Before the economic downturn of late 2008, dry bulk shipowners were enjoying the best market conditions on record, as Chinese demand boosted global trade growth in most raw materials. Many owners ordered significant numbers of new vessels during this period, in the expectation of a continued boom. However, the world economy is now in a much worse state than in the pre-2008 period and bulk deliveries show no sign of slowing.  Overcapacity continues to be a serious issue for the dry bulk market.
As the owner country with the third largest dry bulk fleet and the largest dry bulk orderbook (in terms of vessel numbers), this is a particularly relevant issue for Chinese owners. As the Graph of the Month shows, Chinese owners have bulkers of a combined 46.7m dwt currently on order, which is equivalent to 50.0% of the current fleet. In comparison, the world dry bulk orderbook (which totals 213.6m dwt) is approximately one-third the size (34.7%) of the current global dry bulk fleet.
Saved by Scrapping?
As shown by the graph, Chinese owners have a high proportion of elderly dry bulk vessels. Bulk carriers aged 25 years and over account for 17.5% of total Chinese-owned bulker tonnage, compared to 11.0% globally. At first glance, this might suggest that Chinese owners could be able to mitigate the impact of overcapacity to a larger extent than other nations by scrapping these vessels once they start to face competition from newer vessels with lower operating costs.
Cabotage Consequences
But are these old vessels actually in competition with the new ships? Many of these elderly vessels were acquired by Chinese owners in 2009 when asset prices were low, making them attractive purchases. Much of the buying was by companies connected to the coal-mining or power industries, strongly suggesting that the vessels were intended for deployment in the Chinese coastal trade, which moves more than 500mt of coal from north to south. The regulatory requirements here are relatively light, and vessels are permitted to trade until an elderly 33 years of age. Without the same strict class and port state requirements as international trade, the pressure to scrap these vessels is removed.
Hence, the large ageing segment in the Chinese owned fleet is not necessarily a release valve for over-capacity in the international trading fleet: much of this elderly capacity is not competing in this market. Without this tonnage, the Chinese fleet suddenly looks much younger. Of course, small young Chinese-owned vessels could equally benefit from coastal trade growth. But as the graph shows, 75.4% of the Chinese bulk orderbook consists of Panamaxes and Capesizes.
Oversupply After All ?
So, the Chinese orderbook is heavily weighted towards large ships ordered with pre-2008 growth rates in deep sea dry bulk trade in mind, and the competition between these ships and old Chinese cabotage tonnage is far from direct. Any phase-out of the overage element of the Chinese fleet is unlikely to offset the pressure of increased deliveries. The large volumes of elderly Chinese tonnage alone are unlikely to offer the market too much relief from the supply side.