In the interconnected network of ocean shipping, extremely high demand for one type of vessel may impact the supply-demand fundamentals of different vessel types. Recently, demand for container shipping has been robust, and its spillover effect is boosting the fundamentals of dry bulk shipping, driving its spot freight rates to the highest level since the 20th century.

The Transmission Effect Between Vessel Types

Market effects are transmitted from one shipping segment to another primarily through three channels:

Vessels switch the type of cargo they carry. For instance, coated tankers can transport not only refined oil but also crude oil.

Shippers switch the type of vessel used to transport their cargo. For example, when dry bulk carrier freight rates rise, some grain shippers turn to container shipping instead.

Shipbuilding capacity in Asia falls short of demand. The most extreme example is the shipping super cycle from 2003 to 2008: during this period, demand for new container ships, bulk carriers, oil tankers, and LNG carriers surged simultaneously. Each vessel type competed with others for shipbuilding capacity, thereby driving up the new shipbuilding costs in every segment.

Currently, the spillover effects of the second and third types have emerged.

Containerized cargo has begun to shift to bulk carriers.

John Wobensmith, Chief Executive Officer (CEO) of Genco Shipping  & Trading, stated: "The dry bulk shipping sector has had its strongest start in a decade this year."

Gary Vogel, Chief Executive Officer (CEO) of Eagle Bulk, stated recently that Supramax-type vessels with a deadweight tonnage (DWT) of 45,000 to 60,000 have begun to benefit from the spillover effect of container shipping. Recently, the company transported goods such as bagged cement from China to Guatemala, and then shipped bagged chemical fertilizers to Peru and Chile. This route is usually the outbound route for container ships, while it serves as the inbound route for dry bulk shipping.

The larger the inbound cargo volume, the higher the capacity utilization rate of the round-trip route. I am interested in all aspects of the current container market, as it has a profound impact on our freight rates and trading models.

New orders for container ships are crowding out new orders for other types of vessels.

Hugo De Stoop, Chief Executive Officer (CEO) of Euronav, a tanker owner, stated that new orders for container ships and LNG carriers have squeezed the space for new orders for oil tankers.

The dry bulk segment has also been affected. Loukas Bomparis, President of Safe Bulkers, stated: "The production capacity of most shipyards is already operating at full load, occupied by vessel types such as container ships and oil tankers."

Vogel pointed out that the order book for dry bulk carriers is at a historic low, accounting for only 5.6% of the existing fleet. New orders in the first quarter of 2021 were 33% lower than the quarterly average in 2020.

The cost of new ships has also increased. Currently, the price of Ultramax-type vessels with a deadweight tonnage (DWT) of 60,000 to 65,000, scheduled for delivery in the second half of 2023 or later, ranges from USD 27 million to USD 29 million.

As the order placement pace for other shipping segments accelerates, the production capacity of shipyards is "shrinking rapidly". Over the past few months, orders for large container ships have hit record highs; coupled with orders for other large vessels such as VLCCs, shipyards’ capacity has been quickly filled by these orders, which require longer construction times and are more attractive.