Welcome to today's Pacific Basin 2020 Analyst Day. I am pleased to present Chief Executive Officer, Mr. Mats Berglund, Chief Financial Officer, Mr. Peter Schulz, Asset Management Director, Mr. Morten Ingebrigtsen, and Pacific Chartering Director, Mr. Surinder Brrar. All participants will be in listen only mode. Afterwards, there will be a question and answer session on every session. First, Mr. Berglund will start the introduction session. Mr. Berglund, please begin.
Thank you very much everyone for joining us today. Sorry for the slight delayed start. Please turn to slide four. I will start with just one or two overview slides because I know that there's some of you who do not know us that well. I apologize for those of you who already know this. Just briefly, we, Pacific Basin, operate the world's largest handysize fleet. We're the largest owner and operator of handysize ships, and we also have a significant Supramax fleet. We have what we say a cargo system business model. We are not a tonnage provider, i.e., we do not time charter out our ships on one, two, three years. We deal with the cargoes and the shippers directly, and we have built a very efficient cargo system, which we will talk more about today.
We own 117 Handysize and Supramax vessels, and today we have a total of 271 ships on the water if we include also chartered ships. We are based and headquartered here in Hong Kong. We are listed here, but we do our business all around the globe. We have 10 commercial offices on all the six continents. We have about 300, 400 shoreside employees and more than 4,000 seafarers. We have a strong balance sheet with $362 million at end of December this year. Our organization is one that is very experienced, an experienced board and an experienced management team. You see the org chart here. I myself, as most of you know, will retire on July 31, and I will be replaced by Martin Fruergaard, who comes here to Hong Kong in June. He starts July one.
We overlap for a month, and we look forward to introduce him to you on our six-month earnings call on July 29th. Again, we're fortunate to have a very experienced management team. I did the math here. The average time with the company is 18 years, and most of us are lifelong shipping career people. People like Morten, who you will hear from later, have probably bought and sold more Handysize ships than anybody else on the planet. He's been with us for 32 years. People like Suresh, Captain Suresh Prabhakar, who runs our commercial operations, has probably seen everything you can see as regards loading and discharging minor bulk commodities. Again, we're very fortunate to have an extremely experienced management team. Next slide. I use this slide just to describe to you where we fit in and why we only have Handysize and Supramax ships.
It has to do with the versatility of those ships and the ability to build a cargo system with cargoes in both directions. The top section of this slide, the very basics, we don't have any container ships. We don't have any tankers. We only have bulk carriers, dry bulk carriers. We have the types that have cranes on deck. If you see the left column, you see the four main vessel types within dry bulk. The biggest ships at the bottom are called Capesize, and then Panamax, and the upper two are called Supramax or now Ultramax. It's the same type of ship, and then Handysize. You can see the difference that Handys and Supras have cranes on deck, and it makes them very flexible, very versatile. We do not need shoreside facilities to load and discharge.
We use our own cranes to lift on and lift off predominantly our cargo. We carry minor bulks, which is more than 25 different types of commodities. You see some of them listed on the right column of this graph. The bigger ships you get, the smaller versatility you have. A Capesize ship is almost only carrying iron ore and a little bit of coal. What that means is that you'll only lay them in one direction, and you're going empty back. We don't like these larger segments because we cannot really be different, and we cannot really build a more industrial efficient cargo system with cargoes in both directions if we owned these ships. It's very difficult to be different. You don't really control your own destiny in the Capesize market.
You all are at the mercy of Chinese iron ore imports, and its lowest cost wins. What we can do with our much more versatile commodity mix is that we can build a much more industrial system of cargo contracts that complement each other, and we can build a very high utilization rate. More than 90% of all the days at sea, we are fully laden, and that's how we are different, and I'll talk more about that in a minute. This is why we're only in Handysize and Supramax. The key components of our business model are listed on this slide, and it's been built up over many years. We have a track record of outperforming market rates, and that is primarily because of this higher laden percentage. It's not because customers pay us more than the market rate.
The market rate is the market rate, but we use our ships more efficiently, and that's why we make more dollars per day because we have fewer empty days, fewer days in ballast, as we say. To do that, you've got to have all of these components that I have listed here. Number one is diversified ships, the Handysize and Supramax with cranes on deck and access to all the various minor bulks. The second point is that you need scale so that you can build a worldwide system, and you need interchangeable ships. You need ships that are very well equipped so that we can freely swap ships in and out. If we have different designed ships, for example, if we only have some ships that could carry logs and others could not, it would be very difficult to reach 90% laden.
As an example, in Handysize, every ship that we own, other than one, is log fitted. It means that we can always use the ship that's closest to the load port, and we can build this very efficient system. Predominantly, our ships are built in Japan, or at least Japanese design, and they're very well equipped and very reliable, very high-quality ships. Since I came, we have only bought one non-Chinese ship, and we have bought a lot. All the others are Japanese. As I mentioned, we have experienced staff, and I want to make the point that in this segment, skill and expertise really makes a difference, right? I mentioned to you loading and discharging. To load steel on a ship, you really have to know the ins and outs on how to distribute the weight on deck, how to stack it, how to put dunnage in between.
The more skilled you are in loading and discharging and cleaning in between, that makes a big difference. That can be the difference between making a voyage profitable or making it loss-making. The global office network that we have built is critical. We would not be able to get the cargoes out of South America, out of New Zealand, out of Australia, out of Japan, et cetera, if we didn't have local offices there in that time zone that speaks the language and that is close to our customers. It costs money to have this worldwide office network, so you need the scale to distribute the cost. Arguably, most important is, of course, our customers and our cargo contracts, the relationships, and the direct interaction that we have with our end users. Right? The direct contact that we have with our customers gives us excellent market intelligence.
We know what's happening in the market. If you're a tonnage provider, time chartering, leasing out your ships, you're not really talking to the end user. You're time chartering your ship to another operator or owner. Of course, the cargo network to build this high utilization rate is key to us, and the cargo contracts and the relationships. I would say that maybe half of our repeat business is contractual. The other half is informal relationships where the customer always comes back to us. We say in the last point here that we are both asset heavy and asset light. What we mean with asset heavy, that's our core business. That's the owned ships and the long-term chartered ships. That is really the key in a strong market like we have now. We also have what we call an asset-light business.
