Dry bulk buoyed by IMO fuels uncertainty, fewer ship orders, GDP growth, says Pacific Basin

Drydocking of vessels being fitted with scrubbers could have supply-side implications. Credit: IHS Markit
Drydocking of vessels being fitted with scrubbers could have supply-side implications. Credit: IHS Markit

Uncertainty over the International Maritime Organization’s (IMO’s) 2020 sulphur regulations, a lack of new ship orders, and favourable global GDP growth are all boding well for the dry bulk sector, Pacific Basin chief executive Mats Berglund said on 11 October.

This comes as Pacific Basin saw timecharter equivalent earnings for its Handysize and Supramax vessels hit a five-year high in the third quarter.

Average Handysize earnings are about USD10,080/day, while daily Supramax earnings are about USD12,180 – the highest since the winter of 2013–14, the company said.

Berglund pointed out that the sulphur regulations will likely benefit the dry bulk sector, whether owners fit scrubbers or choose low-sulphur fuel.

“It’s an interesting dynamic in the short to medium term,” Berglund said, explaining that it means slower vessel speeds for low-sulphur users and off-hire for scrubbers. Both will be positive for dry bulk operators, he said.

“Scrubber installation will take supply away. It’s a 30-day shipyard job. [Owners] may be able to coincide it with regular drydocking of 15 days,” Berglund said, adding that it is more likely owners will have to drydock specially to fit scrubbers.

“We do think it will have a significant impact on the supply side,” he added.

Owners opting for low-sulphur fuel may cut vessel operating speeds from 11–12 kt to 9.5–10 kt, reducing vessel availability and supporting freight rates. There could be some inefficiencies in getting the correct low-sulphur fuel, with vessels deviating to get the right bunkers, which would further cut vessel supply, he said.

While several owners of Supramax and larger bulkers have decided to install scrubbers, “extremely few, if any, Handysize owners are going for scrubbers”, he said.

“Both compliance options mean a reduction in supply,” Berglund explained.

He indicated Pacific Basin would use low-sulphur fuel in its fleet of about 230 Handysize and Supramax bulkers, although the company will fit scrubbers to its Supramax vessels to maintain a competitive advantage if other Supramax owners did the same.

“We think the geared fleet will comply by using low-sulphur fuel,” he said, adding that it is “less financially attractive” to fit scrubbers to smaller vessels because scrubbers raise fuel consumption and CO2 emissions.

“It is also easier to pass on [low-sulphur] fuel costs to the customer rather than the capex of the scrubber,” he explained.

“Some Supramax owners are installing scrubbers. We don’t want to, but we may be forced to fit scrubbers if a lot of others do. We have the technology and yards in place if we have to do it.”

Uncertainty over the low-sulphur regulations, plus other regulatory requirements, such as fitting ballast-water treatment systems and tougher long-term IMO emissions regulations, have discouraged other owners from ordering new ships.

Net growth in the dry bulk fleet was 2.3%, or about 22.4 million dwt, in the first nine months of this year.

By comparison, the volume of Handysize and Supramax vessels ordered so far this year have hit a historic low of 1.5% of the existing fleet, Berglund said.

Pacific Basin is also holding back from ordering new ships ahead of the tougher IMO 2030 and 2050 emissions regulations, as it closely monitors the development of technology and designs.

Berglund predicted an increase in scrapping ahead of the IMO’s 2020 regulations, as higher secondhand prices could make it more cost-effective to sell a 20-year-old Handysize bulker for recycling and buy a five-year-old replacement than fitting scrubbers or using low-sulphur bunkers.

He said scrap volumes are about 0.4% of the existing dry bulk fleet, which is “way below normalised scrapping” of 4% a year.

The outlook for dry cargo demand is also upbeat, with growth of 3.1% in tonne-mile demand despite rising trade tensions between the United States and China.

While China has stopped importing US soyabeans, its own soyabean imports of 32 million tonnes a year accounts for just 0.6% of the global dry cargo trade, Berglund said.

He pointed out that US soyabeans are being shipped to Argentina and Brazil for processing, while soyameal is exported from Argentina to China.

“For our segment, Argentina/South America–China is a longer route than the US Gulf–China,” Berglund explained.

He said he believes the US soyabean trade to China will resume normally once the trade dispute is settled.