Older Bulk Carriers Will Exit The Market In 2010

Implications: A significant percentage of the dry bulk fleet continues to trade past the normal retirement age of 25 years due to robust rates.  This will be corrected in 2010, when new vessels will push down rates and push out vintage tonnage.

Analysis: According to Tradewinds, 8.5% of the Capesize fleet, 12% of Panamax, and 7.7% of Handymax vessels are trading past their fifth special survey (25 years.)  An additional 8 Capes, 52 Panamax, and 30 Handymax's will cross that threshold during 2008.  Missing were Handy size figures, which are substantially higher.

Vintage tonnage creates more of a problem with underwriters, given the high correlation between vessel age and casualty rates.   Factoring in much higher asset values, we are seeing a significant uptick in the cost of annual casualties.

Since the maritime industry is largely self-policing (Class societies are hired by ship owners, and charterers can't afford selectivity with supply so tight) the burden is increasingly falling to Port States to ensure that substandard tonnage is removed from the trade.  Unfortunately, Port State resources have dwindled as Class has assumed a larger role in oversight and security issues have taken the main focus.

Given a reasonable choice, charterers will select a modern vessel over a 30 year old rust bucket.  With the heavy deliveries in 2009 and 2010, it is reasonable to expect that falling rates will drive older vessels to their well-deserved retirement.  In the meantime, casualty figures will continue to rise, along with higher P&I premiums for the entire industry.