Welcome to today's Pacific Basin 2021 Q3 trading update call. I am pleased to present Chief Executive Officer, Mr. Martin Fruergaard, for the first part of the call. All participants will be in listen only mode. Afterwards, there will be a question and answer session. Mr. Martin, please begin.
Thank you. Yeah, welcome, ladies and gentlemen, and thank you for attending Pacific Basin's 2021 Q3 trading update call. As you know, my name is Martin Fruergaard. I'm CEO of the company, and I'm joined by our CFO, Peter Schulz. Please turn to slide two. The dry bulk freight market continued its strong upwards trend in the Q3 .
Handysize and Supramax monthly average market freight rates reached 13-year highs in September, driven by robust global demand for commodities and reducing fleet growth, and that was aided by fleet inefficiencies. The upwards trend was briefly interrupted by the seasonal reduction in Australian grain export in July, and also the impact of Hurricane Ida on the U.S. grain export in September.
Market rates have continued to rise in October, although Supramax rates stabilized somewhat early in the month due to marginally increased tonnage availability in the Pacific and the recent National Day holiday in China. Supramax rates are again improving on increased Chinese demand for coal.
Please see slide three. Our core business generated average Handysize and Supramax daily TCE earnings of $24,350 and $36,270 net per day in the Q3 , representing our strongest quarterly TCE performance since 2008. Our TCE improved with each month, and the progressively stronger fixtures in the Q3 will obviously benefit our Q4 earnings.
If you apply our September TCEs and other already published data to our model on slide 18, you will see the model showing an underlying profit in the range of $90 million-$92 million for September.
We have already covered most of October at $29,070 and $40,200 net per day for Handysize and Supramax respectively, and with over 30% of our core vessels days still uncovered in the Q4 overall, mainly in December, we have significant opportunity to add cargo fixtures to our book at what we expect will be strong market spot rates. Please turn to slide four.
Due to the sharp market rise and the one to three month lag between fixing and executing voyages, our relative performance has lacked the spot market for most of 2021. Our Supramaxes have now caught up and are again outperforming the BSI index, supported partly by a current scrubber benefit of around $800 per day. Our Handysize will need more time to catch up, and that's for a couple of reasons.
First, the BHSI rose more sharply than the BSI during the period. Also, we have a higher proportion of lower paying backhaul cover in our Handysize cargo book secured in earlier weaker markets.
Our operating activity margin has increased significantly, partly due to our decision to take in tonnage early in the market recovery, especially for the Supramaxes. Please turn to slide five. Global minor bulk loadings in the quarter grew about 13% compared to the same period last year, which is consistent with the increased level of trade and inquiries we have observed in the recent months.
Demand for construction material was the main driver, in particular demand for cement and clinker, steel, aggregates, and forest products. After a strong first half year for the global grain trade, grain loading reduced in the Q3 due to Hurricane Ida delaying the start of the U.S. grain export season.
What the graph does not show is that U.S. grain exports are now picking up, which we expect will support dry bulk demand in the Q4 . Coal volumes in 2021 have significantly increased compared to last year, when coal exports were hard hit by lockdowns. Coal demand is now additionally supported by power shortage in key countries, including China and India, and a short supply of gas ahead of the Northern Hemisphere heating season.
Growth in iron ore trade was limited by cargo availability in Brazil and Australia. Curbs on Chinese steel production have caused iron ore prices to fall, but the Capesize freight market has not been impacted and has instead strengthened to levels last seen in 2009, supported by renewed strong Chinese demand for iron ore at today's significantly lower ore prices. Please turn to slide six.
Our segments are also benefiting marginally from exceptionally strong container rates, which are driving some commodities and even containers to be shipped in geared bulkers. Also driving multipurpose vessels away from bulk cargoes in favor of containers. In addition, the strain of increased cargo throughput, combined with COVID-related protocols in ports, is resulting in congestions in many ports around the world, particularly in China.
This has further constrained the availability of tonnage to meet global demand for dry bulk shipping. Looking ahead, we expect demand, especially from minor bulk grain and heating coal in the Q4 and going into 2022 to be broad-based and supported by healthy economic growth and continued stimulus in many countries.
The recent uncertainty over China's real estate market, steel production curbs and energy curbs have caused jitters in the financial market, but we have not yet observed any connected impact on dry bulk demand other than reduced iron ore prices. Nevertheless, we will of course monitor development in China very closely.
With a historically low order book and IMO rules forcing slower operating speed from 2023, the long-term outlook for dry bulk shipping remains positive. Please turn to slide seven. Dry bulk net fleet growth has moderated further and is forecasted to grow 3.4% year-over-year in 2021 and actually less than 2% in 2022 because of the slower pace of new building deliveries and despite minimal scrappings. Please turn to slide eight.
The total dry bulk order book has further reduced to 6.5% of the existing fleet, which is the smallest it has been in decades and significantly more favorable than other shipping segments. The Handysize and Supramax order book is even lower at only 5.1%. We are optimistic that dry bulk supply will remain under control.