That's all these short-term chartered ships, and a piece of that is what we call operating activity. Surinder will speak more about that later. That's a complementary business to provide a service to our customers, even if we do not have our own ship or long-term chartered ship in position, and we can make a margin by combining a cargo and a ship opportunistically, very valuable, especially in a falling market or in a weak market, because it's the margin there that is the profitability to us. It doesn't really matter if the market is strong or weak. Especially in a weak market, when we cannot make money on our own ship, it's very valuable to have both. I will say that I would not want to run a company that was only asset light because I think it's a very weak customer offering.
You're not offering your owned and managed ships to your customers. You're chartering in from, mostly the spot market, other people's ships each and every time, so you have no control over the quality, over the service, over the reliability, over the crews on board, right? Because you're taking a ship that's cheapest from the market every time, and you're combining it with a cargo. Our core business is our key, and that's what allows us to get cargo contracts and to build our business. Back a little bit on our business model, and for those of you who doesn't know us well, hopefully you do understand the basics of our business model now. This next slide is just to prove that it works. It does work.
You can see that we have a track record of outperforming market rates with $1,700 per day over the last five years on Handys and $1,490 per day on the Supras over the last five years. Even more on the Supras recently, thanks to our scrubber benefits. It is not only on TCE that we outperform and that we are competitive. We also have very competitive cost structure. You see down below there that compared to our peer group, we also have lower OpEx, G&A and finance costs than our peers. The combination of higher earnings and lower costs provide a benefit of $1,500 per day compared to our peers on the Handys for the calendar year 2020, and more than $3,000 on the Supramaxes compared to our peers last year.
The wider margin on Supramax is due to the scrubber benefits that we have on most of our owned Supramax. Turning to the markets, slide nine. You can see clearly here that the positive trend continues. For the second quarter, we were, when we reported here a while back, about 80% covered at $16,000 a day on Handysize and $18,000 per day on Supramax. This is well above our breakeven level, which we remind you of here by way of the dotted line that you see on this graph. It's easy to do the math between the breakeven level and what we're now making. I remind you that we have about 90 core Handysize ships, and we have about 45 core Supramax ships.
I'd just like to mention as well that we've had quite a different situation in Q1 versus Q2, and Surinder will mention this later as well. The Atlantic market has been significantly stronger than the Pacific market in Q1, and that is especially beneficial for our Supramax segment because we have more Supramaxes in the Atlantic than we do in the Pacific. You can see that we caught more of the stronger markets in Q1 on the Supramaxes than we did on the Handysizes. This has now reversed in the second quarter, and now the Pacific market is stronger than the Atlantic. That is extra beneficial for our Handysize segment because we have more Handysizes in the Pacific than we do in the Atlantic.
You can see that the difference between Supra and Handy is narrowing, and Handy rates are catching up very nicely and especially good for us since we have about twice as many Handys as we do Supras. Very positive market rate development right now. You can see on the next slide that we're kind of on a different planet than we have been the previous years. Encouragingly, you can see that the market has actually turned up again in the last week. When we reported here a week ago, we did communicate that it felt like the market is finding support at the levels we had, and we are now seeing a rising market again, which is very encouraging.
Again, it demonstrates a tight balance between supply and demand, and that it's not just a one-off situation that we had with the spike earlier about a month ago. I also want to remind you here about the lag between the fixing a ship and earning the money on that voyage because we're fixing forward, right? There's a one to three -month lag between fixing and earning. The spot fixtures that we did during the strong spike in late February, early March, is not really showing up until in the second quarter earnings, which you saw on the TCE rates as well. It is not meaningful to compare index rates for Q1. Those rates, by the way, that you're seeing here are index rates.
You can't really compare the average index rates for Q1 with our earnings of Q1 when rates change as dramatically as they have done now early this year because of this lag. You need a longer period to compare with maybe some ups and downs, and then you can compare again between index rates and our earnings. It's really apples and bananas to compare quarter by quarter when rates change as much as they have done recently. Our next slide, why are rates so strong? I'm not going to go through all of the details here. Morten will speak more about the market factors later.
It is China, it is grain, it is construction materials that is growing strongly, it is coal that is coming back to same levels as before, and it is also some temporary factors that we have benefited from, including a few inefficiencies in the fleet and also from high container rates, very high container rates, more than twice as high as our rates, which is causing some container cargo to move to dry bulk carriers. We are now entering the South American grain season, which is kind of what drives the market right now. Next slide, I just want to touch upon the biggest change during the company during my nine years, have been a significant growth of the owned fleet, and we have reduced the long-term chartered in fleet instead. We much prefer to own ships. We have gone from owning 34 ships in 2012 to now 117.
Again, the benefit of this is in a market like we have now, because the costs are substantially fixed. We have tremendous upside and leverage now that market rates are finally at a rewarding level. We have specifically grown our Supramax proportion. As you can see, we hardly owned any Supramax ships back in 2012. Now we own 40. That's been a conscious strategy since Supramax rates have larger upside in strong markets. The larger rates tends to go up more in strong markets, and we are benefiting, as you can see in Q1 and Q2 with even higher Supra rates than Handy rates.
We have continued to grow the fleet, in particular with Ultramax ships, and most recently we bought four ships in November from Scorpio, five-year-old ships at $16.7 million each, a fantastic price for extremely well-equipped ships, including brand-new scrubber installed on those ships included in the price. You can see on the graph to the top left how nicely such ships have developed in recent months. This is the market that we have been waiting for. This is the market that we have worked so hard to build up for and set up for with our now much larger core fleet. We are back to the levels that we last had 2010. Just looking back at 2010, our Handysize rates averaged $16,700 per day in 2010. We are kind of back to those levels now.
You saw that we were covered at [16.1] for the second quarter. Now, back in 2010, when the calendar year averaged 16,700, this company made just about $100 million. I mentioned this before, I'm going to mention it again. If we get the same rates again for a full year, we would not make just over $100 million, we would make $400 million. I'm using this just to make the point that there is still upside in our company, in our earnings, and in our share price and market cap. Back in 2010, our market cap was about the same as it is now. I repeat, the market cap was about the same as it is now, our earnings capacity now is four times as high, we have the same rate levels or about the same rate levels.
It's only for a quarter, yet, but we think it will last. I will revert to that. Next slide. I just did some back of the envelope calculations the other day, which I would like to share with you to also show you that there's still plenty of upside in our business. I'm showing you here the market values of various age ships, 2010 and what the value is now. The third line on this slide is called upside to 2010 values. I'm comparing how much current values needs to go up to match the market's price that we had at the end of 2010. Earlier 2010, values were even higher, but I've taken the end 2010 values. You can see the % increase that it still takes to get up to same levels as 2010.
