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Dry Bulk Shipping

Dry Bulk Shipping

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Published by: krutarthpatra on Sep 06, 2010
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By Nicolas Bornozis
A Review of the Dry Bulk Sector
This review appeared as a Sponsored Report in
of October 30, 2006.
DryShips Inc.
Printed as a Sponsored Report in BARRON’S of October 30, 2006.
Dry Bulk Shipping: The Engine of Global Trade
by Nicolas BornozisThe strong industrial development in theeconomies of China, India and Southeast Asia,since the turn of the twenty first century, hasresulted in a significant increase of the annualgrowth rate of the demand for dry bulkcommodities. This in turn strengthened thefreight rate environment, leading freight rates toall time highs. As dry cargo marketsfundamentals changed, a significant number ofdry bulk companies entered the U.S. publicmarket in 2005 raising close to $2.0 billion, inprimary and follow-on offerings helping thesecompanies to fund the expansion of their fleets.Ten dry bulk companies are currently listed in theUS markets compared to one prior to 2005.
Shipping a Vital Link in Global Trade
International shipping plays a vital role in globaltrade given that 2/3 of the world’s goods aretransported by sea. Tankers, which carry liquidfuels such as oil, oil products and chemicalsaccount for about 40% of total sea borne trade,whereas dry bulk commodities represent about38% and the rest is general cargo andcontainers. Dry bulk commodities are divided intotwo distinct categories, major bulks and minorbulks. Major bulks include iron ore, coal andgrain, which are shipped on the larger sizeCapesize and Panamax vessels and comprise67% of dry bulk trade. Minor bulks are fertilizers,steels, sugars, cement etc., which are shipped insmaller more versatile vessels such asHandymax and Handysize, and comprise about33% of the dry bulk commodities trade.Iron ore and coal are the two most importantmajor bulk commodities with 27% and 26% oftotal dry bulk trade respectively, with grainaccounting for the remaining 14%. Iron ore isused to make steel; coal has two primary uses, itis used to generate electricity as thermal coaland for the production of steel as coking coal.The supply of coal is abundant with reserves atover 200 years versus the 41-year life of oilreserves and 67 year life for gas reserves.The global dry bulk fleet includes about 6,271vessels which are distinguished into four basiccategories based on their carrying capacity indeadweight tons (dwt).
Vessel TypeCarryingCapacity (dwt)Number ofVesselsCapacity(million dwt)% of GlobalFleet CapacityMain TradeCharacteristics
Capesize 100,000 + 688 116.4 32 % Iron ore and coalPanamax 60,000– 99,999 1,365 99.0 28 % Iron ore, coals, grainHandymax 40,000– 59,999 1,464 69.7 19 % Grain & minor bulksHandysize 10,000 -39,999 2,754 73.6 21 % Grain & minor bulksTotals 6,271 358.8 100%Source: Statistics by Clarkson Research Services, September 2006
Unlike tankers, which are required to havedouble hulls, dry bulk vessels are single hull, asdry bulk cargoes do not pose a significantenvironmental risk. Also, unlike the tankermarket that shows high concentration among afew major owners, the dry bulk sector is highlyfragmented with significant consolidationopportunities. There are over 1,000 private andpublic companies. Excluding COSCO, owned bythe Chinese government, the top 19 ownerscontrol just about 20% of the global dry bulk fleetcapacity with the 10 US listed dry bulkcompanies controlling less than 3%.Dry bulk shipping is a global business but thereare a few major trade routes for the major bulkcommodities between exporting and consumingregions. Coal is mainly shipped from Australiaand Canada to the Far East and Europe,whereas iron ore is mainly shipped from Australiaand Brazil –which account for almost 70% ofglobal iron ore production- to China, Japan andEurope. Grain is shipped mainly from the USGulf, Brazil or Argentina to Europe and to the FarEast. Furthermore, there are a multitude of otherroutes for the minor commodities and generalcargo.
Printed as a Sponsored Report in BARRON’S of October 30, 2006.
Dry bulk vessels are employed either in the spot orthe period time charter markets. The spot marketrefers to contracts for one or more voyages thancan last up to a few months. Period time charterscan range from several months to several years. Ingeneral, spot rates tend to be higher than timecharter rates. For example, between 2002 and2006 the average daily earnings of a Capesizevessel were $ 43,269 in the spot market, $ 38,756under a one-year time charter and $ 29,189 undera three-year time charter. While strong spot ratescan generate higher earnings in good markets,time charters provide for a steadier income streamover a longer period of time and reduce short-termmarket volatility. The mix between spot and periodemployment varies by company depending on itsinterpretation of market trends and its overallcorporate strategy.
Freight Rates in a New Trading Range
Freight rates in dry bulk shipping are driven bydemand and supply. Global economic conditionsaffect the demand side, while the size andavailability of the global fleet affect the supply side.Shipping is a cyclical industry and as history hasshown, imbalances between demand and supplyhave a direct impact on asset values, freight ratesand earnings. Furthermore, dry bulk shipping isalso affected by seasonality, as hurricanes,monsoons and cold weather may affect thedemand for iron ore, coal, grain or othercommodities.The Baltic Dry Index (BDI) of the Baltic Exchangetracks the performance of the overall dry bulksector and reflects the rate development of theCapesize, Panamax and Supramax vessels. Theindustry tracks freight rate evolution –includingspot market and time charter rates- on a dailyTime Charter Equivalent (TCE) basis, whichreflects rates paid to shipping companies per daynet of voyage related expenses that arecustomarily borne by the charterers.
Baltic Dry Index 1995 – 2006
Dates: 01/09/2005 – 20/10/2006.Source: Clarkson Research Services
“The increased demand from China, especiallysince it joined the World Trade Organization andthe other developing economies of Asia since2001 has propelled dry bulk shipping to a new era”states
Omar Nokta of Dahlman Rose
. Prior to2001, the shipping markets were operating undercompletely different conditions than today andfreight rates were less than half what they aretoday. For example, based on data provided byJefferies, a 150,000 dwt Capesize vessel under aone year time charter earned on average about $14,000 per day between 1996 and 2001, $ 30,000per day between 2001 and 2005, and $ 50,000 inSeptember 2006. The average daily revenues of a70,000 dwt Panamax were about $ 10,000between 1996 and 2000, rose to $ 20,000 between2001 and 2005 and to $ 30,000 in September2006.“Dry bulk shipping used to be event driven”,comments
Joe Royce, the CEO of TBSInternationa
l. “Notwithstanding the cyclicality andvolatility which are inherent in the shippingbusiness, dry bulk shipping is now affected by thesustainable year over year increase in globaltrade.” Seaborne dry bulk trade grew at acompound annual rate of 2.6% between 1990 and1999 and 4.4% between 2000 and 2005. “Thecurrent cycle started in 2002” comments
DanBarrett of Fortis Securities.
“The previous fourcycles since 1977 lasted 6, 4, 12 and 3 yearsrespectively and were triggered by majormacroeconomic events. Major and minor bulks arethe foundations of the world economy and the

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