The dry bulk shipping market, which primarily is the market for the shipping of such unpackaged bulk cargo as grains, coal, iron ore and cement, has been relatively soft since the start of the global recession. The Baltic Dry Index (BDI) -- a measure of the price of shipping major raw materials such as iron ore, grains and fossil fuels by sea-- is down approximately 86 percent from its November 2009 high. This increasingly challenging environment has been forcing some bulk carriers to take various corporate actions to stay afloat, while some have had to shut down. (To read more about the Baltic Dry Index, see article: The Baltic Dry Index: Evaluating An Economic Recovery.)

The soft bulk shipping market that is the cause of these challenges can be attributed to both a slowdown in the Chinese economy and an increase in the supply of new bulk carrier ships on the market. The slowdown in the Chinese economy, specifically, resulted in a slowdown in its real estate sector and consequently the demand for iron ore. Additionally, China, which has been a large consumer of coal, has been shifting away from coal to natural gas as a source of energy. The result has been a reduction in the demand for coal and the demand for ships to transport coal, which, along with  iron ore, accounts for a significant portion of the annual volume of cargo transported by bulk carriers. (For related reading, see article: China's Economic Indicators.)

Bulk Ships

A bulk carrier ship is a merchant ship designed to transport such unpackaged bulk cargo as grains, coal, iron ore, bauxite, and cement. The sophistication of the ship's design depends somewhat on the major port of call— the port where the ship unloads and loads cargo. Some ships may include extra machinery that unloads cargo and that packages cargo while loading.  Bulk cargos are often corrosive or abrasive; therefore, cargo ships have to be built with a consideration for the highest degree of safety and strength. 

Bulk carriers can be identified by their size. Mini-bulkers are designed to carry up to 10,000 dead weight tons (DWT), excluding the weight of the ship. Mini-bulkers are built primarily for river transport, and they usually have one cargo holding area, while larger ships have many. Handysize ships have a DWT of between 10,000 and 39,000, and they are usually multipurpose in nature. Handymax/Supramax ships, on the other hand, usually have a capacity of between 40,000 and 65,000 DWT. They are also multipurpose and have multiple holding areas. Panamax/Kamsarmax ships are larger ships with a DWT of between 65,000 and 85,000. This ship is called panamax, because its size is the same as the maximum-sized ship that can be accommodated by the Panama Canal currently. Post-panamax ships are ships with capacity between 85,000 and 120,000 DWT. These ships will be accommodated by the Panama Canal after it has been upgraded. The largest category of ships is referred to as capesize ships. Capesize ships are ships that have a capacity of over 120,000 DWT.

In the past most capesize ships had to travel around the Cape of Good Hope, because they were too large to traverse the Panama and Suez Canals. Recently however, the Suez Canal was deepened, permitting the movement of most capesize ships.

Cost of Operating a Bulk Ship

The bulk shipping business is capital intensive, prompting many shipping companies to take on high debt. The operating cost structure is simple.  The cost of building a new ship runs anywhere from US$20 million to US$80 million, depending on the capacity of the ship. Subsequently, the major operating costs that are borne by most shipping companies are port fees, fuel costs, voyage-related insurance premiums, broker commissions, crew compensation, vessel supplies, repairs, and maintenance. These companies which own bulk carrier ships earn revenue through two main channels: the charter market and the spot market. In the charter markets, bulk carriers are contracted at fixed rates over a fixed term (over a number of years), usually with a renewal option. In the spot market, bulk carriers are contracted for a short term at the prevailing market rate.

Market Rates and Company Bottom Line

The rapid decline in the BDI reflects to a high degree the deterioration in the profitability of most of the companies that operate capesize, panamax, and supramax ships. The Baltic Dry Index (BDI), which  is a composite of the spot rate for capsize, panamax, and supramax ships, has exhibited enormous volatility over the last six years, but has gradually trended down (FIGURE 1). For most of the calendar year 2010, the BDI moved sideways, fluctuating between 2000 and 4500. Since the latter part of 2010, the BDI has trended downwards, hitting a six-year low of 548 by early 2015.  Companies with a heavy concentration of capesize ships are more resilient, because the charter rates for capesize ships are less volatile than those for smaller ships. Companies with a heavy concentration of ships that are on long-term charters experience less revenue volatility than those that do not.

Corporate Strategy 

The low charter rates have prompted many companies to find creative means to stay afloat. Some companies in the industry such as Baltic Trading Limited (BALT) have chosen to operate most of their ships in the spot market instead of the long-term charter market. These bulk carriers prefer to accept the uncertainty that comes with the spot market rather than to lock in revenues in a long-term contract, because they believe that future spot rates will be higher by a significant margin.  Other companies such as Dianna Shipping Inc (DSX) prefer the certainty that comes with having a large portion of ships on long-term charter hires. Yet, other shipping companies such as Knightsbridge Tankers (VLCCF) are consolidating as a means to reduce operating costs and increase efficiency.  Some shipping companies such as Eagle Bulk Shipping (EGLE) are in a very challenging spot and are seeking creditor leniency. On the other hand, the larger companies are positioning themselves to make cheap acquisitions as a means to broaden market share.

The Bottom Line

A reduced demand for the transportation of coal and iron ore has led to significant challenges in the bulk shipping industry. This reduction in demand can be partially attributed to the slowdown of China's construction activity, which has lowered the country's demand for steel and iron ore, as well as to the fact that increasing environmental concerns in China have forced the Chinese government to throw their support behind sources of energy other than coal, such as natural gas. Coal and iron ore constitute the two largest portions of the total cargo transported by bulk carriers. The reduced demand in the industry has been compounded by the excess supply of new ships on the market, with the order book for the building of new capesize ships being at some of the highest levels since the early 1980's. This has pushed many companies to the brink and forced others to merge. Larger companies are seeking cheap acquisitions to broaden their market share. (For related reading, see article: Are Shipping Stocks Due For A Rally?)