Despite some new ordering in the very strong market, we believe the dry bulk order book will remain at historical low levels until zero emission-ready ships becomes commercially viable. We do expect this to take several years still, although we strongly support initiatives that seek to accelerate the transition to zero emission shipping and make zero emission-ready vessels the default choice by 2030. See slide nine.
Clarksons benchmark, five-year-old Handysize vessels have increased around 70% since start of the year and actually over 80% for the Supramaxes. They're supported by the firmer freight rates and of course the increased vessel sales activity. New building prices increased around 30% and are still well above secondhand prices. Shipyards are filling up with orders for non-dry bulk ship types, which limits scope for new ship ordering in the sector before 2024.
We continue our strategy to grow our own fleet of Supramax ships by acquiring high quality, modern, secondhand vessels and to sell our older and less efficient Handysize ships and replace them with younger and larger vessels. This is resulting in an even more efficient fleet with greater longevity. We are now benefiting from the larger earning upside that these bigger ships enjoy in a strong market.
We have taken delivery of five modern secondhand Ultramax ships and five Handysize ships in the year to date, and one further Ultramax is expected to join our fleet in the Q4 . We are likely to slow our vessel purchasing as asset prices approach historical high levels. We will continue to look to sell some of our smaller, older Handysize ships, thereby crystallizing value and further optimizing our fleet to more easily meet tightening environmental regulations.
Please turn to slide 10. We have a program of carbon intensity reduction initiatives designed to ensure our existing ships can continue to trade for the foreseeable future and be in compliance with IMO's new EEXI and CII carbon efficiency rules coming in 2023 and beyond. If the carbon intensity indicator were now in force, the vast majority of our vessels would have a C rating or higher.
A few ships would rate lower than C, and that's actually mainly for operational reasons. That could be dry docks, port congestions or short voyages with long loading and discharging time. It is not actually because of any significant technical inefficiencies.
In 2021, the global fleet's carbon efficiency has reduced somewhat as ships have accelerated to practically full speed to meet cargo demand despite higher fuel prices. That will actually be reversed in 2023 when the global fleet slows down to comply with IMO's new CII rules.
We at Pacific Basin remain largely on course to meet our current IMO aligned target of a 40% improvement in carbon intensity by 2030 and our existing fleet will meet IMO requirements through continuously fleet renewal, energy efficient operation measures, and investment in fuel saving technologies.
We have a dedicated optimization team that will increasingly rely on digitization for better efficiency decisions by always looking for collaborative solutions with stakeholders such as just-in-time arrivals, et cetera. With an eye on the longer-term goal of complete decarbonization, entirely new ship designs with zero emission propulsion systems are required.
The Pacific Basin supports the alignment of shipping with the Paris Agreement temperature goal and is committed to owning and operating only zero emission vessels by 2050. We will not order old technology new buildings.
We will only order new buildings vessels when zero emission-ready vessels are available and commercially viable in our segment at appropriate global refueling infrastructure is being built out globally. Please turn to slide 11.
Our strategic priorities remain unchanged. We want to stay specialized in minor bulk and the ship types that we know so well and stick to our cargo-focused integrated owner and operator business model. We currently own 120 Handysize and Supramax ships. Including charter ships, we have over 260 ships overall.
We continue our fleet growth and renewal strategy. We'll continue to look to sell some of our smaller, older Handysize ships as secondhand prices are strong, thereby crystallizing value and further optimizing our fleet to more easily meet tightening environmental regulations. We are also making good progress on other special focus areas.
We are supporting our team to ensure we continue to deliver a quality service to our customers while maximizing our earnings in the current strong market. We are doing our utmost to ensure our crew's wellbeing and that our vessels continue to operate safely and efficiently despite restrictions that continue to make crew changes and repatriation very challenging during the ongoing pandemic.
We are enhancing our focus on the environmental performance optimization, and we are also finding ways to further leverage the increasing amount of in-house data to improve our operational efficiency, cost, and environmental performance, and ultimately to deliver additional value to our customers. Please turn to slide 12.
To recap, the dry bulk demand outlook is positive for the rest of this year and also for 2022 and beyond, and we are optimistic that supply will remain under control with the order book remaining at historical low levels. With dry bulk ships now largely operating at full speed, supply cannot be further increased through speed and IMO and EU fuel efficiency rules will force slower speed from 2023,
Which will reduce supply, giving further support to the dry bulk freight market in the longer term. Potential threats to the dry bulk market include excessive new ship ordering and electricity curbs and a housing construction slowdown in China, both of which we will continue to monitor very closely.
Please bear in mind that in minor bulk, China is not the dominant market, with only 11% of global Handysize discharge activity being in China, and all that you can see on slide 30 in the appendix. Thanks to a much larger core fleet with substantially fixed cost and increasing Supramax proportion, we have significant operational leverage with which to benefit from the current strong freight market.
We have an excellent fleet and team with which to meet decarbonization rules while continuing to provide a seamless and world-class service to our customers, and we are committed to owning and operating only zero emission vessels by 2050. Finally, our current attractive earnings, high return on equity, and strong cash accumulation will enable us to return capital to our shareholders.
Finally, before we move on to the Q&A, I also just want to acknowledge our Pacific Basin colleagues at sea. The safety and wellbeing of our ship crew is our key concern, especially during the pandemic, when restrictions around the world continue to complicate crew change and repatriation, often keeping our seafarers at sea for longer than usual.
