Buoyed by demand for so-called minor bulks from cement to fertilizer, smaller dry cargo vessels will outperform capesizes, the largest drybulk ships.
Buoyed by demand for so-called minor bulks from cement to fertilizer, smaller dry cargo vessels will outperform capesizes, the largest drybulk ships, which are being squeezed by ship oversupply and a volatile iron ore market. Swings in iron ore demand in China, the world"s top buyer, have meant an erratic year for the Baltic Exchange"s main sea freight index which gauges the cost of shipping major bulks like iron ore and coal and so-called minor bulks like grain, cement and fertilizer.
The index is down 26 per cent year-to-date, though it has rallied from a 17-month low in July.
Companies that own mainly iron ore driven capesizes are lagging those with smaller vessels, a trend likely to continue, boosting shippers such as Eagle Bulk Shipping, FreeSeas and Genco Shipping.
?At this point in time it makes sense to be in the (small vessel) market because of the demand-supply scenario,? said Cantor Fitzgerald analyst Natasha Boyden.
Pure play big ship operators such as Diana Shipping, meanwhile, will continue to see their growth limited.
Credit Suisse analyst Gregory Lewis said strong demand for minor bulks and a lively grain trade were the key drivers for the smaller vessels market.
So far this year, handymax, panamax and handysizes which mainly ship minor bulks are earning relatively better rates than the bigger capesize vessels.
The capesize fleet has risen 40 per cent since 2008, and average annualised rates for that sector briefly dropped below those for panamax vessels in July.
Capesize rates have slumped to $40,000-$44,0000 a day from a peak of almost $234,000 two years ago, while rates for panamax vessels have jumped 69 per cent to an average $22,000 a day. Handymax rates have almost doubled.
While growth in coal and iron ore demand has been more than offset by a surge in the capesize fleet, the number of small vessels has risen 6-8 per cent in a minor bulk trade that is up 13-14 per cent this year.
?Over the next 12 months, smaller vessels will outperform,? said Lewis at Credit Suisse, citing seasonal coal and grain demand as short-term catalysts.
An additional boost has come with a wheat export ban in Russia, the world"s No.3 exporter, in the wake of the country"s worst drought in a century. Big grain buyers like Egypt, Morocco and Japan have had to look farther afield, to the United States and Argentina, for supplies.
Given the favorable demand-supply scenario, expected to continue for a couple more years, companies have hinted at buying more smaller vessels, said Oppenheimer analyst Scott Burk.
In June, Genco agreed to buy 5 handysize vessels. The Baltic Handysize Index was at a 21-month high then, and the Capesize Index was well on its way down to an 18-month low.
This augurs well not only for pure play small vessel operators, but also those with mixed classes, including DryShips Inc and Safe Bulkers Inc.
An 18 per cent sequential rise in China"s iron ore imports in September, and forecasts of a recovery in the market, should, however, keep firms such as Diana focused on their core class.
But weaker steel rebar futures in Shanghai in the past 6 months suggest market players may soon put the brakes on the iron ore rally given an uncertain outlook for steel demand as China looks to tame a red-hot property market. Cantor"s Boyden said smaller vessels" relative insulation from a volatile iron ore market was a positive.