Global shipping is making a very slow recovery as demand picks up
The Baltic Dry Index (BDI), an indicator of the shipping costs for bulk commodities, is at its highest level since August 2015, signaling a market recovery in the sector.
The shipping industry has had to sail through tough waters, with overcapacity bringing down shipping rates and sending many companies (most notably Hanjin) into bankruptcy.
However, increasing demand for basic resources, as well as tightening supply as older ships are decommissioned, have helped push rates back up.
"Dry bulk shipping has bottomed out and a market recovery is underway, albeit a slow one. Rising demand for ships to cater for increasing raw material consumption, together with the effect of shifting trade routes will help increase ton miles," Rahul Sharan, lead analyst for dry bulk shipping at research firm Drewry, said in a press release earlier this month.
"With investment remaining out of reach from dry bulk owners, even a modest growth in demand will help support market recovery. Meanwhile, the increasing cost of running an old ship will mean more vessels go to scrapyards, tightening supply over the next five years."
Demand is rising thanks to improved economic conditions in Asia and emerging markets: Brazil is receiving an increasing share of iron ore imports from China, while countries including Vietnam, Korea and Taiwan are opening new coal-powered energy plants, requiring more coal imports, according to a Drewry report released earlier this month.
The BDI has climbed from an all-time low in February of 290. Currently the index is around 1,084. The index has risen 93.64 percent over 1 year.
"The reason the index has recovered is a mix between good cargo demand growth, heavy scrapping in early 2016 and positive sentiment among owners and charterers," explained William Bennett, senior analyst at shipping valuation and data provider Vessels Value, to CNBC in an email.
"(Ship) values in many cases (in dry bulk) have not recovered as much with large capesize dry bulk vessel values remaining stable since the BDI crash earlier in the year. Scrapping is very important for aiding a market recovery and in the beginning of 2016 the demolition market was very strong."
The recovery of the Baltic Dry Index will come as good news for those companies which decided to expand their fleets and buy ships.
"In the last 12 months, contrarian owners have taken advantage of the low values and have been buying cheap tonnage. With hindsight, this looks to have paid off with many values having increased above the purchase price," Bennett said in a report released on Monday.
According to Bennett, ship values have begun to firm, although at a slow rate. The value of bulk carrier vessels remains at historically low levels. Companies which have added ships to their fleet include Anangel Maritime Services, Winning Shipping and Oldendorff Carriers.
Oldendorff Carriers has spent $181 million in the past 12 months, increasing its fleet's carrying capacity by 1,095,500 tons, or 23 percent. Not only that, but the value of these acquisitions have increased 19 percent in asset prices, according to Vessels Value.