A strange situation has been developing in the shipping market over the last year. As the container business crumbles into the sort of crisis not seen in shipping for 20 years (and never seen before in the box sector) the bulker business is positively buzzing. Not at all what we expected, so what's going on?

12 Months Later

The transformation in the fortunes of the bulk carrier business over the last 12 months caught even diehard optimists by surprise. Nominally the bottom of the dry bulk market occurred in November 2008 when Handymax earnings fell to $5,000/day. Sentiment hit rock bottom, but as 2009 progressed, bulker earnings recovered month by month and today have quadrupled to $20,000/day. No fundamentals model could have predicted this transformation. The economic collapse seemed certain to bring dire consequences for the bulk trade, and it did. In 2009, despite the efforts of Chinese iron ore importers, dry bulk trade fell by 1% and minor bulks by 7%. Meanwhile the bulker fleet grew by a brisk 10.8% and the fundamentals balance deteriorated.

Investment Interest

Why this large dislocation of supply and demand quadrupled earnings remains a mystery, but it did. And when shipping markets shrug off the fundamentals the normal reaction of investor sentiment is to follow suit and this was no exception. 18 months into the crisis, bulkers are buzzing.

Chunky Earnings

Another reason why investors are so interested in bulkers is that while earnings boomed over the last year, costs shrank due to falling ship values and interest rates. Two years ago in 2007 a new Handymax cost roughly $19,000/day (see graph). Today LIBOR has fallen from 5.2% to 0.4%, knocking $6,000/day off Handymax bulk carrier costs. Meanwhile the price of a new Handymax bulker has fallen from $40m to around $30m, cutting depreciation from $6,300/day to $4,000/day. So now costs are around $10,000/day, while earnings fluctuate around $20,000/day. Interested?

Shaky future?

But isn't it risky? Of course market watchers can't wait to remind investors of the enormous orderbook lurking out there. But if bulkers could turn in such positive results (+46%) in 2009, why not in the future? In fact the market seems ready to take the orderbook in its stride, and the 3-year TC rate is currently estimated by Clarkson brokers at $13,750 per day. That is still a decent margin over today's costs. So from this perspective it looks like a no-brainer.

Anybody interested?

So there you have it. Investors are checking out the Handy bulker market numbers with great interest and if the graph is any guide, last year was OK. But whether there will be safety in numbers next year is another matter. The orderbook remains and as for interest rates…forecasting them is even tougher than forecasting the shipping market. Have a nice day.