I should say, just to clarify, that this is not a forecast. This is not a projection. We're not making any forecasts. We're not forecasting to make $400 million. We're just making math. The rates are at that level. The point I want to make here by showing these various age vessels is that the older ships have much more upside left. That's always the case, and that's why we like to work with secondhand ships. Our average age is around 10 years. We have some that are older, we have some that are younger, but we like 10-year-old ships. One, because the earnings is much higher, the return is much higher. You can see on the lower section here what tremendous returns we're making at today's level by dividing the EBITDA by the value of the ship.
Take a 15-year-old ship that's worth $6.8 million now as per Torstein, it's a 28,000 tonner. At current rate levels of $15,000 today, I've taken off a little bit since the ship is a bit smaller. At $15 a day, the cash contribution to capital is about $3.1 million a year, and the scrap value is $3.3 million. By adding the scrap value with one year of earnings cash flow, you got $6.4 million and you can buy a ship for $6.8 million. There's just tremendous earnings capacity left in these ships and a lot of upside on the value. Next slide shows the same thing but on Supramax, and you can see the same trend, right. That the older the ships have much more upside left, and the earnings are tremendous on these middle-aged ships. That value of a Supra is $4.8 million.
You're holding in more than $4 million, and a 15-year-old is worth $10.3 million. Next slide. You may ask, why don't we go out and buy a lot more 10 or 15-year-old ships today? Well, it's very difficult to do because competition is very stiff today to buy ships and prices are going up. There's a lot of people inspecting ships, et cetera. We are very fortunate to have so many ships already. We have 117 of them, and we do not have to go out and chase buying more ships if vessel values start to get really high. I'm showing you this slide just to put things in perspective, right? If there's any segment where these strong rates should have capacity to last, it's in our segment.
You can see that the order book in Handysize is 3.5%, and for Supramax, it's about the same as overall dry bulk 5.6%. This is the lowest order book in living memory, and this bodes well for the market in the coming years. Final slide to wrap up. We have a healthy demand outlook. Martin will speak more about it. We have vaccine and stimulus rollout in the world. We have global growth forecasts that's being adjusted up to 6% most recently. Clarksons thinks minor bulk demand will grow 4.8%. It's very unusual to have minor bulk grow slower than overall GDP, so chances are that minor bulk demand growth will be higher than 4.8%. It's certainly a lot higher than that so far this year. The order book is low 3.5% for Handysize.
The net fleet growth this year is, by Clarksons, expected to be just below 2% and even lower in 2022. If you contrast a demand growth of around 5% with a supply growth of two or less than two, that's why we are reasonably optimistic about the market balance going forward. We have mentioned before, we'll mention again, who in his right mind calls up a shipyard today to order a new ship with a fuel oil engine that you need typically 25 years to depreciate that delivers two or three years from now, when we have this environmental greenhouse gas reduction movement going on? You simply have to be extremely strangely minded to do that in our view.
That is why the, so far, touch wood, the order book remains benign, and that is why we believe that we will not shoot ourselves, our industry, in the foot again by ordering too many ships. We do think that it continues to make so much more sense to buy secondhand ships because we can see very clearly that we can use those ships for at least another 10 years. There's no question about that. To order a new ship that delivers two years from now into a market that you're not certain of how it will look, that you then need a very long time, you have a very high capital amount to depreciate. Buy secondhand ships instead, and that's why there's also more upside, in our view, in secondhand values.
Very importantly, starting 2023, the way it looks like, IMO will come in with medium-term or short-term rules that will force power limitations. A lot of the poor design ships will have to slow down already in those years or soon thereafter. That's another factor that will moderate supply and keep the supply-demand balance tight. This is the time to now harvest, and to make money and to save that money, in order to order real new technology ships. That will take many years. We cannot order real new technology ships today because they are not available. Even if they were available, there would be no fuel available for them. We're watching the new technology developments very closely, participating in a lot of programs and research, but it will take time before new technology ships will be available.
Meanwhile, we intend to make a lot of money. That's based on our strong leverage, the larger fleet, our competitive costs, and we're in a very good position now to benefit. Again $1,000 rate. If rates go up $1,000, that changes our bottom line with between $35 million and $40 million. The math is easy to do. We encourage you to do it. We also encourage you to listen in again on July 29th when we will report our six-month results that I think will be very exciting to report. That concludes my introduction and overview, and we, I think, invite for if there's any questions already now. Any questions, please feel free, and after that, we will have more to talk about the markets.
Thank you. We will now begin our question and answer session. If you have a question for any of today's speakers, please press star one on your telephone keypad and you will enter a queue. After you are announced, please ask your question. If you find that your question has been answered before it is your turn to speak, please press star two to cancel the question. Again, please press star one if you have any question. You can raise question through online platform. Our first question comes from Parash Jain with HSBC. Please go ahead. Thank you.
Yeah. Hey, Mats, this is Parash here. Exciting times. I was just wondering, given this forum, I think I should take the opportunity to understand from you, can you talk a bit about what does IMO's first then 2023 EEXI, EEDI regulation mean? I mean, is it possible to quantify, i.e., ballpark, let's say, vessels older than 20 years may need to slow their speed by half knot or something. Is it any way possible to quantify the impact on the effective supply growth? Is it fair to say that that could be a driver to drag supply growth into negative? Thank you.
It is. It's not decided upon yet. We have elected, so far, not to show a lot of details on this because the rules are still work in progress. They haven't decided whether IMO is going to go for a 2% per year decrease on emissions or a 1.5% decrease. It follows this trajectory of reducing CO2 with 40% compared to 2008. Each ship will also be different, Parash.
Yes.
There's no doubt that, if we were to simplify, we would probably say that the best designed ships will be able to continue at decent speeds, while the worst designed ships will start to have problems already 2024. We haven't done a work on the worst designed ships, but they will start to have severe speed restrictions, power limitations already when this kicks in. It will, of course, be up to the charterers also to kind of discriminate, right? Ships will be rated A through E, where A is the lowest emitting ship and E is the most emitting, right? An A ship will be allowed to continue at higher speeds and an E ship will have to come up with a plan how it's gonna move up. It's A, B, C, you do not have any restrictions other than speed.
