Golden Ocean: Scrapping and no newbuildings are upside in bulk

Golden Ocean Group CEO Herman Billung points to small signs of progress in dry bulk within the next 12 months. Scrapping is happening faster than expected by most, the CEO tells ShippingWatch.
Photo: Golden Ocean
Photo: Golden Ocean

Significant growth in the scrapping of dry bulk vessels, currently at a very high level, along with a very low number of newbuildings set for delivery represent the bright spots that Herman Billung, CEO of bulk carrier Golden Ocean Group, ties his hopes to in the midst of the deepest dry bulk crisis in more than 30 years.

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A crisis that has had a particularly big impact on the core segment of John Fredriksen-controlled Golden Ocean Group, namely the Capesize vessels.

"The most positive thing right now is the large-scale scrapping of vessels currently taking place, while no new ships are being contracted. This part of the dry bulk market is healing itself somewhat quicker than most observers probably expected at this time. If this development continues for the next six months, the scrapping will accelerate while the influx of new ships stands at virtually zero," Herman Billung tells ShippingWatch.

Fredriksen's dry bulk merger settled

And the recent numbers on scrapping of dry bulk vessels seem to confirm Golden Ocean Group and other dry bulk carriers' hopes for even a slight improvement in the market. Estimates indicate that 5-6 percent of the global fleet have been scrapped in the first quarter, while the same period brought zero percent fleet growth. Numerous and somewhat young Capesize vessels were scrapped in this period, with an average age of 21 years.

Demand, however, looks bleak going forward.

"I don't expect any real growth in demand for the next two years, maybe a few percentages, which is still very disappointing," says Herman Billung.

The interim report for the first three months of 2015 from Golden Ocean Group - a merger between the two Fredriksen-owned carriers Knightsbridge and Golden Ocean - shows that the major dry bulk carrier is working full-swing to implement precautions, an effort that comes at a high price in relation to the comprehensive newbuilding program.

Golden Ocean Group in major Q1 impairment

Golden Ocean Group has so far in 2015 secured deals with shipyards to postpone delivery of 19 newbuildings, and just a few weeks ago the carrier's management informed that it had signed agreements to sell 14 vessels that are either under construction or part of the fleet today. And more fleet arrangements could be in store:

"We are working on this continuously, but I can't comment on it any further," says Herman Billung.

Golden Ocean Group lost USD 75.3 million in the first three months of the year, where the company also performed a USD 141 million impairment on five Capesize vessels that were sold and leased back from similarly Fredriksen-owned Ship Finance. The impairment corresponds to the difference between the vessels' book value and the price they were sold for.

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The carrier has also, like many other major bulk players, acknowledged that the previously towering growth rates in China, which the dry bulk industry depends on a great deal, look unlikely to return following structural changes in the Chinese economy.

The main reason for the current massive downturn is the huge slide in China's coal import, which dropped 42 percent in the first quarter this year compared to the same period 2014, and most observers project that the import will stabilize at the current level.

Analysts: This is the strongest dry bulk carrier

In Thursday's interim report from Golden Ocean Group, the management states that, in spite of the challenges in the dry bulk industry, the developments could lead to opportunities for robust companies with solid balances.

"Golden Ocean intends to be at the forefront of a much needed consolidation of the sector," says the carrier in the report.

Herman Billung hesitates to elaborate deeper on this statement, beyond the fact that it represents mergers or acquisitions.

"Right now it's important to safeguard liquidity as best as possible, and to be aware of costs, and then we'll see for how long the current market situation lasts."

According to Golden Ocean Group's fleet list, the carrier has a newbuilding program of 24 vessels, including 21 Capesize. A majority of the vessels are set for delivery in 2015.

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