Cover Story Nachipa

Can dry bulk have success without excess?

Felipe Simian, CEO of Chilean dry bulk firm Nachipa, on the markets ahead

Over the last two decades any sustained uptick in dry bulk freight rates has triggered a tsunami of newbuild orders. That was certainly the case when there were spikes in 2007-2008, 2010-2011, and 2013-2014.

Will this time be any different? Can the dry bulk sector avoid undermining its opportunity for success? Could 2021 be the next 2006 and come to be seen as the year before the next cycle’s momentum hit its stride? Felipe Simian, CEO of Chilean dry bulk firm Nachipa, is not so sure.

“In my experience a lot of the people answering, ‘yes’ to those questions are the same people who think we’ve arrived in a ‘new normal’. While I’m inclined to respond positively to those questions, I don’t believe that we’re in a new era,” says Simian, the third generation at the helm of the 73-year-old firm.

The complexities of the shipping industry are more visible than they once were, Simian argues, and that’s making a lot more people critically analyse the sector in new ways.

Simian has been cautiously optimistic about the direction of dry bulk freight rates since early 2018. Rates had bottomed in 2016 after several years of depressed conditions, and given trends in cargo and fleet growth he felt back then that the sector was at the beginning of a sustainable uplift. Unfortunately, two black swans interrupted. First the Brumadinho dam disaster in 2019,

“Nobody wants to be the guy who bet the farm on newbuilds powered by the equivalent of Betamax”

and then the global pandemic a year later.

So what makes him more optimistic about the timing now? Three elements: Regulation, commodity economics, and construction.

Starting with construction, Simian points out that about threefifths of the dry bulk fleet is non-eco, and approximately 10% are more than a quarter century old.

“What’s the working life of these vessels post- Energy Efficiency Existing Ship Index (EEXI) and the Carbon Intensity Indicator (CII)?” Simian muses, going on to suggest that they will need to be replaced, and eventually owners will need to make a choice. However, even if they make that choice tomorrow the average lead time in recent years has been nearly two years. Moreover there are very few slots left in 2023.

“We can predict with a reasonable level of accuracy that the current state of the orderbook will mean low dry bulk fleet growth in the next couple of years,” Simian says.

As per regulation, the Chilean is convinced that the upcoming EEXI and CII requirements will mean a swathe of vintage ships will have to slow steam resulting in an effective reduction of vessel supply.

Then there’s the whole uncertainty surrounding propulsion choices.

“It’s become common to hear companies say that they’ll buy zero-emission vessels once they’re commercially viable, and there’s appropriate refuelling infrastructure in place. This is the classic chicken or the egg causality dilemma, and the result on the orderbook is equally characteristic,” Simian says. “Is it going to be ammonia? Or hydrogen? Maybe methanol? Nobody knows, and nobody wants to be the guy who bet the farm on newbuilds powered by the equivalent of Betamax.”

In any case, Simian points out that almost all of the biggest shipping banks, apart from the Chinese, have signed the Poseidon Principles.

“So unless you’re a copper-bottomed credit you’ll be struggling to get rates much below double digits to finance newbuilds with hydrocarbon propulsion anyway,” Simian predicts.

Looking at commodity economics, Simian notes how grains, cement and clinker among others have all been strong this year.

“We’re seeing broad demand across almost all commodities and it’s leading to some very optimistic speculation,” Simian says, going on to quash talk of a supercycle.

Over the medium to long term Simian expects commodities which are more integral to demand for renewable infrastructure to have a slightly more positive outlook. Whereas those which are more reliant on Chinese growth, such as iron ore and coking coal, are likely to face headwinds.

“There are no sure things in our industry, but if I had to pick one macro challenge in the years ahead, it’s the end of the current Chinese five-year plan,” Simian warns, explaining: “Beijing has made clear its desire to bolster strategic reserves of commodities, but once those stockpiles have been accumulated we could see demand drop substantially. As always when it comes to buying newbuildings in the years ahead, caveat emptor.”

Formed in 1948 and still family-owned, Nachipa, formerly known as Naviera Chilena Del Pacífico, unveiled a rebrand last year coinciding with the opening of the company’s first European office in Hamburg and move to an asset-light model. It currently has seven handies in its fleet with plans to add ultramax and supramax tonnage soon. ●

“The current state of the orderbook will mean low dry bulk fleet growth in the next couple of years”

Spot on Nachipa

Formed in 1948 and still family-owned, Nachipa, formerly known as Naviera Chilena Del Pacífico, has a fleet of seven handy bulk carriers.