If you're a D after three years, you have to come up and there may be charters who say that I'm only gonna charter A, B, C, et cetera, right. These poor designed ships, they have to go down below 50%. They have to go down to maximum slow MCR, which is 30%, 35%, and that's only nine knots or something, right. A lot of charters will find that that's a bit too slow, and they're not gonna look good chartering these types of ships. We think this will be very helpful for our market. Thankfully, us having predominantly good designed, fuel efficient Japanese ships, we will be affected. Everybody will be affected, but our fleet is good, and we will be less affected than others.
A vast majority of our ships, as far as we can see now, will have no problems trading, although at slower speeds for some of them.
Mats, are we expected to get final outcome or more visibility by mid-June when IMO will be meeting later this year?
I think close to final, at least. You never know how these meetings goes if some countries come in and protest and try to change it. It looks set to be substantially decided upon in this June IMO meeting. Again, it will not kick in until, I think they will start, the date that was 2023 will be used as the starting point, and then January 1, 2024, it will start to kick in hard, so to speak. Peter, is that correct?
That is correct. Yeah. What we're hoping to do, Parash, is assuming we feel that the IMO has been clear enough and that there are rules a vailable so that we can analyze and look at in a little bit more detail than we've done today. We were planning to have perhaps incorporate in our Investor Day later this year in the autumn, where we do a little bit of teaching on these rules, how it will affect us, but maybe more importantly, how it will affect the market overall. What we're talking about is potentially mid-decade, a substantial part of the fleet will struggle to operate optimally and commercially. This is before there will be a zero carbon alternative available, right? That's the key.
Okay, fair enough. Thank you so much.
Thank you.
I have a question coming from online, from Andrew Lee from Jefferies. He asked that, "On slides 14 to 15, given the EBITDA returns, do you expect vessel prices to rebound sharply?
Yeah. Vessel values have already gone up, Andrew. Whether they will continue to go up or not will most likely depend on how rates develop going forward. I show these slides to indicate that we know we're close to the values we had back in 2010. That's 2010, these rates average for the year at those levels. So far, probably people are not 100% sure will rates stay there. They're not prepared to pay up. Maybe, again, it's the good design ships that people can see, also including these IMO rules coming. When we look at, we're still looking to buy ships, we are very particular about ships that we buy, we will only buy the most fuel efficient ships that we can clearly see can trade to 2030 with these rules in mind.
If you can buy a ship today that you are confident under these IMO rules you can trade until 2030, you have at least 10 years of trading. If you're making $4 million to the capital every year, that's a lot of money, if you think that you have many years at these levels. Yes, definitely more upside on secondhand values. Again, we're not predicting that a five-year-old Handysize will be worth $15 million. We just have to wait and see. It's only upside for us. It's all upside.
One last question for this Q&A session, coming from Nathan Gee, from Bank of America. Mats, do you see current spot rates as sustainable in the second half of this year, or do you think that current FFAs are reasonable pointing towards backwardation?
The FFA rates are fairly accurate in the short term, but the long-term value is not there in FFA. Just look at 2012 FFA rates are very low. Try to charter a physical ship at that level, and good luck to you. If you look at the physical one year time charter rate now, I think Frontline has a 61,000 tonner at $185 or something. Maersk has it higher than that, $195 or something. The FFA rates for Supramax for calendar year 2022 is like $125 or $13 or something like that. The physical margin is much higher if you go out one year or further. To answer your question, yes, we do believe that there's certainly a good potential for these strong rates to continue. Again, it's very encouraging to see rates going up now.
It's not one particular reason, you can quiz Morten on this, who is our most experienced and data intelligent person that we have. He looks at all these factors. It's not one factor, it's many factors, and it takes a long time to get to this level. We've suffered for many years to finally get into a tight situation. Again, I can only repeat that the demand outlook looks good with 6% GDP and 5% minor bulks. We know that the fleet will grow much lower than that. With those fundamentals, we can only say that, yes, of course there is a chance that these strong rates will continue.
Thank you.
Thank you once again, ladies and gentlemen. If you'd like to register for a question, please press star one on your telephone. Thank you. Once again, ladies and gentlemen, if you'd like to register for a question, please press star one on your telephone. Thank you.
Shall we go to Morten?
Sure. Now we will move on to supply and demand fundamental session. Mr. Ingebrigsten, please begin.
Yes. Good morning, good afternoon, everyone. I'm sorry that I'm not able to be in Hong Kong today due to COVID travel restrictions, but I'll do my best from this end to take you through the market slides that we have presented for you today. Starting with the overview, I'll go through this relatively quickly. A lot of this is covered by Mats already. As he mentioned, supply and demand balance improved. We have seen a vast improvement in the first quarter this year, and I think it's fair to say that we hit a tipping point evidenced by the increase in earnings. This is obviously not something that has happened overnight. As Mats mentioned, it's something that's built up over time, and at some point, the market simply just runs out of ships, and that's what we've seen happening in the first quarter when earnings reached 10-year highs.
On the supply side, we had the dry bulk fleet growth peaking at the middle of last year, and it has been declining since that time. We do have visibility for this for the next, I would say, definitely this year and also next year, and we can see that this will decline further as we go forward in time. The dry bulk order book is at a record low. As Mats mentioned, contracting is held back by the uncertainty of the future vessel designs and what is compliant when you look 25 years ahead, to meet emissions reduction targets. We'll talk a little bit more about that later on. When looking at last year, with the severe COVID lockdowns that we had, I think it's fair to say that the dry bulk demand was surprisingly resilient. It did drop a little bit.
Obviously, rates were lower last year than the year before. We have had good recovery and good growth in the first quarter of this year. Especially, again, as Mats mentioned, grain and minor bulks have supported the market. We've also had some assistance from the tight container market, where cargoes have shifted out of containers and back into dry bulk. Looking ahead, we have the normal seasonality applying to dry bulk shipping, which means that rates and demand is typically higher in the second half of the year. We also have the stimulus in the background that we think will support demand growth further into 2021. If we can move to the next slide, please. This is basically a repeat of what Mats mentioned, but I think it's worth talking a little bit around this.
We have rates at a 10-year high, and it's tempting to look a little bit at what happened in 2010, and why rates dropped at that point. That was, of course, when the deliveries of ships that were ordered in 2007, 2008, started to deliver, which of course, today is vastly different. Instead of having a high order book, we have a low order book, and we got declining deliveries. That's one key observation of the start when you compare 2010 to 2021. Also worth mentioning is that if you go further back in time before 2010, rates were significantly higher. I think it's wrong to say that where we are now is a unique peak that will not be sustainable.
