Mercator Lines Points Finger at Private Equity for Dry Bulk Overcapacity Issues

A day after dry bulk shipper Genco Shipping announced filing for Ch. 11 bankruptcy protection, the Baltic Dry Index (BDI) continues to fall further.

At 930 points, it’s less than half of where it was at the end of December 2013.

The BDI is a simple measurement of the balance between the demand for shipping capacity and the supply of dry bulk ships and factors-in the daily time-charter rates for Capesize, Panamax, Supramax and Handysize bulk carriers.  Demand for dry bulk shipping is largely driven by China, a country which is now entering a period of reduced GDP growth, and thus lower demand for dry bulk shipping.

The above graph, posted in Singapore-based Mercator Lines’ 2014 Annual Presentation shows that although deliveries of new bulk carriers are expected to be significantly lower in the coming years, the global fleet is continuing to grow.  This fleet growth is mainly due to the influx of cash into the market led by private equity firms according to Mercator.

Data from Pareto also shows that going forward, the compounded annual growth rate (CAGR) of China’s steel production is predicted to be half of what it has been over the past decade, further exacerbating overcapacity problems facing the capesize shipping market.

In Safe Bulkers’ 2013 Annual report released in March, they note:

“The market supply of drybulk vessels has been increasing, and the number of drybulk vessels on order as of December 31, 2013, was approximately 21.4% for Panamax class vessels, 12.6% for Post-Panamax class vessels and 20.0% for Capesize class vessels of the then-existing global drybulk fleet in terms of deadweight tons (dwt), with the majority of new deliveries expected mainly during 2014 and 2015.

As a result, the drybulk fleet continues to grow.”

According to a report by Clarksons last month, the dry bulk fleet has grown 6 percent since 1 January 2013.

Although the dry bulk fleet is growing, the market demand for this added capacity continues to grow as well.  In a report released recently by MIDF, the 2013 year-on-year growth in demand was up 7 percent.

It’s important to note however that during that same period, China’s GDP growth was at 7.7 percent and the year prior it was 7.8 percent.  This number is projected by the IMF to fall however, to 7.5 percent in 2014 and 7.3 percent in 2015.

How exactly all of this will translate into the dry bulk sector is anyone’s guess, but it does not look like news of a greater sector recovery.