Despite the hardship they face, our seagoing colleagues continue to demonstrate great loyalty, professionalism and attention to safety operating practices, resulting in extremely good performance of our ships on the voyages and our best ever safety KPIs in the year to date.
We are actually very grateful for their remarkable support, and it's important to remind everyone how vital their contribution is to keeping the global economy going. Ladies and gentlemen, that concludes our trading update presentation.
Lines will now be open for any questions you may have, and operator, over to you.
We will now begin our question and answer session. If you have a question for any of today's speakers, please press one on your telephone keypad and you'll be placed in a queue. After you are announced, please ask your question. If you find that your question has been answered before, please press two to cancel the question. Once again, please press one if you have any questions. For the first question, we have Mr. Andrew Lee from Jefferies. Your question, please.
Hi. Thank you very much for your time. I'd like to say that in the presentation, slides 18 and 19 is actually very useful. That's very good. My first question is on the fleet replacement. Could you give me a little bit of sense in terms of what is the strategy? Is it a buy and then sell? Is it a sell and then buy? Is it like if I sell but I can't buy a new vessel, would I sell back? Would I do a similar leaseback on those vessels?
Sticking with the same point is, how many vessels have you identified which are smaller and over 20 years that have hit that level where you're looking to sell? Second question is on the forward coverage ratio. Well, forward coverage on the Q4 .
Could you give me a little bit of update in terms of why is this Supramax rate for the Q4 lower than the Q3 ? Also, do you have any guidance you can give us in terms of what is the forward coverage ratio and the rates for next year as well? The final question I have is on long-term contracts.
I think last time we spoke, Well, last time we spoke, I think there wasn't that many customers who were trying to lock in long-term contracts. They were adopting a let's-wait-and-see approach. Have you seen a shift from these customers who are now willing to lock in more of these long-term contracts? Thank you.
Yeah. Thank you very much, Andrew, for all these questions. Let's see if I can remember them all. Let's start with the first one, which I guess was the sale versus leaseback part of our older ships. It's not our intentions to do the leaseback. The people that we have working on this, they will, of course, look at the different options. I think what we'll do is that we'll probably do an outright sale of the ships, but I'm sure we'll look at different options as we go along.
Our aim is probably to sell them outright. You also asked how many ships we are talking about. I think we usually have a sort of a rule saying that when the ships become 20, we have an interest in selling them. I think that's still the case.
We probably delayed that a little bit due to the good market. Now we're sort of just starting up again, doing the same. As I remember it, I think we have six, seven vessels. I think we have two ships that's over 20, and I think we have five or six ships nearing 20 years of age, all on the Handysize market.
I would also probably say that not necessarily, of course, the older ships are probably on the list, but we also have some ships that may be on the IMO compliant part are difficult ships. They might also be ships that we are considering selling. They might not be as old, but be on the list for that part as well. You had a question about the. Yeah. What was the question again?
Your coverage for the Q4 .
We have about 68% coverage on both the Handys and on the Supramaxes. Majority of the cover is, of course, in October. I think we have nearly fully covered in October. We have about half the days covered in November and about 30% in December, as I remember it. That's, I hope that replies your question.
You asked about next year coverage. We do have coverage for next year. I think we have around 30 something% in the Q1 on both of them. I think actually we have more coverage on the Supramaxes on the Handysizes. It's around 30% in Q1 . It's falling quarter- by- quarter. I think we end up just below 20% in Q4 next year on the two segment. The last question we had was about the contract renewal.
I think we said last time we had a call that we thought the customers probably were a little bit hesitant. Of course, the market is changing all the time. The reality is now that we are in the contract extension period here in the Pacific, mainly in the Pacific, actually less in the Atlantic. We actually do see the pipeline of opportunities for contracts increasing.
According to our chartering team, it's a little bit like last year. It seems like the customers are actually coming now and asking for extension of some of the contracts. That doesn't mean that we can agree on the rates. That has to be seen. At least when we look at it right now, the pipeline is increasing and the negotiations are ongoing, and then we have to see where we end up.
Can I,
Yeah, please.
Can I just add something, Andrew? I think you're also asking why the Q4 was lower than sort of what we're earning in September. Of course, as always, forward cover does contain a portion of sort of legacy contracts, COAs, et cetera. I do think we see that new fixtures being put into the book.
We're quite hopeful that the Q4 could be stronger than the Q3 . Don't read too much into the current Q4 coverage rate, because we are putting very good fixtures into the book today. That cover rate, we do expect to move upwards.
I think it's good question, Andrew, and I think next time we will have to look a little bit at how we describe it. We could probably do a little bit better for you on that one.
Yeah, just give us more information. We're clearly interested. Thank you.
Thank you, Mr. Andrew. Next, we have Mr. James from Bloomberg. Your question, please.
Hi, good evening. I'd like to ask about the China energy curbs. I think you touched on it a little bit in your presentation, but could you elaborate more on what are the possible impacts or concerns that you have? You touched on iron ore and Capesize, but yours are mainly Handysize and Supramax, right? Is there a risk that might get affected, or can you help to put it into context into how it might affect Pacific Basin, please?
