Overcapacity More Of An Issue For Dry Bulk Than Slackening Demand

Implications: There is no doubt that world GDP has a strong correlation to dry bulk shipping rates, but the short-term problem is impending oversupply, rather than slackening demand.

Analysis: Even the most optimistic pundits expect weakening dry bulk shipping rates by 2010 based upon the massive expansion in supply in 2009 and 2010.  The article questions whether diminished growth in the world economies will exacerbate the situation.

Dry bulk shipping is primarily driven by the three major bulk cargoes: iron ore, coal, and grains.  It has been the exceptional expansion of the Chinese steel production that has driven freight rates to their record levels.  While there is some evidence of moderation in the growth rate of demand for iron ore, there would have to be considerable drawback in world GDP for steel demand to significantly reduce.

Offsetting this is the rapidly growing demand for coal - primarily into China and India.  Neglecting the minor portion of this demand that represents met coal (and hence, tied to steel demand), the growth prospects for steam coal are enormous in the short term.  Utility demand should be relatively insensitive to economic conditions, short of a deep world recession.

The grain trade is relatively stable over the long term.  As grain trade primarily relates to animal feeds and human consumption, it is relatively insensitive to economic conditions.  People, and their livestock, must eat.

The minor bulks (cement, fertilizer, alumina, etc) are relatively sensitive to economic conditions, but this primarily affects the smaller dry bulk ships.  The handy-size segment of the dry bulk fleet is far and away the oldest group and a significant reduction in demand will see a large number of these head to the scrap yards.

Worry more about supply, and less about demand.