Precious Shipping narrows losses in recovering market

August 07, 2017

Precious Shipping is the second Asian bulk carrier to report a narrowing of losses as its earnings were lifted by an improving market, increasing daily vessel rates and the disposal of older ships that cut operating expenses.

The Bangkok-based shipping company posted a second quarter loss of USD150,000 compared to a USD13.48 million loss for the same period in 2016.

It’s results follow those of Hong Kong-listed Pacific Basin Shipping that reported first half net losses narrowing to USD12 million compared with a loss of USD49.8 million for the year before. This was attributed to improved market freight rates compared with the historic lows of a year earlier, while at the same time demand was outpacing supply.

Those same market fundamentals improved Precious Shipping’s earnings in the first half, with its net loss declining from USD50.7 million in 2016 to USD1.9 million this year. Average earnings per day per ship during the second quarter were USD9,206, 46% higher than in the same quarter of 2016. By segment, the daily earnings were also well above last year’s levels for Handysize, supramax and ultramax vessels, the Bangkok-listed carrier said.

Precious Shipping’s net vessel operating income for the first half of 2017 increased by around 32% compared to the same period of 2016, even though the income was earned from an average of 36 vessels during the first half of 2017 against an average of 43 vessels in the same period of 2016. This was mainly down to the increase in the average earnings per day per vessel during the second half increasing from USD5,519 in 2016 to USD8,899 for the same period of 2017 as a consequence of the market improvement.

Vessel running expenses in the first six months of the year were lower by about 21% compared to the same period of 2016, mainly due to the decrease in the number of ships being operated. The decrease is also a result of operating expenses per vessel decreasing from USD4,523 in the first half of 2016 to USD4,265 this year as a consequence of the sale of old vessels that on average were more costly to operate than other vessels in the fleet. Those vessel sales resulted in an impairment loss of USD18 million.

However, Precious Shipping Managing Director Khalid Hashim pointed to a Banchero Costa report that said market conditions may have improved compared to the lows of 2016, but that the slowdown in demolition activity and continued large deliveries could cap substantial rate increases this year.

“Supply side developments in the world bulker fleet show a rather pessimistic situation,” Hashim said. “If we were to apply a slippage factor of 16.7%, annualised from the 8.28% in first half 2017, to these scheduled deliveries and further assume that scrapping reaches 17.44 million dwt, we would be left with a net fleet growth of 3.67% (819.42 million dwt) in 2017 and net fleet growth of 0.56% (824 million dwt) in 2018.”

Scrapping in the dry bulk fleet in the first six months is now 50% behind that of the same period last year, but the analysts expect scrapping levels to increase in the second half as market rates come down.

Pacific Basin Shipping CEO Mats Berglund said more demand than supply was forecast this year for the first time since 2013. “The worst of the current dry bulk cycle is behind us,” he said after the carrier’s earnings announcement.
Berglund expects the shrinking orderbook to have a positive impact on dry bulk shipping in the long term, but says that more time, scrapping, and limited ordering are required for a more normal market balance to be sustained.

However, a factor that could influence the scrapping decisions of shipowners is the International Maritime Organisation (IMO) agreeing to delay enforcement of the Ballast Water Management Convention (BWMC) compliance for existing vessels from September 2017 to September 2019.

Ship brokerage Charles R. Weber said compliance for existing vessels called for the fitting of Ballast Water Treatment systems from their first International Oil Pollution Prevention (IOPP) renewal survey after the enforcement date.

“Given the cost and lost time associated with ballast water fittings, it had been an industry wide assumption that the mandate would hasten the phasing‐out of older vessels, which already faced higher maintenance costs than their younger counterparts,” the broker said.

That assumption could be challenged by the extending of the BWMC compliance date, with slowing scrapping levels threatening the fragile dry bulk market recovery. BIMCO has warned of a false dawn in the dry bulk shipping industry as strong demand and rising rates lift sentiment in the market, but also raise the risk of a wave of newbuilding orders that would kill a recovery in earnings.