Yeah. Of course, we can. I think, of course, we follow China quite closely, also what's happening. It's not only China who has an issue on the energy side, also other places have it. I think, actually, the short-term consequence of that is actually an increased demand for coal going into China and also to India, actually. We already see that on the Supramaxes in the Pacific.
We'll see more inquiries for ships to transport coal into both China and India. In reality, it actually has a positive short-term impact on our fleet. If it has a longer-term impact, I think it's a little bit too early for us to conclude on it. We'll just have to see what happens and how big the issue is. I think it's a little bit too early to start concluding on that.
The short-term impact is more activity actually on the Supramaxes, especially in the Pacific. Probably also something we'll see in the Atlantic, where I think there's also other countries who probably need more coal with the high gas prices and so on. I hope that replies the question.
Okay. Thank you.
Thank you.
Yes. Thank you.
Thank you, James. All you participants with questions to pose, please press zero one on your telephone keypad and you'll be joined in the queue. Next, we have Mr. Steven Leong from BlackRock. Your question, please.
Hello. Can you hear me?
We can hear you.
Yep. Thank you. I got two questions. One is the demand going into next quarter. We have talked about the iron ore, the price has fallen, but you are saying the demand or the demand of the shipping has not been impacted. I'm curious because basically China is reducing the utilization of the steel mills at the moment.
Why do you think the demand of iron ore on the shipping side has not been impacted, or is it too early to tell, or actually the iron ore are actually being shipped to somewhere else, so actually it's not too much an issue? Secondly, regarding the grain and soybeans, you mentioned about the hurricanes. Is it fair to say that after the weather issue, going into Q4, it should be normalizing?
Yeah. Thank you, Steven, for both these questions. The first one about the iron ore to China, this is mainly for the Capesizes. We do not do much iron ore, but the way we see it is that market for the Capesizes have gone up quite a bit, that is mainly driven by increased iron ore import into China.
I think China is taking a little bit advantage of the lower iron ore prices that actually sort of halved within the last month or so. I think it's about half the price. I think China is using that to restock on the iron ore in China. How long that will last, I can't say, but at least at the moment, we see the Capesizes getting very healthy rates driven mainly by the iron ore to China.
I agree with your statement about the grain and the soybean in the U.S. Gulf. As we see right now, it's September. Of course, with the hurricane, a lot of things had to be dealt with in the U.S., the grain, the soybeans and all that is still there, now they're starting moving it out. The season has just been a little bit delayed.
You are correct that as we see it right now, with the orders and the lineup in the U.S. Gulf and the requirements, we are a little bit back to normal, just a little bit delayed due to the hurricane.
Yep. Understand. Maybe if I can ask one more follow-up question regarding cement. Can you describe between what countries are the cements moving that is driving the minor bulk growth?
I think the good thing about the minor bulk is that it's quite broadly, it's all over the world. I think if you look at slide 20, you can see a little bit about where we actually discharge. Compared to the Capesizes, who are 58% China, then the Handysizes are only 11%, but reality is they are transporting around the world.
I think what's driving the market a little bit at the moment is actually construction material into the U.S., for instance. It's also, of course, now the coal into China and India. Then, of course, finally the grain season, a little bit delayed, but has started up in the U.S. When you look at minor bulk and you look at us, we sort of are two-thirds agriculture.
One-third is agricultural products, one-third is construction material, metal 16%, energy is actually only 13% of what we do. We are quite broad on the different commodities we move, also quite broad in where we sail around the world compared to the other dry cargo segments.
If I may add, cement is one of our sort of classic backhaul trades. It's actually a trade that goes from Northeast Asia, places like China and Japan, into Southeast Asia, Australia, South America, North America. For us, it's a backhaul trade. It's very good to see that that trade is strong and vital because it underpins the sort of global and diverse basis of our business.
Maybe I could just add that I think it's 90% of our trading is actually done laden. We have a very good ratio between the ballasting and the laden, which sometimes when you talk about the environmental impact, actually the minor bulk, at least we're utilizing the assets quite well compared to many of the other shipping segments, which is probably more 50/50 on laden and ballasting.
Understand. If I can ask one more question regarding on the supply side. On slide eight, we talk about the very low order book for dry bulk. It has been the case for a while. Do we have enough visibility about the carbon emission standard already? It always has been an issue that people do not quite understand what do they need to do, so therefore, they are not willing to order the ships.
I'm curious about the divergence versus container shipping, where the order book has been increasing quite rapidly. There's a theory that some people are saying that because the shipyards are actually getting filled by the orders from the container shipping, therefore, the dry bulk people cannot really make orders. I'm not sure if it is really a bottleneck in the shipyard or actually people are still unwilling to put in orders.
Yeah, I think it's a little bit of both, Steven. I think first of all, we usually say, who in their right minds will buy a ship with the old propulsion technology that they get delivered in 2024 and that they have to trade, depreciate over 25 years? You are in 2049. Who would actually do that?
