Topic 4 Dry Bulk Shipping Logistics

Time Frame Week 18 | 3 hours

Learning Outcomes | At the end of this topic, you should be able to:

1. Explain the principles of dry bulk shipping logistics.

Materials

Pen and Paper

Lesson 1 | Dry Bulk Shipping Logistics

Pre-Test

Instructions: Read the question carefully. Write your answers in the ANSWER SHEET
provided.
1. What do you think is the difference in terms of logistics of a dry bulk cargo
compared to petroleum cargo?

Vocabulary Lists

1. Agribulk. Bulk cargoes used in the agricultural sector, such as cereals, seeds, sugar,
animal feed and fertilizers.
2. Freight Derivatives. A financial instrument’s value that is derived on the future levels
of freight rates, such as “dry bulk” carrying rates and oil tanker rates.
3. Metallurgy. The branch of science and technology concerned with the properties of
metals and their production and purification.
4. Spot Price. The current market price at which an asset is bought or sold for
immediate payment and delivery.

Acronyms

*No Acronyms been cited in this lesson.

Engagement Activity

Instructions. Follow tasks given below. Read the questions and write your answers in the
ANSWER SHEET provided.

1. On your OTG Drive, watch the video entitled “Dry Bulk Shipping.mp4”
2. How do bulk carrier trade contributes on world economy?

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Dry Bulk Trade

The globalization of economic activities has to led to a profound mutation in the dry bulk trade.
First, the world demand for bulk commodities has tripled since 1970s to reach above 8 billion tons
in 2008 with petroleum products (oil and natural gas) and the five major dry bulks (iron, ore, coal,
grains, bauxite/alumina and rock phosphate) accounting for 36% and 25% respectively of overall
world seaborne trade. Second, with an increasing share of East Asia’s imports in dry bulk products
originating in Latin America, West Africa and East Coast North America, ton-miles demand
associated with this trade has expanded. Third, the long-haul trade of raw materials in support of
East Asia’s economic growth has created a demand for tonnage additions in the world bulk carrier
fleet with new buildings entering the fleet being large units with an average size of 66,500 dwt.
Fourth, the need to penetrate deep inland continents to secure provisioning or discharging of
commodities combined with the importance of load factor to ensure the competitiveness of
transporting bulk products gives a key role to railways and inland waterways.

More importantly, dry bulk trade underpinned by marine output is a key element in the supply
chain for metallurgical producers, steel plants, aluminum industries and agro-food businesses. The
participation of bulk trade within global economic processes will not diminish. The growth in the
amount of dry bulk carried by sea and the mutation in the direction of flows are some of the major
phenomena of world exchanges. The steady growth in the volume of dry bulk shipments has
resulted in intensive demand for increasing the competitiveness of bulk logistics.

The understanding of dry bulk logistics is underpinned by key salient features. Bulk commodities
have a low value/weight (or volume) ratio implying that the efficiency of land and marine
transport has an impact on value added. The handling conditions of dry bulk materials are
influenced by a wide range of factors (size, weight, water content, surface adhesion, ease of flow,
extent of compaction). Handling equipment is often custom designed for a specific dry bulk
commodity. There are various types of contractual arrangement used for the shipment of dry bulk.
The command center of dry bulk trade is not always commensurate with dry bulk port location.
Ships and consignment size vary enormously. These conditions raise a series of key issues. How
has the dry bulk shipping fleet evolved? How is the commercial structure of dry bulk trade
responding to the globalization of economic activities? Above all, how are these developments
affecting dry bulk shipping logistics?

The Major Dry Bulk Trades

The dry bulk trade is divided into major bulk trades (iron ore, coal and grain) and minor bulk trades
(phosphate, bauxite, soya, rice, sugar, fertilizers, metals and minerals, steel products and forest
products). The three major bulk trades are the driving force behind the dry bulk market (Stopford,
2009). Please note that in the following articles from UNCTAD, major bulk trades are still
mentioned as five major bulk (iron ore, coal, grain, phospate rock, alumina-bauxite).

