Market Analysis of Capesizes Dry Bulkers - Case Study Example

Capesizes Dry Bulkers: Market Analysis Report Introduction The key aim of this report is to provide a market analysis for Capesizes dry bulkers. Foremost, based on a critical review of various relevant literatures, this report will examine the factors that affect supply and demand in this market. Secondly, this report will analyse the current and short term future demand of Capesizes dry bulkers. Subsequently, it will analyse the current and short term future supply of Capesizes. Moreover, this report will provide a critical analysis of Capesizes’ supply and demand equilibrium. In addition to this, based on the data collected it will depict the expected outcome in relation to the supply and demand of Capesizes for the next 6 months. Factors affecting supply and demand Basically, the drybulk carrier industry is a very crucial link to international trade and the overall transportation of bulk cargoes. This industry provides the most efficient means of transporting large volumes of cargoes over long distances (GSTL 2012). Nevertheless, there are various factors that affect supply and demand in this industry. According to Stopford (2009), some of the key factors that influence demand in this market include; Seaborne commodity trade such as crude oil, grain, containers, coal, oil products and iron ore. According to Lloyd’s Register, 93% of the cargo carried by Capesizes include coal and iron ore. Capesizes are often used in the transportation of iron ore, coal and other raw material commodities and as a result they are designed to meet the demands of extremely bulky cargoes. The overall world economy; regional growth trends and business cycles influence the volume of goods that are traded via the sea. For instance, development in the steel industry may determine iron trade this influencing the volumes of iron ore carried by Capesizes. Random shocks such as the global financial crisis Average Haul; the distance cargos have to be shipped Transport costs which is influenced by the performance of the market. On the other hand, Stopford (2009) observes that, supply in the drybulk carrier market is influenced by factors such as; World fleet; influenced by demand, new building, scrapping and logistical efficiencies in relations to waiting time and speed. Shipbuilding deliveries; influenced by bank lending policies Freight revenue which influenced by the performance of the market Fleet productivity influenced by demand, policies of banks and regulators and decisions made by shipping investors. Scrapping and losses; shipbuilding deliveries increase the number of fleet whereas scrapping reduces the number of fleets. As the Capesizes dry bulkers grow older, the costs of operating them increases (Stopford 2009). Current and short term future demand In references to Stopford’s (2009) sentiments on factors that influence demand, the current and short term future demand of Capesizes dry bulkers will be analysed based on the volume seaborne commodity trade items such as iron ore and bulk cargoes such as grains and coal. The graph below shows the current and short-term projections of Capesizes’ demand based on the total volume of iron ore cargo deliveries in DWT of a Capesize bulker for the past 6months. It is worth noting that, Capesizes provide the large- size bulk carriers typically 150, 000 to 400, 000 deadweight tonnage (DWT). Capesize Bulker Deliveries – Order book data According to the graph in the above section, it is evident that the current demand of Capesizes dry bulkers is very high. This graph projects that in the short-term future, the demand is also going to be high. It is apparent that the main factor influencing the demand of Capesizes dry bulkers is seaborne commodity trade such as coal, iron ore and grain among many other bulks (Stopford 2009). Wallis (2011) observes that, the increasing demand of Capesizes dry bulkers can be attributed to China’s demand for coal and iron ore in its manufacturing industry and infrastructure expansion. Wallis (2011) notes that, China is currently the world’s largest iron ore market for bulk shipping and mining companies. Moreover, it has been observed that the huge demand of these bulk carriers is fueled by the rapid expansion of the Chinese economy. As a result, China’s imports of iron ore has significantly boosted the earnings of Capesizes dry bulkers as freight rates increased even to uncharted territories (Maritime 2012). Current and short term future supply According to Stopford (2009) shipbuilding deliveries and scrapping are among the key factors that influence supply in the drybulk carrier industry .Basically, shipbuilding deliveries increase the number of fleet whereas scrapping reduces the number of fleets. Therefore, in this case demolition and fleet pivot can be used to determine the current and short term future supply. The graph below shows the current and short-term projections of Capesizes’ supply based on; a). Demolitions pivot in the past one year b). Fleet