That seems to not really make sense when you think about the decarbonization efforts around the world. When I didn't say that, some people have ordered ships. I also think many of those have ordered either dual fuel or they have ordered these ships that's ready for some sort of different propulsion systems in the future.
I think there's a huge difference between ordering a $160 million, $170 million container ship, then maybe over time you have to replace something on it compared to ordering a Handysize or Supramax at $30 million, $32 million. Also space-wise, physical space on the ship. I think the challenge we have on the smaller, a little bit cheaper ships is a little bit different than the bigger ones in it.
Of course, I agree today when you look at it now with all the other segments, especially containers, maybe also the PCTC and so on, they have ordered lots of ships. It's actually hard to get space at the yards.
Finally, I think now with the energy prices and also with the COVID, and also with the steel prices and so on, it's not going to be cheaper and easier to build ships for the shipyards. What came first, maybe I can't even remember that, but I think it's a combination of those things, Steven, and I hope that replies your question.
Yeah, the IMO thing or the decarbonization thing, we previously have seen some additional details about what is actually required. I'm not sure from an industry expert point of view, do we still expect more details going forward or basically we are still waiting for something in terms of the information?
If you think about IMO, actually, well, there's a meeting now here in November also with IMO. I think we pretty much know what it is we have to comply with by 2023. I think we in Pacific Basin, we probably have preferred that the rules were a little bit different, that it was more based on the cargo and less on the deadweight of the ship.
It was more the EEOI instead of the EEXI. On the other hand, I think it's just important that we get some rules that we know we have to comply with, and then we have to deal with that. I'm sure over time that these rules will change and be improved and so on. I think we actually do know what we have to do in 2023.
EU has come as well with some levy on the tax on the CO2. Those rules are a little bit more uncertain because I think they have to be rectified still within the EU. We think it's fairly sure there will be a tax on the CO2 in the EU, and I personally also believe that will spread to the U.S. and China over time. Right now it's the IMO 2023 rules that we are focusing on for the existing ships that we have. We have to comply with that.
Yeah. Understand. Thank you very much.
Thank you, Steven. Next we have Ms. Lisa Lin from Huatai Securities. Your question, please.
Yes, thank you. Thank you, management. This is Lisa. I have one question on the cost. You mentioned on the announcement we are seeing a rising operating cost due to restrictions. I want to ask, do we expect the cost to continue increase quarter- on- quarter if the market is rising? How about the P&L breakeven level? Do we expect a higher breakeven level for the company? Thank you.
Thank you. That's true, we mentioned that costs are coming up a little bit. It's not much up. If you look at the OpEx, I think OpEx compared to what we stated in July and what we expect now, I think OpEx per day will go up with around $125 per day. That's what we're talking about on the OpEx side. Our G&A will also go up a little bit.
We will have a very good year, and we have also had a very busy year. Of course, we have expanded a little bit on the organization. We have also invested in different things in respect to digitalization and so on. Of course, we also have to look at the bonus structure for the end of the year in such a good year.
On the OpEx side, the cost increases are actually in respect to the crew, that's of course, a COVID-related cost. It's just with the quarantines and with all the difficulties in changing the crew and also with the flight cost and so on, it is quite costly. Also this year, I think our focus has been probably more on optimizing,
making sure we have as many days available and we have a good operation, and maybe a little bit less on managing the cost all the time. The reality is, if you save a day on each ship, that's a lot more money because of the daily rate than actually looking at every little cost thing. We're probably a little bit more easy on the cost and maybe a little bit more focused on the time.
Okay. Thank you. Understood. Thank you.
Overall, it's very little cost. I don't know, Peter.
I would say a lot of the cost increases, we have kind of taken because we've had these repatriation issues of crew for some time now. I don't think there should be an expectation that costs will continue to escalate, but rather, as the world moves beyond COVID, borders opens up, some of the costs will start to come down.
I don't think we should expect costs to continue to climb inexorably, but I think there will be some moderation in cost increases and maybe some reduction in costs as we move through 2022, specifically when it comes to crew repatriation, et cetera.
Okay. Sure. Thank you.
Thank you, Lisa. Next, we have Parash Jain from HSBC. Your question, please.
Thank you. Hi, Martin. Hi, Peter. I just have two questions. Everything is going great, so I don't want to play devil's advocate, but can you help us understand what % of dry bulk fleet is being impacted because of ongoing congestion? When shall we expect that to ease going into 2022?
Secondly, with the slowdown in the China property sector, time will tell how much impact it'll have on 2022, but not only the iron ore, but probably will it impact the construction material sector as well? In that case, going into 2022, how do you see the effective demand and supply shaping up? Thank you. Probably another question for Peter. With a happy problem, how should we think about capital structure?
Shall we see some sort of special dividend, or you will take an opportunity to perhaps increase the regular dividend further for the upcoming year? How should we think about it?
Thank you, Parash. If I just start with the congestion situation. According to Clarksons, it's about 3% of the dry bulk market. We've been discussing this a few times with different people, and maybe not on the minor part. We see, of course, congestion in China, but I think as we said earlier, only, what is it? 17% of our ships are actually discharging in China.