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The import demand of emerging developing economies, in particular China and India, remained
the main driver of growth in dry bulk cargo shipments in 2014. During the year, the increase in
world seaborne dry bulk shipments was estimated at 5.0 per cent, a slower rate than the previous
four years (Dry Bulk Trade Outlook, 2015).

Fig. 8 Changes in the Dry Bulk Trade Volumes 2013 -2015. Source BIMCO

Growth was underpinned by the strong expansion in iron ore trade (+12.4 per cent) which
accounted for about 30.0 per cent of all dry bulk cargo and reached 1.34 billion tons. In contrast,
coal trade shipments were estimated to have increased by a modest 2.8 per cent, a much slower
rate than the double-digit growth recorded in 2012 (+12.3 per cent). Shipments of the five major
bulk commodities increased by 6.5 per cent, while the volume of minor bulk commodities is
estimated to have increased by 2.0 per cent, reaching 3.1 billion tons and 1.43 billion tons,
respectively. Exports of dry bulk commodities such as bauxite, nickel ore, iron ore and coal were
constrained by, among other factors, bans on mining activities, restrictions on exports, weather
patterns, regulatory measures and policies seeking to promote national producers and industries.
Following on, brief information will be given on the major and minor bulk trades, respectively.

Iron ore:
Iron ore accounts for the largest share of the major dry bulk commodity trades (Stopford, 2009).
The ore shipped has a stowage factor which varies between 0.30m3 and 0.52m3 per tonne, with
an average of 0.4m3 (Wöhlbier, 1985: 200). It is the primary raw material for the steel industry
and in the past years we have seen an increasing development in world steel production and
therefore iron ore imports. China is one of the leading nations when it comes to steel production
and has seen an extreme increase the past decade.

Supported by increased production and exports from Australia, seaborne iron ore trade is
estimated to have grown by 12,4 per cent, taking the total to 1.34 billion tons in 2014 (UNCTAD
Review of Maritime Transport, 2015). While growth in China’s steel production decelerated in
2014 (World Steel Association, 2015), its iron ore imports remained robust due to lower
international iron ore prices and the ample supply from Australia.

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Looking forward, while, in the short term, iron ore shipments are expected to continue to grow,
concerns relating to a slowdown of China’s steel industry and import demand are causing
uncertainty in the outlook for bulk carrier demand. Additionally, while lower iron ore prices
stimulated iron ore trade in 2014, the sharp fall in prices raises concerns about the ability of some
miners to continue production at a loss (Trimmel, 2015).

Coal:
Coal is the second largest dry bulk trade and is used for two different purposes, as coking coal for
steel making and thermal coal for power generation (Stopford, 2009). Coal is like iron ore, a
growing commodity and has been growing fast since 2002, especially in China.
The bulk carriers used in the coal trade are generally smaller than in the iron ore trade… The main
reason appears to be the smaller volume of coking coal used in the steel making process, relative
to iron ore, its greater volume to stockpile, the higher value and the risk of spontaneous
combustion in very large cargoes (Stopford, 2009).
Growth in world coal shipments (thermal and coking) decelerated to 2,8 per cent with total
volumes estimated at 1,2 billion tons. Thermal coal exports, which accounted for over two thirds
of coal trade in 2014, are estimated to have increased by 3,8 per cent and reached 950 million
tons. Coking coal shipments fell marginally (—0,8 per cent) to 262 million tons, owing mainly to
reduced import demand from China (UNCTAD Review of Maritime Transport, 2015).

