The impending Ballast Water Management Convention might be a dry bulk blessing in disguise

By
Carly Fields & Lara Shingles,

Despite being inundated with technical challenges and opposition from owners, the implementation of the IMO Ballast Water Management Convention (BWMC) on September 8, 2017 could provide the basis for a dry bulk market recovery, says Maritime Strategies International (MSI).

MSI’s chart shows that a number of vessels in the dry bulk fleet will hit special surveys of three or more over the course of 2017 to 2019 based on age profile extrapolation.

According to the London-based shipping consultant, the long-delayed ratification of the IMO anti-pollution regulation could see 100mdwt of bulk carriers removed from the fleet in the four years to 2019.

This high number of scrapping together with a low number of deliveries has the potential to pull the dry bulk sector off the floor and fuel a recovery that will gain traction at the start of 2020, it says.

The new convention will require all affected ships to install a ballast water treatment (BWT) system by the first renewal of their International Oil Pollution Prevention Certificate (IOPP) during the vessel’s special survey. This means that by 2022, all ships in the fleet must have a BWT system installed.

“Owners will be almost immediately impacted by the parlous state of the market and have one eye on the entry into force timeline.”

Installing and running ballast water treatment plants, however, involves a significant amount of capital expenditure, the level of which varies dependant on the type and size, flow rate of the system and the technology selected. Accordingly, cost range from $500,000 to $2m per bulk carrier – a source of concern for both industry and individual owners.

Some vessels requiring a special survey in 2017, and all vessels with a special survey in 2018 and 2019, will be required to fit a BWT system. With the cost of a capesize third special survey in excess of $1m, plus the additional outlay for retrofitting a BWT at around $1.5m, MSI predicts that for a 15-year-old vessel that is only earning $7,100 per day and worth $8.2m, the alternative of scrapping at $6.7 million will look appealing to many owners.

Delete or keep

Speaking to Baltic Briefing, Will Fray, MSI senior analyst, says: “In light of both the prolonged depressed state of the market and the imminent entry into force of the convention, we expect almost 100mdwt of bulkers to be removed over the course of the next four years.”

Many of these deletions will be frontloaded, adds Fray, “because owners will be almost immediately impacted by the parlous state of the market and have one eye on the entry into force timeline”.

Beyond the impact of the BWMC, Mr Fray highlights other elements likely to underline deletions in the four years ahead. These include vessel age, values, scrap prices and profitability.

By the end of 2016, MSI expects that 40.1m dwt of bulk carriers will have been removed from the dry bulk fleet, with scrapping falling to 26.6m in 2017. It adds that scrapping over the course of 2015 to 2017 will exceed all other historical triannual totals, not only in dry bulk but also across any individual shipping sector.

Foundation for recovery

A blessing in disguise, Mr Fray believes that the combination of low deliveries and high scrapping will be the driving force that will help pull the dry bulk sector off the floor and provide a foundation for a recovery that will gain momentum at the start of the next decade.

“Of course some of these vessels will be scrapped before they reach these special survey dates but as an indicative position there is just over 100m dwt of dry bulk carriers currently on the water where the owner will soon have to make the call to invest or scrap,” he adds. 

As for scrap prices, Mr Fray says that MSI believes scrap prices have reached a floor this year. Further, MSI expects scrap prices to improve between 2017 and 2020, although only marginally: “For instance, the scrap value of a capesize ship was $14.5m but it has dropped to around $6.2mthis year; we expect prices to increase to $7.4m in 2020.”

Disruptions and uncertainties

Of course, this recovery faces a plethora of potential disruptions, particularly coal trade to China and India on the demand side, for which Mr Fray says there are “very significant uncertainties”. There’s also a downside to MSI’s view for iron ore shipments, he adds.

On the supply side, Mr Fray says there’s potential for “stronger than expected” contracting, as MSI is forecasting what it considers to be the minimum of around 15m-20m dwt per year. What’s more, he says: “Scrapping is difficult to call and we could be surprised by the age at which ships are scrapped which may bring about higher scrappage than expected.”