Of course, for those ships, we do see the congestion situation. Overall, when you look at it, we do not see congestion all over the world. I am sure if you have a Capesize and you are 58% in discharging in China, you probably feel it a lot more than what we do. When that will be over, that's hard to say.
I think as long as we have COVID and all the restrictions in the ports and these things, then I think we'll probably have a COVID situation. A little bit here, the discussion is probably also what came first, the congestion or the high utilization of the assets? I think actually demand came first, and usually that actually also brings these inefficiencies along because there's not enough ships to do it.
I think that was the start of it, and then it ends up in congestion, and then the congestion very much in China also because of the COVID restrictions in China, that's probably added to that part as well. If you look at the rest of the supply of our fleet, we're going full speed. There's actually not much runway left. We can't do more to create more supply than we do today.
The only thing is, of course, the congestion, which I think is probably more on the larger sizes, a little less on the smaller sizes. Of course, we also see the congestion. In respect to China and the construction part, as you also said, we have to see what happens. It's a little bit early days. We haven't really seen any consequences in the minor bulk or in the bulk market yet.
We do see maybe, if I should be honest about this, we do see maybe a little bit expectation that there will be less logs into China. You're right when you say that's for the construction part. The feedback I get is that we'll probably see a little bit less logs end of the year. On the other hand, we probably see less export of steel because the steel production will go down.
We actually see rising steel production and exports out of other countries in Southeast Asia. You can say just because China doesn't produce the number of steel, maybe other countries still need the steel after, so it will just come from other places. Our trade is just changing again. That might actually not be a negative thing all in all.
I think I agree with you if you're hinting, Parash, that if China goes down in activity all in all because this escalates, then of course, it will indirectly also hit us a little bit on that side. At the moment, I must admit, actually we see more coal going into China. We see steel moving from other places. Yes, we might see logs reduce a little bit into China in the Q4 .
Yeah. No, I think that's very helpful. Yeah.
Of course, these kind of long term demand risk, we look at that and we're very pleased that the order book is at a three-decade low. That kind of provides our segment and our industry with quite a lot of insulation against demand volatility, I would say.
Yeah. I think, Peter, Parash, if we step back and look at the order book in 2008, I think it was 68%, wasn't it?
Yeah, I think that around 80.
Or even 70 or above 70%. I think that's a big difference between the market we have today and what we had at that time. That, yeah, as Peter is saying, that the supply side of it is under control after it sort of hands over the market to a certain extent. Peter, do you want to reply on the-
Yeah. Just on the dividend, Parash, obviously it's a nice problem to have. We are de-leveraging quickly. We obviously are building up cash balances. We, of course, always want to maintain a minimum cash, significant amount of cash in the business as we always have. If we have a capital on top of that, obviously, we will think about what to do with it.
We have a distribution policy. It's at least 50% of profit, it gives the board some flexibility. How exactly to do and what we will do and what decisions we take around it, let's wait for the year to finish, then I'm sure the board will discuss around these issues.
Okay. Thank you.
Thanks, everyone. Have a lovely day.
Thank you.
Thank you. Next, we have Mr. Yang Liu from Pinpoint. Your question, please.
Hi. Good evening. Good evening, management. I have a couple questions. Number one, regarding your Q4 cover, forward cover. You mentioned around 68% of your capacity in Q4 has been parked. May I know, is there any backhaul cargoes contracts that is included in this 68% fulfillment of your capacity? That's number one.
Number two, regarding your Panamax, which is a small part of the business, is there any sign of a restrike of this Panamax contract for next year or so? Number three, regarding the crew situation, we have recently read a lot of the articles about the crew members cannot No, not your company, but other shipping companies, crew members cannot go back and they got stuck on the vessels for so long time, et cetera.
My question is: Is there any risk in the crew shortage at some stage becomes a new bottleneck for the industry? What Pacific Basin is doing at the moment to ensure that you have enough crew in place in a compliant way? Three questions that, in the Q4 cargo cover is in backhaul, Panamax, and about the crew situation. Thank you.
Yeah. Thank you very much, Yang. Three questions. First, the backhaul. Yes, you're actually very right that we have actually quite a bit of backhaul in our contract, our legacy contract portfolio, there's actually quite a bit of backhaul business. That's actually also one of the reasons where the Handysizes also struggle a little bit with the benchmark to the index.
They have actually, in their contract coverage, a little bit more backhaul. Hopefully that will actually benefit them a little bit going forward. We have to see. Historically, yes, Pacific Basin has always been very focused on the backhaul business as well. That's still in the contract, maybe more Handy than actually under Supramaxes.
Sorry, Martin. My question is, I understand you do have the backhaul, but my question is, did you count the backhaul cargoes into your 68% cover in Q4 capacity? Did you already count the backhaul into that cover ratio or not?
Yeah, that we did. That's a yes.
Okay. Might know approximately what kind of a portion of your covered capacities are backhaul, one third, half? Just approximate number.
I can't tell you. I don't know what it is, how much it is. Specifically the backhaul thing, we'll have to come back to you on that one. I do not have that number.
Sure. Okay.
I don't know, Peter, you don't have it either?