Indeed, as Mats said, we have seen at the end of last week and earlier this week, that rates are beginning to come up again, which is very comforting to us. I think also when these things happen, people who have cargo tend to hold back when rates go up, and at some point, they have to show their hand and go out and get transportation for those cargoes, and that is also part of the reason why we see this volatile move forward. I will also mention here that we've been looking hard at data, and there isn't any specific single big reason why this is happening. The growth is spread across a wide range of commodities, and that is also helpful, and that also explains why Handysize and Supramax earnings have done particularly well this year. If we can have the next slide, please.
On the dry bulk order book, we have set out here the order book in percentage of the fleet, and as it stands as of the start of March, we had a 5.6% nominal order book for dry bulk carriers, and that is the lowest that it's ever been across this period here, going back to 1995. Also interesting is that if we focus on the four big major sectors of dry bulk, we find Handysize at the bottom at 3.5%, Supramax a little bit more, 5.4%, which is an all-time low for that sector, and also Panamax and Capesize at historically low levels, 6%. A little bit about the reason why there is a lack of ordering. Normally, in a situation where you have a bullish sentiment like today, you would have a lot more ordering and people going to the yards to book new tonnage.
That is not happening. There is a little bit of ordering, but nothing like what you would expect if you had a normal bullish sentiment like what we have today. It's also worth mentioning that it's not just the risk of having an uncompliant vessel, perhaps halfway through its 25-year lifetime, due to stricter environmental regulation and requirements. It's also the fact that these new designs, whatever you choose, whether you go for the intermediate solution which many people regard as LNG to more carbon neutral forms of propulsion. It's a lot more expensive than what you have today. It's not just the risk that you're taking by getting the wrong vessel and the wrong design, but it's also paying more for that in the process. I think this is holding back the appetite for more ordering. If we can have the next slide, please.
We have here a, I would call this a crude or broad-based annual estimate for supply and demand based on the forecast that we have from Clarksons Research. This is of course, on an annual basis. It doesn't actually explain what's happening on a sort of month-to-month basis or what is happening today, but it does give you a broader review that tells you in what direction the market is going. You can see here from 2020 on the left-hand side where we have minor bulk against the Handysize and Supramax fleet, that we have a positive balance with demand growing higher than supply is expected to develop. Similar for dry bulk, the total dry bulk, including all ships and all cargoes. We have a positive balance this year, and the spread remains positive also for next year and indeed widening.
One thing is forecasting demand, which in itself is difficult, but it's there in front of us, but I would add also that on the supply side, underlying this is not just deliveries, but also scrapping of vessels. Clarksons is forecasting that the scrapping will decline this year. Perhaps it will decline a little bit more than what they have set out. Sorry, decline a little bit less than what they have set out, and at the moment, we have almost no scrapping due to the strong market. I think scrapping is the variable that will determine the supply side as we move through 2021 and into 2022. Next slide, please. We have here four, the demand side split into the four sort of classic groups, grains, minor bulks on the left-hand side, and iron ore, coal on the right-hand side.
This is based on cargo tracking that we get from a company called AXSMarine. It is a tool that didn't exist a few years ago. It basically tries to identify what is on board vessels as they move from load port to discharge port. It's not absolutely perfect. The system is not able to catch absolutely everything that is on board ships, but for broad categories like these sort of big volume categories, it is reasonably accurate. We have tested this against our own ships, our own fleet, and our own trading, and we find it surprisingly accurate. I think as you drill down into individual cargoes, it tends a little bit more error, but at this level, we think it's reasonably representative. Starting with on the grain side, we can see good growth for this year.
Grain obviously is not a cargo that is driven by sort of industrial production, GDP, that sort of thing. It's more about crops, it's about people eating, it's about China having a more meat-based diet than before. All of this is supporting the grain markets. We've had this year a particular support out of the U.S. and also the beginning of the South American grain export season, which I'll get back to a little bit later on. Moving down onto minor bulks. The first observation to make here, I think, is that we had a particularly bad development due to the COVID lockdowns in the first half of the year, particularly around April and May, where things were dropping back. We've had good growth so far this year. This is where the sort of broad-based cargo growth is coming in.
I'll cover that in a little bit more detail later on. Iron ore is also growing. The feature of the iron ore market is very much about China. China is overwhelmingly the biggest importer of iron ore. We can see on the iron ore price, which we'll get to a little bit later on, that has increased substantially from bottoming in 2016. There is a problem on the supply side of the cargo. There's plenty of demand, and supply is struggling to keep up with the demand side. We have growth out of Australia, first of all, and also out of South America, which are still struggling to get back to the level they were before they had that disaster with the dam breaking in 2019.
We've also seen this year, due to shortage out of these traditional iron ore suppliers, increased volume out of India, which is very much a Supramax, Ultramax trade, which has helped the market as well. Lastly, on the coal side, I think this is the only cargo group that we could see a sort of a real COVID decline last year. You see the red line well below the two years before. We've had recovery in this in the last quarter of last year and continuing into this year. Coal is a little bit more political as a cargo than many of the other ones. It depends on Chinese policy on importing versus domestic coal output. It's also, for other countries, driven by the use of electricity, which is most of the coal volume, thermal coal.
We'll move on to the next slide, which deals more in more detail with the grain trade, which has been growing strongly. You can see here on the upper left-hand side, we have combined U.S. and Canadian grain, soybean, and soybean meal loadings, with a 57% growth in the first quarter based on these cargo tracking data that we have used for these charts. Very encouraging. We saw the U.S. coming back. We'll get back to that a little bit later on, but we saw that coming back again strongly in the second half of last year. We have the beginning of the South American grain export season, which started late due to late planting, but coming back very strongly with Brazil exports in March actually exceeding the level of last year, which in itself was very high.
Australian grain, which is really just grain, there's not much soybean oil coming out of there. The Australian grain exports this year have been very strong. We've had a couple of years with low exports, and this has increased substantially. It's not a huge, big trade when you compare the volume to the other ones, but it does have a significant impact in the Pacific region. That has been helpful as well. Black Sea is covered also, just to show also the seasonality of other parts. It's a little bit down this year. There is some export restriction coming out of Russia, where they prefer to keep more of the grain domestically to lower the domestic price. We should see a significant pickup in the second half of the year as the seasonality chart indicates. If we move to the next slide.
