Short sea shipping: worries in the dry bulk segment

In their first report1, published in February 2012, Bloem Doze Nienhuis recommended the introduction of more shipping pools in the short sea sector. One year later, the situation has not changed for the better. In the market for dry bulk and, multipurpose ships especially, the clouds are even darker than before. Shippers, owners and charterers all have an interest in a stable market, which is far from reality at this moment.

Let us first have a look at the general fleet development in short sea shipping. Ideally, the size of the fleet is just sufficient to meet the demand. One key performance indicator is the capacity of the fleet compared with the transported cargo.

The total short sea volume from 2005 to 2014 shows a relatively stable demand, with a small decrease of 2.8%. Whereas, the short sea fleet increased in the same period from 1,4 billion tons to 1,8 billion tons capacity. This means an increase of the supply of more than 21%.

Concluding, that continued growth of the short sea fleet and slightly shrinking volume (-2.8%) created a substantial overcapacity.

Fleet and order book overview

At this moment, the small fleet of European owners has a 50 million dwt capacity. The containership fleet holds 17.5 million dwt and the ro-ro capacity is 4 million dwt. The order book contains 1 million dwt MPP capacity, and only 0.07 million dwt general cargo capacity. The order book/fleet-ratio is the highest of the ro-ro freight carriers, 25%.

The dry bulk volume is the second largest in the gross weight seaborne handled in the short sea. In 2011, the gross weight of dry bulk handled in the EU-27 main ports increased by 2,5%. If we estimate an increase of 1% per year from 2011 onwards, volumes similar to those before the current financial crisis will be reached in 2014.

Chart 3 shows the T/C average earnings estimates form 2011 to the beginning of this year. It must be viewed against the following facts: from 2001 to 2008 peaks and falls of approximately 40% were observed. From 2008 onwards, the market has fallen by 50% due to the current financial crisis. In 2010, a small increase occurs followed by a decrease in 2011. The period 2011-2013 show more or less same volatile fluctuations, but these have more or less seasonal patterns. The minimum Time-Charter levels seems to have a bottom line, which we think this reflects the OPEX level.

At the beginning of 2013, the ratio of the fleet versus the order book of small general cargo vessels under ownership of EU-27 countries is 2%. This is 1,346 vessels with a capacity of 3.1 million dwt. The order book contains 19 vessels, with a capacity of 70,000 dwt. The overall order book shows a top at 2010 (0.54 million dwt), while the fleet reaches a peak at 2013. When comparing the total fleet of 2013 with the total fleet of 2005, this shows an increase of 24%.

2015 will come

The major share of short sea operations takes place in the Emission Control Areas (ECAs) of the North Sea and Baltic region. Exactly in this region, new legislation will come into force as per 1 January 2015 requiring a sulphur limit of 0.10% m/m. Short sea ships spending most of their time in these ECAs, will be confronted with a mandatory switch to either new technologies or low sulphur distillates. If the ship owner opts for distillates, at current prices this will lead to an increase of bunker costs of approximately 40%, based on a current HFO price of approximately $ 600 and Low Sulphur MGO at $ 850 per metric ton. It is not clear if and how the freight markets will absorb this cost increase.

In our view most short sea ship owners will opt for distillates for their ECA operations and hope that competitors will make the same choice, so all have to increase their rates. In time, most probably the short sea fleet will switch to alternative fuel systems like LNG, preferably to be installed in newbuildings. However, at this moment it will be difficult, if not impossible, to invest in new technologies in existing vessels because of lack of financing.

Conclusion

Especially in the dry bulk market, the situation in short sea shipping calls for urgent action. Upcoming legislation will increase costs in a market that is financially not capable of investing. One way or the other, owners will have to review the situation in order to restore a healthy market. A more comprehensive analysis will be available shortly, when the second short sea report of Bloem Doze Nienhuis will be published.

Rabia Geng and Johan Wagelaar