No, I mean, normally, I can't speak exactly for the Q4, normally we would have a COA cover, say, for the next sort of 12 months of sort of 20%. It's probably a bit lower at the moment because we have more spot exposure. The mix between backhaul and fronthaul, historically, I think, maybe has been a little bit more backhaul, say 60% of that's more sort of historical averages, I would say. I don't have it. That's sort of a rough guide, right?
Okay. That means your exposure to your fronthaul capacity is actually bigger than this 30-ish %, 30% of the uncovered capacity you specified in your presentation. Am I right?
Yeah. If you're saying that there is a potential upside in the 30% uncovered because we are actually ended up in loading areas, then you are correct in that assumption. Exactly how much it is, I have to come back to you on that part. I agree with you. That's actually one of the drivers for why our earnings actually also looks better when we actually do the voyages, because our contract that we put in here, actually some of it actually ends up in the loading areas with an upside on the rates.
Okay. Yeah. The Panamax.
The Panamax thing, the Panamax contract, the one ship we have there, that continues unchanged. It will continue for additional 5 years, is the contract. There will be no changes for that for next year.
Okay. About the crew.
The last thing is the crew repatriation. I have to be careful not to get too emotional about it. I think we have more than 4,000 crew members. We have everything in-house, basically. We do all the ship management in-house. This is actually our colleagues we haven't seen, and they do a very good job.
In reality, they are the key actually for us to be able to sort of benefit from the good market and keep servicing our customers. They do a really good job at the moment. The thing that we have a problem delivering is actually getting them home in time, and we also struggle with that. Some of them are there for extended periods, which, of course, is not very nice in it.
We must say that we still have a very engaged and loyal crew who helps us on what we do. Looking ahead, I think one of the things about Pacific Basin is that we actually have been able to buy 11 ships this year, and we can buy them with short delivery because we have our own crew and our in-house ship managers are actually able to sort of deliver qualified crew at short notice.
I think that has been a commercial advantage for us in this market. Going ahead, it is one of the concerns we have is, of course, to a certain extent, the way the crew are treated at the moment.
I'm sometimes in doubt if they go home and promote a life at sea to their family and friends, because they go out for five months, but it takes 10 months before they come back. When they go back, they have to be two, three, four weeks in quarantine before they get home. That is a tough life. We will, of course, keep on pushing for the education and training and getting people into our pipeline. We source the crew from China and from Hong Kong and from Philippines and from India. We will, of course, keep doing that.
Okay. It sounds like crew would not be a potential bottleneck risk for the industry.
No, I don't think so. Definitely not for Pacific Basin, also because we have it all in-house and we do it right. As we also said, of course, cost is going up for some of them, partly the infrastructure cost, but of course also salaries are going up for some of them. We just have to remember many of the crew members, they have a long education and been with us for many years. Both onshore and offshore, we actually have a loyal crew of employees.
At the moment, we don't see it as a big issue, but if you go ahead five years, and also if the fleet is growing, and also with new technology being implemented on the ships and so on, we need to invest in our crew continuously to ensure we have crew who can run these things in a safe manner. Don't forget that the requirements to the crew is not becoming less in the future with the decarbonization and so on. It's actually only becoming more.
Okay. Thank you.
Thank you. Next, we have Mr. Ngoi Se Chai from Oaklands Path. Your question, please.
Hi. Hello, can you hear me?
Yes, we can hear you.
All right. Regarding the IMO speed limits that you mentioned just now, how much would that impact on the total shipping capacity?
Yeah.
Yeah, this is the first question.
We are doing some calculations on that to see what it is. I would be a little bit hesitant to put a number on it, what it is. I think it's fair to say that in 2020, compared to 2021, we have sort of increased our speed with, I guess a little bit more than 10%, maybe a little bit more than one knot.
You saw the slide where we had sort of the ranking, the EEXI part, and if we go back and have to slow steam like we did last year, then we are taking out again about a knot on each of the ships. Then we have to calculate a little bit of that, is that, we do not sail all the time. We probably only sail half of 60% of the time.
We have to do some calculations on that. It's very hard to say exactly what it will be. Of course, that's something we're also looking at. What impact will that have on the supply side?
What is the limit, the impulse? Are you currently at above or below the limit?
Sorry, can you repeat the question?
What is the speed limit that IMO imposed from 2023? Currently, are you above or below that speed limit?
Yeah, that depends on the vessel. They're not coming out saying an exact speed on it. Depending on what ship it is and how it's designed and so on. We have to look at it ship by ship, to assess that part. Some ships actually don't have to reduce, and some ships actually have to reduce quite a bit. Usually, when we talk about it's actually power reduce of the ships and not the speed.
Of course, as you reduce power, you also reduce speed. There's actually ships also in our fleet that doesn't have to do anything to begin with because they are already in compliance. In Pacific Basin, we own 120 ships, and most of them are actually built in Japan.
They're actually good quality ship, well-designed, and is already doing quite well when you go in and look at the ranking or rating IMO is requiring. We are in a good position compared to many, already from the beginning. We also have to reduce power and thereby speed on some of our ships.
On the IMO 2030, 40% reduction in emissions, right? May I know what kind of ships or new builds, what kind of technology are you looking at in order for you to be able to meet that 2030 kind of requirements? Do you feel or anything?