We have here four examples of commodity prices just to illustrate the strength of buying, if you like, what has been happening lately. I would start with the iron ore on the upper right-hand side. As it happens, we had a new high actually set yesterday at $188 per ton, which is the highest. We have to go back to 2011 to see anything similar. This is really just a sign of the supply of cargo not being able to meet the demand. There is talk in China about the Chinese steel production actually reducing this year. There is a sort of a policy to say that this will happening. Everything that we see on the ground tells us opposite. The steel production in the year to date is up 16%. China is short of steel. The steel prices in China have gone up significantly.
The margins to produce steel is positive, so the steel mills are incentivized to produce more. I would also add that China still has about more than 800 million tons annual domestic supply of low quality, which is due to be replaced at some point. By doing that, they will actually also reduce the emissions from steel making by using imported ore, which has a higher FE content, which again means that you need less power to convert this into steel. Corn, we have here as an example of the grain prices that have gone up significantly. A lot of that is due to increased buying out of China. We'll also get back to a little bit later on. Then lastly, we have copper as a representation of industrial metals. If we move to the next slide, please.
What we set out here is, again, using the cargo tracking data that we get from AXS. We thought it would be interesting to show you just how the year varies. If you split the trade and had it combined Handymax and Supramax, Handysize and Supramax trades by sort of oceanic basins. You have your Inter-Pacific, you have your Inter-Atlantic, you have trades going from the Atlantic to the Pacific, which is what we refer to as front haul, going in the other direction from the Pacific to the Atlantic, so-called back haul. In general, the biggest, the sort of largest group is the Inter-Pacific trading that you can see here with a 16 million tons increase in the year to date. We've also had strong growth out of the Atlantic.
I think part of that is due to some decline last year due to the COVID restrictions in Europe. That is coming back again. There's also other things like steel moving into Europe from other places and also the general recovery story, I think, is behind the Inter-Atlantic increase. What is interesting on the last two slides is the fact that the Atlantic to Pacific, the so-called front haul trade is larger than the backhaul trade. Ships are moving with cargo on a net basis from the Atlantic to the Pacific, and much less cargo going the other way. This cements also, it creates inefficiencies in a way. You have to move ships from the Pacific back to the Atlantic to carry the cargo, but you haven't got the cargo base to do that. This is all what we do.
This is what our chartering team is all about, getting those backhaul trades, moving ships to where they have to be, where there's loading going on, and making use of the differences between the oceanic basins. Can we move to the next slide, please? What we've set out here are the grain trades, and we focus specifically on U.S. grain exports to China. First of all, on the upper part of this slide, we have total worldwide grain loadings for China discharge, i.e. Chinese imports. This is based on loading data, so that's the basis behind it. You can see here that we had, I would say from April last year, we had significant growth in the Chinese grain imports. Part of this is soybeans, with the Chinese pig population coming back again after the African swine fever.
You've also got China branching into other commodities, other grains that they are starting to import that they have not imported before. Corn is perhaps the most prominent example, a lot of corn going into China. Also minor grains, more wheat. We've also seen sorghum. We saw last week a weekly export of 860,000 tons of sorghum to China, which is very unusual. It's the highest ever weekly exports of that grain from the U.S. to China, covering more than 30 data period. All of this is telling us that China is needing these grains. The prices are going up, and they are taking opportunity to import this from a variety of places, including, and most prominently, the U.S.
If we look at what happened in 2020, on the upper right-hand side, you can see that China increased its total grain imports, including soybeans, by almost 40 million tons, and the vast majority of that came from the U.S. If we move to the lower side, we focus here on U.S. grain loadings, specifically out of the U.S. for China discharge. In the year to date, we've had a 228% increase. It's from a low level because it's classically not the period of time when the U.S. is exporting grains. If you look on the right-hand side, we've had a 43% increase in that trade, 11 million tons so far, and the vast majority in total. The vast majority of that is coming out of the U.S. again. These are very strong grain trades that support the market.
If we can have the next slide, please. We take a little bit step away from the cargo data and look quickly at the Chinese minor bulk imports. This is based on customs data. It is not specifically on dry bulk carriers, but what the real imports, if you like, in volume is covering. We've got here 10 trades or 10 commodities that we are tracking with the China customs data. For the first seven, we have data covering the first quarter, and the last three are still waiting. That is another week before we have the data for logs, bauxite, and nickel ore. You can see here, for all of it except coal, we've had good growth on all of these. That is for the first seven. The last three, I would say, I fully expect logs to go up next month.
Based on preliminary data, that's certainly the case. Nickel ore is very much a trade these days that is driven by exports out of the Philippines, where you've had a rainy season, that should come back again. Bauxite is a little bit negative. It's mainly actually a Capesize trade, bauxite into China. If we can have the next slide, please. I talked earlier about minor bulks dropping back in 2020, particularly around the April, May period. Minor bulks is a little bit more difficult to cover because they cover a wide range of commodities. We thought it would be useful to dig a little bit deeper into this to show why we have that growth and what has happened this year.
The bar charts on top are basically the minor bulks divided into seven main categories, six more specific and one more general, which we've here referred to as others. This is a function of the way that the AXS cargo tracking system works. When drilling into the minor bulks, as I mentioned, it covers a wide variety of minor commodities. The deeper we dig, the more difficult it is to track. I think we can make some general observations a little bit behind the category that we refer to here as others. I think last year, one of the main reasons why we had a big decline here, 41.6 million tons year-on-year decline, was due to nickel ore.
Indonesia introduced, at the end of 2019, a ban of export of nickel ore, which was a trade which at the peak in the last quarter of 2019, was running at about 6 million tons per month. That went to an abrupt halt, stopped completely from 2020, and that explains the vast majority of the decline that you see in 2020 for the other category. There was also aggregates dropping back. You also had some positives. Bauxite actually, last year, was growing, and limestone as well. Generally speaking, nickel ore was a big feature in that decline. What has happened this year is you can see on the right-hand side, is that all of these cargoes, except for iron products, very small trade, and pellets, also very small trade, all of these have come strongly back again.
I would mention specifically nickel ore is starting from a low base, actually. Obviously, with the Indonesian exports being stopped, that has grown this year in the first quarter 23% up, based on preliminary numbers. Aggregates also, which dropped last year, has come back again. You've got manganese ore, you've got chrome ore, all of these are coming back strongly, which are a result of the coming recovery after the lockdowns last year. We also have break bulk, that on the right-hand side stands out with the high volume growth. I wanted to cover also quickly, touch a little bit on what also Mats mentioned, the moving of cargo out of containers and into dry bulk. It's very difficult to get data on this. The container lines are not talking about it. They don't want people to know what they carry in the containers.
