Capesize owners were probably glad to see the back of 2012, a year in which average Capesize earnings remained below operating expenses for much of the time. The surge in deliveries since 2008 created im-mense supply-side pressure on the market that made its force felt most heavily last year. However, 2012 may also have marked a turning point for the sector, with the delivery peak likely to have now passed and fleet growth expected to slow in the coming years.
A Difficult Year
While there was a short-lived improvement in Capesize rates during the fourth quarter of the year, overall 2012 was still the worst year for Capesize owners since 2002. Estimated average voyage earnings fell 41% y-o-y to $8,356/day, while in August earnings were less than $3,000/day. There were some demand-side difficulties during the year, including the slowest growth in global iron ore tonne-mile demand since 2008, and a period of weaker Chinese seaborne iron ore imports mid-year.
Under Pressure
These factors are likely to have had some impact in 2012. However, the major pressure on the market was further supply growth. At 41.8m dwt, deliveries into the Capesize fleet in 2012 were marginally lower than in 2011, but still caused rapid fleet growth of 12%. While this is down from 18% growth in 2011, four consecutive years of double-digit fleet growth have nonetheless caused the Capesize fleet to double since the start of 2009.
This surge in deliveries, combined with lower contracting, has caused a sharp fall in the Capesize orderbook. At the start of 2013, there was 49.6m dwt on order (equal to 18% of the fleet), 70% less in dwt terms than at the start of 2009 when the orderbook was 113% of the fleet. Now that the orderbook is smaller, deliveries should now slow. After accounting for projected non-delivery, deliveries in 2013 are expected to drop 33% to 28m dwt, with y-o-y fleet growth slowing to 7%.
Shifting Fundamentals
Since growth in the iron ore trade is expected to reach 6% this year, the gap between Capesize supply and demand growth in 2013 is likely to be the smallest for several years. Existing fleet oversupply means that the market is unlikely to improve immediately or significantly as a result of this, but the narrowing of the gap is in itself a notable milestone. Once deliveries have slowed down, it becomes possible for existing oversupply to be gradually absorbed, rather than added to on a monthly basis.
So, as Capesize supply growth is likely to slow further going forwards, the long process of absorbing overcapacity can soon begin. In the short-term, a sustained improvement in demand can still support rates slightly, as in Q4 2012. Thus much depends on the strength of Chinese iron ore imports this year. But in the longer-term, the further shrinking of the orderbook is likely to be of some relief to Capesize owners, who will be hoping that the worst part of the market cycle may soon pass.