Fleet growth reduces biomass freight rates

Apr. 14, 2011, London, UK – A huge increase
in the number of freight vessels has led to a subdued market for dry bulk ship
owners so far this year, with bearish Handysize rates on offer for biomass
cargoes. The increased tonnage comes despite a rise in vessel scrapping, which
this year has already matched last year's 6 million deadweight tonnage (dwt).
This is still not enough to offset the rate of new builds, expected to be 140
million dwt this year.

“Over the last few years, we have had a
high order rate of new ships, but only now is the new capacity coming in,
eroding the dry bulk earnings,” said Peter Norfolk, head of research for
Freight Investor Services, at the second Argus European biomass trading
conference in April 2011.

The drop in price is attractive for biomass
shipping, with average Handysize earnings less than $10,000/d in February
compared with a peak of more than $20,000/d in spring last year.

Ship owners are leaning towards the spot
market, as they say it will be more profitable in the next several years. This
is making it more difficult to secure long-term agreements, as ship owners do
not want to tie up a large proportion of their ships, Norfolk says. “But if you
go entirely spot on freight, it could leave you with difficulties, as there is
a lot more risk involved.”

“Freight is a volatile market and will
remain volatile even if the general trend is depressed,” he says.

Vessel scrapping is beginning to become
more profitable. Norfolk estimates that more than 25 million dwt will be
scrapped this year. With scrap prices high, this is becoming a more attractive
option for ship owners.

The fleet profile appears to be changing,
with the trend now for larger ships. Few vessels of less than 20,000 tonnes are
coming into operation, with the average capacity of a Handysize vessel now
around 28,000 tonnes.