I've been struggling to try and find a way to describe this or put numbers on it. I narrowed down on Chinese steel exports. It's a big trade. It's up to four or five million tons a month. What I've done here is to look at the total exports based on customs data and combine, compare that with what the AXS Cargo Tracking says on steel exports out of China. These are crude measures. We're using two different data series that have slightly different definitions. I think in an overall way, it is possible to see the effect that the strong container market has had. You see that the indicative portion share of Chinese steel exports that is carried on dry bulk was declining from, say, the middle of 2014.
Come the end of 2020 and into 2021, when we have seen the container market pick up strongly, that portion has gone up strongly. I think it would be misleading to say that it's exactly 70% as the end of this line here indicates. I do think it does tell us that there has been a shift of steel cargoes out of containers and into dry bulk. The reason this is happening is not just the cost side of moving things in containers, which has become more expensive, but also the lack of empty containers where they are needed, typically in China and the Far East for moving containerized, whether it's exercise bikes or computers or whatever, back to the Atlantic.
In the old days, when there was more slack in the container system, there were more empty boxes moving around that could be filled with dry bulk cargo, typically on container backhaul trades. That is not the case now. The containers are needed immediately in an empty state, and therefore means that there is much less ability and willingness from the container liners to carry dry bulk cargo and delay the whole empty container coming back again. The other part of this is obviously break bulk, which consists primarily of bagged cargoes. I think there has also been a move back to dry bulk out of containers. strangely, also logs. We have seen log exports from Europe into China absolutely exploding in the last few years.
Based on data for the first two months of the year, we should have March data in a few weeks' time, that has dropped back significantly, which obviously is helpful for our traditional log trades out of the U.S. West Coast and out of New Zealand, which we have seen strongly this year as well. Next slide, please. What we've done here is to try and look a little bit closer at the Australian coal exports, particularly due to the Chinese, well, policy is the wrong word, but the Chinese ban in some form or shape of buying Australian coal. The bar chart on the bottom with lots of colors shows you basically that whereas the total Australian coal loadings has held up, it's dropped back a little bit. It's held up relatively well.
You can see China, the blue bars at the bottom, basically disappearing during 2020. This has caused a shift in the way that the Australians export coal. They moved more into India, and also Japan has grown as well. You could see these sort of shifting patterns, which I've tried to illustrate on this chart. If we go on the upper two smaller charts, volume 2020 and the year to date 2021, you can see here that China, in both cases, has dropped back. It dropped 25 million tons in 2020, and so far in 2021, year on year, it's dropped 16 million tons. Others have been more scattered in 2020, but in 2021 it's up.
What is interesting about this is that if you try and convert these data into what has been carried on what ships, which is what I've tried to do on the right-hand side. I've got again 2020 on top and then year to date 2021. Instead of measuring volume here, we have measured the days on which these ship types are carrying Australian coal to whatever destination it is. Obviously, if it's more volume, then you have more days, you have more ships, and also if it's a further distance, that also adds to the number of days that ships are employed carrying Australian coal. We could see in 2020 that both Panamax 65,000-120,000 tons and Capesize 120,000+ tons , both of those dropped by 4%-9% indicative based on these cargo tracking data.
Whereas Supramax 43,000- 65,000 tons actually increased by 41%. It's not a huge trade, but you could see the way that the trade is shifting partly as a result of the Chinese absence as a buyer that has pushed cargo onto Supramax, Ultramax ships. The same happening in 2021, year-to-date, year-on-year comparison. Here we have a 9% drop in the number of days that Panamax has carried Australian coal, little bit less drop for the Capesize. Again, Supramax, Ultramax cargo days with Australian coal has picked up. This is an example of the way that even though the trade in itself is dropping, you have shifts within the trade that has benefited, in this case, the Supramax and Ultramax bulk carriers.
Apologize for this being a little bit of a busy chart, but I hope I've been able to explain it reasonably well, what the thinking behind it is. Finally, we got to the last slide, which is about looking ahead. As mentioned, we have a tighter supply-demand balance, and we can see that to create a volatility. This is something that you would expect to see happening when you have a tighter supply and demand balance. We think that we will have rates moving up. It's not going to always move up, it will move down again. You will have this happening from a higher base level.
That I think is what we've seen just these days, when I think many people, particularly on the cargo side, expected rates to crash down again to what they were a couple of months ago at the beginning of the year or perhaps last year. That is not happening. It's starting to move up again. That is part of the volatility of a higher base level. We will have the net fleet growth continue to decline. I would mention again, perhaps we're not going to have quite as much scrapping as what Clarksons is indicating, but even so, we will see a declining trend for the fleet growth going forward. Dry bulk cargo volume has a seasonal boost effect later in the year. There's always more cargo moving in the second half of the year when you have higher earnings.
That should be happening this year as well. We also have, obviously, a widespread stimulus that continue to support dry bulk trade. We saw also, I think in March, we had a new eight-month high for U.S. steel imports. They're also importing actually lumber from Europe these days. There are things that are happening on the back of the stimulus that will take us to the next few years, I'm sure. We also obviously have the lockdowns, the COVID recovery happening. Over here, we are still very much locked down. This will turn back into a more normal economic development later on, and that should be supported as well.
Lastly, just to drive down again the point about high new building prices and risk of getting the wrong design where you find halfway through your new building's life that it's no longer compliant and fit for trade with new emission standards and regulation coming in. I think the only thing that is fair to say is that we're not going to have less environmental pressure. Actually, I think it's going to be more, and that I think is seen by many in the industry, which is why people are holding back and putting their bets on the next 25 years based on the old design with an oil-based propulsion. That, ladies and gentlemen, was the end of my presentation. If there are any questions, I'll be happy to address that.
Thank you. We will now begin our question and answer session. If you have a question for any of today's speakers, please press star one on your telephone keypad and you will enter a queue. After you are announced, please ask your question. If you find that your question has been answered before it is your turn to speak, please press star two to cancel the question. Again, please press star one if you have any question, or you can raise questions through the online platform. Once again, ladies and gentlemen, if you'd like to register for question, please press star one on your telephone. Thank you. We do have a question that comes from James Teo with Bloomberg Intelligence in Singapore. Please go ahead. Thank you.
Hi. Thank you, Morten. I'd like to find out more about this seasonality that you mentioned. You mentioned that, I think, going into 2021, especially second half, I believe, there will be stronger seasonal trends. What are some of the seasonality that we expect? Is it from particular cargos like grains or something else? Could you elaborate a little bit more on that? Thank you.
