How will lower bunker prices affect the substantial overcapacity in the dry bulk market?

As bunker fuel costs have come down from $600 per tonnes to $330 per tonnes in the past six months, much talk about increased ship speed have surfaced...
How will lower bunker prices affect the substantial overcapacity in the dry bulk market?

Some single-voyage or single company estimations aims at supporting reintroduction of higher speed to generate higher revenue and potentially higher earnings. In reality, some of them may actually prove to deliver on the promise too.

However, as Chief Shipping Analyst at BIMCO, Peter Sand, said: “When you consider the entire dry bulk fleet on a global scale, overcapacity remains substantial. In that sense, there is no overall case for increasing speed anytime soon.

“BIMCO concur to the estimates made by Dreary, which point to an operating surplus of some 25 percent in the market today.

Source: Drewry Maritime Research

Bear in mind that as long as the demand side and the supply side continues to match one another quite narrowly, the operation surplus will stay put. We need several years of strong demand growth and low supply growth in order to reduce the overcapacity substantially.

This is why is remains important for industry profitability to make sure slow steaming continues to be an integrated part of business conduct.

Slow steaming

In spite of bunker fuel costs coming down significantly, it remains by far the largest cost item for owners and operators. The hefty fuel bills, seen during the past couple of years, may have been paused for a while, but may also prove sticky as the oil price futures all present a steep counting (Canting is a situation where the futures price (or forward price) of a commodity is higher than the expected spot price).

“Bringing higher ship speed back may cause some unwanted commotion to the freight market, where the norm in recent years has been one of lower and lower ship speed.

“Lower ship speed has significantly assisted freight rates in staying higher than they would in the case of all ships steaming at full ahead. Reversing this trend may also mean reversing the benefits obtained from slow steaming”, adds Peter Sand.

How will lower bunker prices affect the substantial overcapacity in the dry bulk market?

by Peter Sand

Chief Shipping Analyst at BIMCO

Peter Sand joined BIMCO in 2009 and holds the position of Chief Shipping Analyst. In this position he is responsible for analysing the commercial markets for dry bulkers, tankers and containerships. Taking the offset in global economics as the analytical starting point for all seaborne trade, he assists management and members with insight into many different aspects of the shipping industry. Peter’s regular reports and interim focus articles on the shipping market are widely read and have often been referenced in mainstream media.

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