Dry bulk markets are strengthening, says Pacific Basin

A rise in demand from higher commodity volumes and a reduction in supply owing to IMO 2020 low sulfur fuel regulations are giving a boost to the international dry bulk freight markets, says Hong Kong ship operator Pacific Basin (HKEX: 2343).

The future will likely see continued “generally tight market conditions” with freight rates supported by the switch to more expensive low-sulfur fuels. That will, in turn, likely lead to a slowing-down of the world fleet (going faster consumes disproportionately more fuel) which will reduce supply, Pacific Basin says.

Market analysis: demand

Sport rates for handysize vessels averaged at US$7,990 a day in the third quarter and spot rates for supramax ships averaged at US$11,890 a day in the same time frame. This was a “39% and 53% improvement compared to average market rates in the first half of the year,” Pacific Basin said.

The company, which typically carries bagged and bundled bulk commodities such as fertilizer, grain and minerals, along with break bulk cargo like steel and logs, said freight rates reached “multi-year highs”. This improvement was driven by “seasonally strong” shipments of South American and Black Sea grain and a “return to normal” volume of Mississippi River grain and Brazilian iron ore.

Volumes of bauxite (the ore from which aluminum is extracted), nickel and manganese all “grew at robust levels” while Chinese imports of logs, fertilizers, bauxite, nickel ore, copper concentrates, manganese ore together grew at about 17% and coal volumes increased by 8%. But grain (cereals and soybean) fell by 13% and iron ore fell by 3%.

Market analysis: supply

Pacific Basin added that “tighter supply” also led to stronger rates and this was driven by global fleet inefficiencies and ships preparing to comply with new ballast water requirements and IMO 2020.

Ships draw in and expel large volumes of seawater as ballast to maintain stability and reduce stress on the hull. Unfortunately, the practice can result in micro-organisms being sucked into the tanks, transported around the world and then expelled into new environments. The foreign organisms may then out-compete, out-breed, or predate upon local organisms which can cause local ecological collapse. One example is the European Shore Crab (Carcinus maenas), a voracious feeder, which is native to north-west Europe but has spread around the world.

Countries have decided, through the International Maritime Organization, to issue a new, more strict, global standard for ship’s ballast water discharge.

The other major regulatory change is the IMO 2020 regulation which radically reduces the amount of sulfur that can be emitted by a ship as a result of combustion.

Pacific Basin reports that “a large number of ships have migrated eastward” to have new ballast water treatment systems and sulfur scrubbers installed in Asian shipyards. This has resulted in “stronger freight market conditions in the Atlantic,” Pacific Basin says.

Meanwhile, the company reports, the appetite for ordering new ships “remains restrained, discouraged by the continued gap between new building and second hand prices as well as uncertainty over upcoming environmental regulations (to meet the IMO’s ambitious C02 reduction strategy) and their impact on future vessel designs”.

Pacific Basin’s commercial indicators

Pacific Basin, which currently operates a fleet of 240 vessels (58.8% handysize and 41.3% supramax), reports that it generated an average of US$9,480 time charter daily earnings for its handysize fleet and US$11,580 a day on its supramax fleet in the third quarter of the year.

The company notes that these earnings represent an increase of three percent on the handysize earnings in the first half of the year and an increase of seven percent for the supramax fleet.

Cover has been secured (as at October 11) for 67% of the 10,420 contracted handysize vessel days that remaining in this year at about US$11,450 a day. Meanwhile, the company has secured 72% of the 6,920 contracted supramax days at about US$13,660 a day.

Looking forward to 2020 suggests there might be a decline in future earnings however. About 17% of the 35,960 handysize vessel days have been contracted at US$8,980 a day while 22% of the 15,050 supramax vessels days have been covered at about US$11,330 a day.

Pacific Basin comments that the 2020 cover is “backhaul heavy to minimize ballasting and to position our fleet for favourable fronthaul cargoes”.

In the near future the company expects to deliver two “older smaller” handysize ships to new owners by the end of December.

Meanwhile, the company expects its costs to shrink in the near future as it has committed to buying four second hand ships for a total of US$73.8 million, which is 33% funded by new equity issued to the sellers. The four vessels are all capable of carrying forestry products (logs) and range in price from US$17.20 million to US$20.51 million. Two of the vessels are supramaxes (one is 61,400 deadweight and the other is 57,600 deadweight) and the larger of the pair is 2012 built. The other is 2015 built. The remaining two vessels are 2015 built handysizes, each with 35,900 deadweight.

All four vessels are currently operated by Pacific Basin on time charters that will expire between October this year and April next year.

“Our purchase of these vessels will replace our charter costs with significantly lower owned vessel cash costs,” the company said.

Pacific Basin announced a net profit of US$8.2 million for the first half of 2019. This profit was down from $30.8 million recorded in the first half of 2018. However, EBITDA rose to $101.1 million from $99.3 million. Revenues for the first half of the year stood at $767.1 million, down by 3.58 percent from $795.6 million recorded in the same period in 2018.

Pacific Basin: the fleet

Founded in 1987 and listed on the Hong Kong Stock Exchange in 2004, Pacific Basin employs 3,800 seafarers at sea and over 330 staff on-shore at 12 locations around the world.

The company primarily operates handysize and supramax vessels. A handysize is at the smaller end of the international ocean going fleet – but it is still a massive vehicle. It can typically carry between 25,000 to 41,999 metric tonnes (27,600 to 46,300 U.S. short tons) of cargo. A metric tonne is equivalent to 2,204.6 U.S. pounds or 1.10 U.S. short tons. Meanwhile, a supramax is a ship in the next-biggest size range and can haul between 42,000 to 64,999 metric tonnes (46,300 to 71,600 U.S. short tons) of cargo.

At the time of writing, Pacific Basin owned 82 handysize vessels and 32 supramax vessels. It has a further 25 handysize vessels and seven supramax ships on long term charters. Meanwhile, it has 94 ships on short-term charters (less than one year) of which 34 are handysize ships and the other sixty are supramaxes. The average age of the fleet is just under nine years.

Each ship in the fleet is between 170 to 190 meters long (558 and 623 feet long) and 27 to 32 meters wide (89 and 105 feet) wide and need a water depth of about 10 to 12 meters (33 to 39 feet) when loaded. Pacific Basin’s ships are fitted with four cranes each with a 30-tonne (33 U.S. short ton) lifting capacity. The dimensions and the cranes make the ships suitable for working in shallow or restricted water-spaces such as rivers and narrow channels, the company indicates. The cranes enable the ships to work in areas that have less developed infrastructure.

Fuente : Port Technology