Sunday, July 19, 2009

Is the Handymax sector as good as conventional wisdom claims?

From the outset of the crisis in shipping markets, conventional wisdom has praised companies in the Handymax/ Supramax sector and castigated the Capesize sector. Analysts based their arguments on the record order book for larger bulk carriers and the high age profile of the smaller sizes suggesting need for fleet replacement. Yet the smaller sizes have not been immune to decline in asset value. On the other hand, the recovery in cargo demand this year has favored the Capesize sector.

Secondhand Handymax-bulker values have fallen between 70% and 85%, according to a review of the market by DVB Bank. Shipowners who invested in Capesize bulkers got the best value for money last year, according to research from a top shipbroker, Lorentzen & Stemoco ( and are likely to keep the lead this year.

Whilst most shipping analysts remain focused on supply and demand, they tend to overlook matters like operating margins and leverage as well as investment returns. The larger-size units benefit from lower unit costs. For example, crew cost for a Capesize unit is far less analogous to a Supramax or Handymax on a per Dwt basis, but the freight market for the larger sizes is a lot more volatile with significant profit potential.

Of course, the order book situation for the larger sizes is troubling, but the higher age profile of the smaller sizes is due to the traditionally lower investment returns for the smaller sizes whereas the money for new tonnage follows the higher investment returns.

So far Far East demand has once again smiled on the larger bulk carriers despite order book concerns. The question is whether this is sustainable over the long run? The debate between the smaller and larger bulk carriers is a bit like the Tortoise and the Hare.

Will the analysts backing the smaller sizes laugh last and best?

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