up of break bulk, general and containerised cargoes.

Looking deeper into the dry bulk shipping pie, the steel industry is the lead driver of the entire dry bulk market commanding a 50 percent share with its combined cargoes of iron ore, scrap iron, cooking coal, and steel products. Steam coal, which is used for generating electricity, takes up 20 per cent and grains 10 percent. The balance 20 per cent is made up of minor bulks (for example, minerals such as alumina and concentrates), forest and agricultural products (like lumber and sugar), fertilisers and others. Bulk shipping delivers practically all the raw materials to industrial and population centres of the world to feed manufacturing processes and support production of food, infrastructure (buildings, roads and bridges), building materials, etc, as well as deliver energy in the form of fuel (oil and coal) - processes which, although not commonly visible to us, affect the daily lives of everybody everywhere in their finished form.

Singapore is not a centre for loading or discharging bulk cargoes, it is nevertheless a big centre of bulk shipping activities for both the wet and dry bulk markets. Many bulk ship owners, charterers, brokers, trade financiers, insurers and other support industries are based in Singapore or maintain a listening post here owing to our excellent infrastructure. Bulk shipping contracts are concluded in large volumes out of Singapore on a daily basis and the rates contracted here are watched by the rest of the bulk shipping world as one of the leading barometers of the state of bulk shipping market.

Baltic Dry Index (BDI) which measures the demand for dry bulk shipping capacity versus the supply of dry bulk carriers, has grown so much in importance and relevance that it has come to be accepted today as one of the world's leading economic indicators. The rise of BDI was aided by:

=> insufficient new ship deliveries to match growing demand, especially large ships with cargo-carrying capacity over 150,000 tonnes, often referred to as cape-sized bulk carriers.
=> severe port congestion in major dry bulk ports of loading and discharging. This resulted in extended occupancy of ships which would otherwise have returned to the pool of available ships much earlier, and thus created a severve artifical "shortage" of ships
=> economic growth in China, Brazil, India and Russia
=> changes in trade patterns involving longer distances between load and discharge ports, again leading to extended occupancy of ships and exacerbating the artificial shortage of ships.

Here are some of the challenges facing shipowners today and strategies adopted by some owners to face them.

Supply of ships
Whereas it was a case of vessel famine just 12 months ago with insufficient ships relative to demand, the industry today is beset with a feast of too many ships chasing too few cargoes. The key now is to reduce supply in order to achieve better long term balance between supply and demand.

Shipyards are like production lines now and modern efficient shipyards in Japan and Korea take 2-4 months to build a ship from the time steel is cut and the keel laid, to delivery. Many of these yards have order books which are full till 2012. In other words, a new ship is delivered every 2-4 months from each dock. The large yards have multiple docks and it is not an easy task to adjust delivery times wihtout disrupting production of the others in the production line.

Nonetheless, some of the strategies which may be adopted to reduce tonnage singularly or in conjuction are: lay up uneconomical and older ships; scrapping of old ships, deferring delivery of new buildings; cancellation of newbuilding orders if the market outlook stays bearish; and considering foregoing instalment payments as this would be the cheaper option compared to potential losses in proceeding with the vessel slow steaming.

Cash
Cash is now kind owing to its severe shortage. Creation of new cash flows is extremely challenging these days and most owners are busy instead with efforts to preserve the flow of cash. Some strategies include: heightened monitoring of counterparty risks; timely collection of freights and hires; tightening up on ship management procedures to curb waste, manging price volatility of their fuel oil exposure by purchasing forward contracts if opportunities permit; hedging on forward exposures by capitalising on suitable opportunities; and restructuring of their captial base.

Trading patterns
Many of the old trading patterns which have run for years have broken down in recent months with the shortage of LCs to support shipping. As a result, shipowners who have invested in specialised tonnage to service the routes end up with underutilised ships. Some shipowners have responded by crossing over to new trade areas directly or through modification. Hence, out of work pure car carriers are experimenting with carriage of fruits and other utilised cargo; and bulk carriers are increasing their versatility by including logs storage equipment on deck to accomodate logs cargo on deck.

Given the changes in the industry and its outlook, the challenge for the industry is to identify which sector offers the best promise and to adopt strategies that meet it. The market is obviously made up of both pessimists and optimists. Depending on which category shipowners belong to, decisions and strategies will differ. The pessimist camp would rather remain long on cargo at current day levels as they hold the view that markets will cease; conversely the optimist camp would rather be long on ships with the view that the market will turn bullish again.