News came out over the past week that General Maritime has filed for Chapter 11. This is not a surprise. Although a relatively high level of uncertainty exists in demand projections, supply projections for 2011 have essentially been known quantity for the past three years.
Dry bulk shippers need to take notice of the events transpiring among their tanker brethren. Brazilian mining company Vale has commissioned 19 ships that are so large that their ships are literally going to be in a class of their own – the Valemax class. Valemax class ships are going to be larger than Capesize ships. The latter received their name because they are too large to get through the Panama and Suez Canals, consequently requiring them to journey around the capes of South America and Africa.
Looking at just the Capesize segment, Clarksons reported as of January 2011 that there were 638 vessels on order and 309 of them are going to be delivered in 2011. This is indicative of the magnitude of oncoming supply facing the entire industry. A summary of orderbooks from the three major dry bulk segments is below, taken from Eagle Bulk’s most recent 10-K filing (pp. 61–62):
The Baltic Dry Index, which tracks shipping prices, has essentially been bumping along depressed levels since the end of 2008. Unless the world economy rebounds or a wave of shipping company consolidation also leads to scrapping of older ships, we would not optimistic on our outlook for shipping.
There is, however, one bright spot in the shipping industry: liquified natural gas (LNG). LNG, which has long been viewed as one of the cheaper energy commodities in recent years, has been experiencing a surge. One of the major catalysts was the nuclear crisis in Japan, which has shifted energy usage away from nuclear power and towards sources like natural gas.
Unfortunately, we can’t quickly convert oil tankers or dry bulk ships into LNG carriers due to the containment systems required for carrying LNG. Alas, like many other industries with high fixed costs, supply is inelastic in the short term.