A third of global bulker deliveries in doubt

By Rajesh Joshi in New York - Friday 8 May 2009

AN ESTIMATED 30% of the world’s dry bulk orderbook risks not being delivered at all, as shipowners in the sector struggle with financing troubles and a lack of cargoes, Eagle Bulk chief executive Sophocles Zoullas said. 

This figure could be as high as 60%, he suggested at the company’s first quarter conference call. 

Together with fewer than expected new ships delivered in the first quarter, increased scrapping and signs of recovery in China and India, the dry bulk sector has grounds for “near-term cautious optimism”, the executive added. 

Eagle Bulk said it has been tracking developments at major engine makers Wartsila and MAN B&W, and has increased its estimate of “potential cancellations” announced from these two majors from $1.5bn to $2.6bn. 

A back of the envelope calculation by Lloyd’s List based on a suggested retail price of $3m to $4m per engine, based on Mr Zoullas’ comments, would indicate that 500 to 850 existing ship orders across various ship categories are considered in danger of being cancelled. 

Mr Zoullas said the dry bulk orderbook is in ‘flux’, and ship supply statistics available through traditional channels are unreliable. 

“Shipowners around the world are cancelling orders because of a lack of finance, lack of employment and other financial problems,” Mr Zoullas said. 

“We believe a more reliable indicator is to track developments at component manufacturers for ship construction, such as engine makers, since they are lead indicators of changes in ship supply.” 

Apart from the data available from engine makers, Mr Zoullas said statistics available from other sources also point to “increased cancellations over the next two years”. 

Apparently, a critical component of this theory is that 40% of the world orderbook is with greenfield or newly established yards. 

“Current estimates indicate that a substantial portion of the world orderbook does not have secured financing in place,” Mr Zoullas added. 

“As a result, we estimate that 30% of the world orderbook could slip for 2009, although we have seen reports that this could hit 60%.” 

Eagle Bulk has prepared a “progress report” chart that stacks up actual deliveries so far into 2009 against the total scheduled deliveries for this year in four different sizes of bulk carriers. 

In each case, the number of ships delivered so far indicates that “all vessel types are well behind meeting their scheduled delivery dates,” Mr Zoullas said. 

Simultaneously, scrapping of dry bulk ships in the last quarter of 2008 and the first quarter this year reached a 40-year peak, at 10m dwt. This kept fleet growth ‘negligible’ in the first quarter. 

With 111m dwt of existing bulkers being more than 20 years old, “accelerated scrapping is expected through to 2011”, Mr Zoullas predicted. 

While recounting these figures that reflect on the ship supply side of the equation, he also cited several factors on the demand side that promise better times ahead. 

Chinese premier Wen Jiabao’s comment in March that industrial production grew 8.3% year-on-year is a sign that the government’s stimulus package is working, he said. 

One concrete sign of this turnaround is Caterpillar’s excavator sales in China, which broke records in March and April. 

Overall, he said the World Bank expects to see China’s recovery start in the middle of 2009. Promising signs have emerged from India as well. 

The general increase in dry bulk freight rates since the start of the year can only underpin such optimism, Mr Zoullas said. 

Specific to Eagle Bulk’s fleet, he said $355m in guaranteed contracted revenue through to 2011 is complemented by a hypothetical figure of $212m on the open days of ships without cover, at the current average rate of $12,000 a day. 

This would provide the company enough cashflow ballast to fund its ongoing newbuilding portfolio of about 20 remaining ships. 

Eagle Bulk’s existing fleet, too, is enjoying charter coverage at “above market rates”, Mr Zoullas said.
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