As the BDI moves higher, demolition activity weakens. Tempting leasing deals or other fully financed offers might result in a flood of new orders with the potential to kill the ongoing recovery of freight market earnings.
After the Baltic Dry Index (BDI) had its seasonal weakness[ds_preview] around the Chinese New Year in early February, stronger-than-expected demand came from across the board and lifted freight rates, recent BIMCO data indicates. This brought earnings into profitable levels for a couple of days, as the BDI passed 1,282 on 27 March 2017. BIMCO sees the current developments as a »false dawn« and recommends to reiterate expectations for 2017 as being a loss-making year for the industry as such.
January had more dry bulk capacity demolished than February and March combined. As the BDI moved higher, demolition activity weakened. Higher demolition prices that often follow in the wake of higher freight rates do not sufficiently tempt shipowners to sell for demolition, BIMCO says in its April Market Overview & Outlook. Owners either keep trading the ships themselves or sell them off in the second-hand market as asset values have climbed too.
»It’s hard not to get carried away«
BIMCO’s Road to Recovery, encourages shipowners to make fleet expansions via the second-hand market, but it also builds on 0% total fleet growth, »something which can only come around via more demolition.«
»With powerful sentiment in the market being felt and heard, it’s hard not to get carried away. You can almost feel the fear of missing out on the next super cycle as owners’ rush to the second-hand market to expand their fleets. Such strong growing interest has seen rising asset values. In turn, this also means existing ships are no longer priced significantly below newbuild ones,« the Council said in its recent Market Overview & Outlook.
Most potent threat to market sustainability
»What it could also mean is a return to the shipyards for some of the owners who did not get the ships they were looking for in the second-hand market. So far, we have not seen a flood of new orders, but the shipyard industry certainly stands ready to take owners’ new orders,« the report continues.
Should such a flood of new orders come around, it will kill the ongoing recovery of freight market earnings, BIMCO fears. A lot of shipyards have a low order cover, and idle capacity to build. Added with tempting leasing deals or other fully financed offers might result in large order numbers. »Making use of shipyard capacity to produce more new ships remains the most potent threat to the sustainability of the shipping market,« the Council warns.