Yeah. There's multiple things we do. First, you can look at the technical side of it, and of course, there's things we can do in respect to propeller and antifouling and many other things. I think we actually looked at that for years also because of fuel prices and so on.
Another advantage of having all our technicians in-house in the same building as us, so they've been looking at that and keep looking at what are the technical solutions you can implement on the existing ships in order to make them more efficient. We have done quite a bit of things, and we have a number of things in the pipeline. You can say, secondly, it's the power reduction and the speed reduction.
I think over time, up to 2030, depending on the year and year requirements after 2023 that IMO will impose, I think most ships over that period will actually have to reduce the power or the speed over time. One thing is to comply with 2023, but every year you actually have to improve up to 2030. We only know the requirements from 2023 to 2026.
After that, we actually don't know exactly what the requirements will be, but we don't believe it's going to be less than it was the earlier years, probably more. Speed reduction is of course, also a major part of it. Finally, what I would call the big thing is that we also have to look at the trades we do, and that's where we actually have to engage with our customers.
Reality is, these rules are actually quite dependent for each ship on what kind and how you trade the ship. If you trade the ships in trades where you have to be a lot in port, a lot of congestion, and maybe you have the sea going part of the voyage is in rough seas and difficult waters, then actually your rating will actually be quite poor even though your ship could be quite good.
Actually, a big part of it has actually to do how we are trading the ships. It's partly technical, partly speed reduction, but partly actually also what kind of voyages we do.
Therefore, we need to engage with our customers in that respect because they also need to understand that the different voyages they have, they will have a different impact on the ships, and therefore we have to work around that to make sure we do the right thing for the ships.
The route actually not that complicated to understand, but how to do it is actually quite complicated. There's actually many things that we have to work on at the same time. I don't know, Peter, if you have anything else to add.
No. One last question.
No, nothing to add, Martin.
Good.
One last question for me is, how many of your long-term charters is going to go off next year and the following year? If you plan to renew it, you'll be way higher rate than the old one, right?
Yeah. Could we just show the long-term charters? We have a slide for that, don't we? Hang on.
From page 19.
Page 19. Yeah. Here you can see how actually what we have of short-term and longer-term charters. Reality is all our short-term charters, they will go off within a year. The longer-term charters, they are in excess of one year.
All right. Thank you.
Thank you. We will be taking one last question from Mr. Mervyn from Bank of America. Your question, please.
Hey, Martin. Maybe just two quick questions from me. Just in terms of these incredible second half rates that we're seeing, do you have any conviction around whether they could sustain into 2022? That's the first question. Second question, do you have any estimate around how much of a demand boost dry bulk has seen from shifts from container? Just two questions. Thank you.
Yeah. It's two of the difficult questions. What will the market do? It's always hard to sort of predict, but I think all in all, our conclusion, we're quite positive about it. Of course, we have to follow what's happening in China and other places. When we look at the supply side, what ships are coming, we know that. When we look at sort of the demand side of it, we are actually, on the minor bulk, we are quite positive about the developments.
Here we can also see Clarksons is also, their estimates on the demand growth is also quite positive. It looks really good for 2022. I think we all have to remember that likely when we enter 2022 compared to when we entered 2021, actually the market is quite good.
We will have good earnings in the beginning of the year as well. That was actually not the case this year. I think we all tend to forget a little bit that this upturn has actually not been there that long. It had been positive all along, but it only started early this year, and now we are in October. We do see a little bit more runway on this upturn, as long as we have transparency on the supply side.
What happens in China and other places, it's a little bit hard to predict, but maybe you also know a little bit more about these things. We are quite positive actually about the market for next year. Then container into dry bulk. We have had a lot of discussions on that. We do also actually move containers in our dry cargo ships.
We've actually done that for years. I know people come out and say that's something new, but we have actually done it for quite a bit of time. This year we have moved 2,200 containers, I think it is, from China to the U.S. on 12 different liftings. Actually, it's 53 foot containers that we are lifting.
A little bit odd size that I don't think the container ships will move, and we move them to the U.S. where they are used. I don't think the big container lines are worried about us and our 2,000 containers. That being said, I think actually it's more the multipurpose vessels.
I think there's maybe a little bit more argument on that side that the smaller multipurpose ships who usually also carry dry cargo, commodities, they have probably gone, as we see, have probably gone more into the container business than container cargoes.
How much it is, we actually don't know. I think there's a lot of logic into it that they have, of course, because they are built to move containers as well, that they have entered into that market and taken advantage of that market.
Of course, the day the containers comes down and to a normal, they will probably migrate back again. Of course, that will have a little bit of impact on the supply side all in all for dry cargo. That's something we have to follow and then see as things get more transparent as we go along.
Great. Thank you, Martin.
Thank you. Next question.
As there are no further questions, we will now begin the closing comments. Please go ahead, Mr. Martin.
Yeah. I'd like to thank you again for joining us today and for your continued support to Pacific Basin. I do urge you to look at page 18, how to model Pacific Basin. It gives you a good feel for how we're doing at the moment and maybe also an ability to calculate the future earnings. I think that's a quite important slide to look at. Thank you very much.