Grain:
Grain, is also a major bulk but differs from iron ore and coal in both economic- and shipping terms
(Stopford, 2009). Grain is an agricultural commodity which follows the seasonal patterns in
different parts of the world and is therefore sometimes unpredictable (Wijnolst & Wergeland,
2008). Largest bulk carriers can transport enough grain to feed nearly four million people for a
month (OECD, 2010). In the grain trade, variation in seasonal conditions result in large fluctuations
in transportation requirements as well. Various types of vessels of different sizes are used,
including combined carriers (Wöhlbier, 1985: 201). But however, Combined aka. OBO-Carriers are
today not as common as they were in the 70-80's.
Reflecting improved weather conditions and harvest recovery in key exporters including Canada,
the European Union, Ukraine and the United States, and, in the case of the Russian Federation, a
favourable exchange rate, global grain shipments (including wheat, coarse grain and soybean) are
estimated to have increased by 11.1 per cent in 2014 and totalled 430 million tons. Other
exporters including Australia and Argentina recorded flat growth rates or contractions in export
volumes during the crop year 2013/2014.

Japan, the top world importer, imported less grain (-1,3 per cent), while China, the second world
importer, increased its imports, in particular of soybeans (+16,4 per cent). The strong demand
from China will continue to support soybean export shipments from developing America (UNCTAD
Review of Maritime Transport, 2015).

The Minor Bulk Trades

Most diverse sector of the bulk trades are the minor bulks, this group comprises a mix of raw
materials and semi-manufactures, divided into many groups such as: agribulks; sugar; fertilizers;
metals and minerals; steel products; and forest products. This is not a complete list, and the
statistics include some trade by land, but it covers the main items and gives a fair indication of the
growth trends. Not all of this cargo is shipped in bulk carriers. Shippers use whatever type of

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shipping operation is most economic for their particular cargo. (Stopford, 2007) Carried mainly by
the smaller bulk carriers, the container services also compete for many of these minor bulk
commodities
Once being a major bulk, bauxite – alumina and phospate rock, are nowadays considered as minor
bulk trades along with agricultural products, fertilizers, mineral cargoes (including metal
concentrates), cement, forest products and steel products. Most types of minor bulks are
transported by smaller vessels of less than 40,000 dwt. (Genco Shipping, 2016) In the period
between 2003 and 2013, world seaborne trade has grown by 49% from 6,7 to 9,9 billion tonnes.
During this period the growth in trade in certain key commodities has hit the headlines, but the
Figure 9 shows that other (minor) dry bulk cargoes also added a highly significant volume of cargo.
(Clarkson Research Services, 2013)

Fig. 9 Additional Minor Bulk Sea Trade 2003 - 2013.

Source Clarkson Research Services

Growth in global shipments of minor bulk commodities are estimated to have decelerated to 1.8
per cent in 2014, with total volumes reaching 1.43 billion tons. Manufactures (steel and forest
products) accounted for 41,9 percent of the total followed by metals and minerals (35,4 percent)
and agribulks11 (22,8 percent). While manufactures and agribulks each increased by 6,0 percent in
2014, metals and minerals declined by 3,0 percent (UNCTAD Review of Maritime Transport, 2015).
Growth in manufactures reflected the firm increase in Chinese steel production and export growth
supported by a tax rebate on some products as well as weaker domestic steel demand. Exports of
metals and minerals were constrained by reduced Indonesian exports of nickel ore following the
implementation of the export ban in January 2014. China’s nickel ore imports are increasingly
sourced from the Philippines, which have come to dominate the international nickel ore market in
the past year. The drop in metals and minerals is also reflective of the fall in anthracite shipments
resulting from a drop in Viet Nam’s exports (Clarksons Research, 2015).

Mechanism Between Markets of Dry Bulk Shipping

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Companies or organizations that
are operating in the shipping
sector, mostly get integrated in
all four shipping markets and
their activities are closely
interrelate through economic
relations. We can describe the
relationship among the shipping
markets like a domino effect; by
saying that a change in one
market can affect the others,
undoubtedly. The relations
between these markets are
thought as a market on the
development can influence one
another, see Figure 10 An
economic development or a
market growth of supply side Fig. 10 Economic relations between markets in the Dry Bulk Shipping. Source:
new-building vessels would Chen, 2010
result an effect on the freight
rates, second hand prices or on the scrap prices eventually.