pivot since 2009 Demolition Pivot- Clarkson’s bulk Fleet Pivot- Clarkson’s bulk Based on the data represented in the graphs in the above section, it is evident that, with time the rate of demolitions has decreased whereas the number of fleets has increased. This shows that the current rate of supply is high however, it is bound to decrease in the short-term future. According to an analysis by BIMCO, the increase in number of fleets often results to reduced demolition. Dry vessels that leave the fleet for recycling get older and older thus affecting the supply capacity. Consequently, the increase in the number of fleet experienced in 2012 may mean that more demolitions will have to be carried out in the short-term future. BIMCO predicts 20 million DWT of dry bulk to be recycled by 2012 as the demolition rates are expected to increase from the very low levels currently carried out. Therefore, although the supply capacity of Capesizes dry bulkers is currently high, it is bound to be affected in the short-term future due to scrapping and demolition process (Hellenic Shipping News 2012). Critical analysis of Capesizes’ supply and demand equilibrium A critical look at the supply and demand of Capesizes dry bulkers as forecasted in this report, it is apparent that, currently the demand and supply is high. The volume of seaborne commodity trade items such as iron ore and bulk cargo delivered via Capesizes dry bulkers is the key variable that this report has taken into account when it comes to determining demand in this market (Stopford 2009). It is established in this report that the rapid expansion of the Chinese economy is the main factors that has influenced demand of Capesizes dry bulkers. Therefore, the current high demand in this market hinges on the Chinese demand for iron ore, coal and bulk cargo. However, the high demand level in this market is susceptible to several changes that may eventually cause it decline. For instance, analysts predict that there is bound to be an economic slowdown in China which might lead to import slowdown and eventually affect the demand in this market (Wallis 2011; Maritime 2012). Moreover, according to SSY forecasts, the increasing prices of commodities such as iron, coal and other dry bulk cargo may contribute to the decline of demand in this market. This prediction is in line with the law of demand which states that, as prices increases, the demand of a commodity or service decreases. Although, the prices of commodities provide indications regarding the underlying demand of commodities, it also puts constraints the availability of exports (SSY 2011). On the other hand, shipbuilding deliveries and scrapping are the key variables that this report has taken into account when it comes to determining the supply in the Capesizes dry bulkers. The findings of this report show that due to the increase in the number of fleets, which has been influenced the increase in demand, there is need for increased demolition activity so as to compensate for the increased tonnage. Nevertheless, increased demolition activity may reduce the supply capacity of this market (Hellenic Shipping News 2012). By taking into account the key variable that influence supply and demand in the Capesizes dry bulkers, it is possible to conclude that currently the demand is high however in the short-term future the demand is bound to decrease due to variables such as increase in price of commodities or economic slowdown. Therefore, in future there is bound to be an oversupply since the demand is bound to decrease in the long-run. Expected outcome in the next 6 months Based on the findings of this report, the expected outcome of Capesizes dry bulkers market within the next 6 month will be characterised by; Reduced fleet numbers due to increased demolition undertakings A sustained demand level due to China’s demand of iron ore, coal and other bulk cargo needed for the expansion of the country’s infrastructure. Overall balance in supply and demand. Short-term re-balancing of the market depending on scrapping record, minimized rates of new building deliveries and expansion in coal and iron ore export capacity (SSY 2011). However, according to experts, in the long-run the demand in this market is bound to reduce due to increase in prices of commodities and economic slow down. Consequently, there is bound to be an oversupply (Wallis 2011; SSY 2011). References Genco Shipping and Trading Limited (GSTL) 2012, Drybulk Carrier Industry Overview, Retrieved on December 18 2012 from Hellenic Shipping News 2012, Analysis forecasts the demolition of 20 million of dwt of dry bulk carriers during 2012, Retrieved on December 18 2012 from Maritime 2012, Bulk Carriers, Retrieved on December 18 2012 from Simpson Spence Young (SSY) (2011). Dry Bulk Freight Market, Stopford, M. 2009, Maritime Economics, 3rd Ed, Routledge, New York. Wallis, K. 2011, ‘China seen as key for iron ore, shipping firms’, South China Morning Post, November 14 2011. 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