Orders for new dry bulk cargo ships plummet

Weak freight rates, a lack of capital and uncertainty surrounding how International Maritime Organization (IMO) 2020 rule will affect marine fuel prices led to a further drop-off in dry bulk newbuild orders in the first half of 2019.

Only 80 bulker newbuild orders were placed in the first six months of this year, down 66pc from the same period in 2018, according to research firm VesselsValue.

Dry bulk freight rates, which have recovered in recent months, fell to 20-month lows at the beginning of 2019 following several shocks to market fundamentals. The major one was the 25 January dam collapse that shut in the Brucutu mine, which sharply cut iron ore exports out of Brazil, a key driver for the Capesize market. Shipbrokers Tony Larson from Ifchor and John Keeshan from Simpson Spence and Young both said that the weak rates were a key factor in limiting bulker newbuild orders.

The rate of newbuilds has fallen in recent years after a period of particularly high demand for new ships from 2013-15. During those three years, bulker newbuild orders averaged 720 per year, according to VesselsValue. The demand has fallen since then, to an average of 266 newbuild bulker orders from 2016-18.

This year, bulker newbuild orders are on pace to hit just 160.

Panamaxes were the most popular vessel class in the first half of 2019, while shipowners shied away from ordering Capesizes, VesselsValue said. One reason for this is because Panamaxes can carry a wider variety of commodities, while Capesizes are almost exclusively reliant on iron ore and coal shipments, Keeshan said. Additionally, iron ore producer Vale's recent expansion of its 400,000 metric tonne Valemax iron ore carrier fleet has weighed on the Capesize market and made the vessel class less attractive to shipowners, Keeshan said. Vale will have 67 Valemaxes in operation by the end of 2019, after having just 35 at the start of 2017.

A dearth of available capital has also contributed to the drop in newbuild orders, Larson said. More stringent lending practices by banks in light of the global economic slowdown and poor-performing dry bulk equities have helped to limit dry bulk shipowners' cash on hand.

Shipowners are also uncertain about marine fuel costs after the IMO 2020 rule kicks in, and whether to pay to add scrubbers to new ships or just buy sulphur-compliant fuels on the market, according to Keeshan. "IMO 2020 is the biggest factor we have had in this business since I have started," Keeshan said.

In recent months, dry bulk freight rates have rallied. Since 26 March, the Brazil-China iron ore rate has risen by 125pc to $26.25/t, the highest in more than five years. Despite this rally, Keeshan does not anticipate a rush of newbuilds. He expects shipowners to wait and see how IMO 2020 affects dry bulk fundamentals before deciding whether to expand their fleets.