 Firstly, a lead-lag relationship exists between the freight market and the freight derivatives
market
That is because prices in the freight derivatives market affect the expectation of market players
about future movements in the spot market, changes in returns and volatilities in the forward
market will be spilled over to the freight market and will influence the market sentiment and
activities, causing a subsequent increase or decrease of spot prices. The freight rates and freight
derivatives rates are basically determined by the market fundamentals, but also a distinct
difference can be found between these two markets (Chen, 2010).

 Secondly, there are significant influences of the freight market on the ship markets
The ups and downs of time charter rates in the freight market are the primary mechanism driving
activities of market investors. When the freight market is in an upward trend, the effect will be
transmitted into the new-building market and shipowners will start ordering new ships, while a
continuously downward trend in the freight market will possibly cause delay in delivery of new
ships or order cancellations. Changes of time charter rates in the freight market also influence the
prices of second-hand ships, due to changes in the expected earnings. Furthermore, old or
obsolete ships will be scrapped in a strongly weak freight market, especially during a recession.
The new-building market and the demolition market together form the changes in the supply of
the freight market (Chen, 2010).

 Finally, three ship markets are linked through economic relationships

High prices in the second-hand market will attract ship-owners to order new ships, while a full
orderbook in the new-building market will drive up second-hand prices. Decisions to scrap ships
are also affected by second-hand ship values. If the scrapping value is higher than the second-
hand value, old ships will be scrapped. Furthermore, the new-building price or the second-hand
price can be determined through a net present value relation, as the sum of the expected future

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earnings, the expected scrapped price and a risk premium, if any. Each of these central markets
can also be divided into segments categorized by ship type: Capesize, Panamax, Handymax and
Handy. Dynamics in each market differ with each ship type. Though dry bulk vessels nowadays are
standardized vessels, different quality of ships measured by major technical indicators, such as
deadweight, main dimensions, speed and the fuel consumption, still has a significant impact on
the earnings potential during ship operation. The different quality of a ship can be evaluated by
the economic performance of a ship (Chen, 2010).

In conclusion, the dry bulk shipping markets fulfil all the conditions of the perfect competitive
market. The support by many researchers for the perfect competition model in bulk shipping
makes sense (Veenstra, 1999, p. 18). As the dry bulk freight market is a highly competitive market,
the identification of determinants in freight rate analysis can be based on a supply and demand
framework. Following in this chapter, it will be discussed the influential factors on the dry bulk
freight market.

The dry bulk market has some unique characteristics such as volatility, fluctuations, and cyclical
patterns. Dry bulk shipping is known with its perfect competition market and there are so many
complex variables that affect the markets of dry bulk shipping.
The demand side of the dry bulk shipping can be formed with the world economy, seaborne
commodity trade volume, as well as economic and political issues. On the supply side, it is the
fleet capacity and fleet productivity, the price of new-ships and second-hand ships, delivery and
scrapping volumes and freight rates
This dissertation analyzed the variables of the demand and supply sides along with the world
economic growth. And the variables of the dry bulk shipping market are analyzed through
correlation methods to see how they affect each other and to which extent. There have been
some causes that could not be analyzed through statistical data. It may be an unknown variable,
some speculative forces, or future expectations or rumors. The author expected that there would
be some correlation between the GDP and the freight rates, however the correlation is low,
contrary to the expectation. It would be a very wrong assumption to think that the freight rates
are determined by not more than two or three variables. The factors that determine the freight,
should be analyzed as a whole system.

Sources

1. Dong Wook Song and Photis M. Panayides. Maritime Logistics. 2nd Edition. 2015. [p. 211 –
224]
2. Demir Ali Akyar. The Effects of Global Economic Growth on Dry Bulk Shipping Markets
and Freight Rates. 2016.
https://www.researchgate.net/publication/315701139_The_Effects_of_Global_Economi
c_Growth_on_Dry_Bulk_Shipping_Markets_and_Freight_Rates

Further Reading

1. Review of Maritime Transport 2014. Developments in International Seaborne Trade.

UNCTAD. https://unctad.org/system/files/official-document/rmt2014ch1_en.pdf

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