Older capesizes and VLOC vessels will be scrapped in 2019 at a level that could not have been foreseen four months ago, Cargill’s head of research said on Thursday.
The capesize market will get worse but should start to improve by the end of 2019, Eric Aboussouan told a conference call moderated by Amit Mehrotra, Deutsche Bank’s analyst for transportation and shipping.
Cargill maintains a negative outlook for iron ore for much of this year, which will have a big impact on shipping as the commodity accounts for such a large proportion of tonne-mile demand, Aboussouan said.
Vale’s plans to cut iron ore production by up to 50 million tonnes per year, in particular, will have a “huge impact” on markets, he continued.
For that reason, growth in dry bulk tonne-mile demand has the potential to be negative this year for the first time in two years, Aboussouan said.
This will prompt shipowners to scrap older VLOCs and capesize bulkers during 2019, he explained.
Until just a few months ago, Cargill had projected that scrapping of larger bulkers would maintain the level seen in 2018.
Scrap sales
Seventeen capes were sold for recycling in 2018, including two ore carriers, according to VesselsValue data.
Although dry cargo markets underwent record lows in 2015 and 2016, Aboussouan said the situation is different this time around.
“Now the environment has completely changed,” he said.
The extra costs related to compliance with the IMO 2020 sulphur regulation means that shipowners will no longer be able to run their vessels at rates below operating expenditure, he said, even though they might have done so two or three years ago.
“The incentive to keep those old ships floating will not be there,” Aboussouan said on the call.
Cargill expects between $200 to $400 per tonne of extra costs for compliant fuel compared to heavy fuel oil from late 2019 onwards.
What is more, the spread between the two prices will widen significantly once the 2020 regulation is in force, the conference call heard.
“In 2016, we were close to $3,000 to $4000 [daily],” Aboussouan said. “We cannot go below $5,000 on capes [today].”
Floor to falling rates
The anticipated rise in scrapping will not turn the market around, but will bring some floor to falling rates, Aboussouan said.
That being said, Cargill remains hopeful that the cape market will rebound by the end of 2019.
“It’s not a totally bearish scenario,” the trader's head of research said.
During the second quarter, Cargill expects it will be difficult to achieve rates over $10,000 per day for capes.
Rates could reach $10,000 to $12,000 per day in the third quarter and $10,000 to $15,000 per day in the final quarter, Aboussouan said.
