Freight prices to receive triple boost

As an oversupply in shipping capacity continues to plague the dry bulk freight market market with the Baltic Dry Index bumping along the bottom, there may be some signs of improvement. Higher forecast demand for commodities combine with reduced deliveries of new vessels and higher scrappage rates to support freight prices although a sustained recovery cannot be expected in the short term, according to Bank of America Merrill Lynch (BoAML) research.

Persistent oversupply in capacity is being tackled by scrappage of older vessels, a phenomenon seen particularly in but not limited to the capesize segment. For instance, vessel scrappage ran at a record rate of 4.9 per cent, more than double the five-year average of two per cent, as vessel owners fail to meet cash breakeven costs. Japan’s Mitsui OK Line announced that it will demolish vessels that are over 15 years old.

New vessel deliveries are slowing. While in 1H12, around 64m dwt entered service, representing a 31 per cent YoY growth, the second half of the year noted a 30 per cent drop YoY to 35m dwt, seeing a stark reversal of the trend. While this was mainly in the capesize segment, the panamax market is expected to following this year.

Meanwhile, the acceleration in seaborne demand for bulk commodities expected for 2013-14 should help to push prices up – good news for shipping lines but less so for customers – although perhaps not with immediate effect. With demand growth forecast to outpace fleet capacity expansion, the oversupply in the market is predicted to contract next year. However, a large surplus in capacity should delay any sustained recovery in bulk freight prices, according to BoAML analysts. It is not until 2015 that bulk freight rates will see a significant pick-up.