JP Morgan: The Only Way to Make Money in Dry Bulk is to Cut Costs, Expect Years of Low Rates

Sokje Lee, J.P. Morgan's executive director in Korea, warns that dry bulk shipping rates may stay low for years.

Sokje Lee, JPMorgan Chase & Co. (J.P. Morgan)'s executive director for Korea, says that dry bulk sector players will need to cut costs if they want to make money, as rates could stay weak for years, Reuters reports.

"Don't look for an increase in freight rates. Instead, the way to make money is to save costs," warned Lee.

"Because of this, we are going to see big restructuring of Chinese yards in the next two years," added Lee.

As average charter rates make it difficult to cover operating costs, dry bulk ship owners are said to be struggling among the lowest freight rates within the past several years.

Capesize rates as of mid-October are reported to have been around $7,196 per day, according to shipping service provider Clarkson plc (Clarkson), compared to estimated operating costs of around $7,300, as quoted by Moore Stephens.

Jeffrey Landsberg, managing director of commodities consultancy Commodore Research & Consultancy, says that in addition to China's slowing economy and decreasing demand for raw materials, dry bulk is also suffering as a result of similar slowdowns elsewhere in the world.

"Global steel output outside of China has continued to fare even worse than Chinese steel output," explained Landsberg.

He says many people do not realise that half of the world's steel output comes from outside China, but "when they do, they will realise how gloomy prospects are for the longer-term dry bulk shipping market."

Earlier this month a report by J.P. Morgan predicted that next year will be even worse for the dry bulk sector than 2015, and analysts have warned that bankruptcies in the dry bulk sector may continue as the market continues its decline.