Yeah. Hi. Thank you, James. That's a very good question. I would say generally, it is something that we see in any sort of normal shipping year. You always have sort of a higher, the peak of the earnings typically is in the third or the fourth quarter, around that period. I think iron ore is a prime example of that. There typically is more iron ore moving in the second half of the year. Part of that is due to Chinese pre-winter stocking. Part of it is also due to more rain and weather issues in the first part of the year out of Brazil and also out of Australia. That is definitely a driver. You also have on the coal side, the beginning of the heating season, when more coal is needed. You have also the pre-winter stock-up.
On the grain side, you have U.S. exports kicking off from September, October. Typically, that peaks around October, November period. Last year, we had a very strong also December. Typically, that should be more sort of an October, November story. The similar can be said for many of the minor bulks. They just move in greater volume in the latter part of the year. Also, just on the seasonality from a market perspective, there is also more ships delivering in the beginning of the year, even sort of disregarding the trend, whether it's moving up or down. There is always more ships delivering at the beginning of the year. This is what we refer to as the sort of new year effect, where owners prefer to get the ships delivered in January with a new delivery year, rather than in December or even November with the previous year.
All of these are things that play into the seasonality for dry bulk cargo. If you look at the grain side, you can see here also strong growth out of the Black Sea, although it's a smaller volume than North and South America. These are also drivers that help to explain the seasonality.
Okay, great. I have an online question coming from Nathan V. from Bank of America. This question relates to U.S. stimulus. Do you have any thoughts on what materials the U.S. would need to import via dry bulk ships versus materials where U.S. has sufficient domestic supply or where materials can be imported via land from Canada or Mexico?
From my point of view, I think it's two sort of main groups that I would put that into. One is cement. U.S. has cement industry, but it is polluting, and it's difficult to get permission to make new cement capacity in the U.S., and that is something that I could see could be a driver once they start employing the funds that they have sort of politically put in. This will take a little bit of time. It doesn't happen overnight. I can see cement and cement clinker being one of those cargos, and also steel. Steel is sort of political in the sense that there has been support in the U.S. for sort of putting trade barriers up to support local industry.
I think that can only go so far, and at some point, they do need the steel, and that will encourage them to import more steel, particularly from the Far East. There is obviously some trade going over from Canada, but it's not huge. I think once this gets going, we will see steel imports into the U.S. picking up. Perhaps not sort of the advanced expensive steel, but more steel driven towards construction, which is the sort of simpler stuff you get out of places like China. As I mentioned also briefly I saw a headline, I think last week, saying that the steel imports in the U.S. hit an eight-month high in March. I haven't seen the data yet, but it will be interesting to see where that is coming from, and I expect a lot of that is out of the Far East.
Thank you for that. One last question coming from Andrew Lee from Jefferies. He has a two-part question. The first question, from the different commodities, which area will you see strongest growth, whether it be grain, iron ore, coal, or minor bulk? The second question being, and which are you most concerned of? Sorry, third question, container building new orders have been increasing, how is their logic different from the minor bulk sector?
I'll address the first question. I'll maybe come back and ask you for the second one. I didn't quite get that, but I'll address the first one initially. I think grains will continue to grow. I think it's not just a sort of a crop issue where you have some good years and some bad years. I think there is genuine driven demand out of China based on the shifting of the diet towards more meat-based and less vegetables. We can see that happening. The swine population is still growing. I think also it's difficult to get a real sense of what is happening in China when it comes to grain. I think what we're seeing with these sort of huge purchases of corn particularly, but also, what I mentioned also, sorghum, which is not a huge trade, but it is very much dominated by China.
I can see that happening going forward. I think minor bulks, a wider variety of cargos. It is very much sort of recovery driven. I think that we will have industrial demand for these minor bulks. I think that will continue, not just in China, but also outside of China as the recovery moves forward. Many of these sort of other big importers like Korea and Japan, have still not got back to where they were pre-COVID, I would say. There's still a potential for that to increase. Iron ore, I talked a little bit about. I think China will continue to be driving this, not just to produce more steel, but also to shift away from the more polluting low Fe ores that they still employ in sort of relatively large quantities that is due for replacement.
We also see China investing into, despite saying that they intend to produce less steel this year and next year. We see that they actually are investing into new mining capacity where they can. In Africa, there's also apparently in Morocco, there's a project to try and develop a very expensive iron ore deposits there by Chinese sort of investment. all of these are things that tells me at least that there is still plenty of demand for iron ore going forward, and not the least the high iron ore price is telling us that. On the coal side, a little bit more difficult. As I mentioned, it is a sort of a slightly more political cargo. China continues to rely overwhelmingly on coal to produce electricity or produce power.
Whereas you have alternative sources of electricity, wind, solar, nuclear, that sort of thing, growing at high percentage levels, but from a very low base. Even if the percentage levels are high, China continues to be reliant on coal, and we have seen that this year, particularly in the March figures for hydroelectric power, disappointed, and China has to turn into coal. How much they prefer to import, and how much they prefer to source domestically, is difficult to say. Traditionally, this has been a price issue. China imports coal not just because they're needed, but also as a way to control the domestic price. Coal prices have been increasing, and that should mean that they will be opening up the tap a little bit more to make sure that the domestic coal pricing doesn't run away by simply just having more imports.
I think coal is on the way down in Europe. I don't see that really coming back, but I can see in the Far East that there is still potential for coal trade to grow. I would say out of the two, I would still point to grains and minor bulks as the most promising, which is what we've also seen so far this year. Can you repeat the second question?
Yeah. I think Peter will take on the last question for that part, which was, container new building orders have been increasing. How is their logic for new build ordering different from ours?
Yeah. Morten, obviously, you can add to this, but the dynamics of dry bulk and container shipping are quite different. What we see at the moment on the container side, and by no means we're experts on this, so we're looking at this from the outside. We are seeing orders for large vessels, which are not necessarily readily available to container guys in the secondhand market. In dry bulk, we are fortunate. Every type of vessel, more or less, is available in the secondhand market. If you recall last time we ordered ships, which is early part of the last decade now. We did that largely because at that time there weren't large heavy ships available in the secondhand market, so we needed that size to meet our customer demand. Since then, we've not felt that need in dry bulk.
That goes for a lot of other dry bulk, most other dry bulk owners as well. We can't find the vessel type that we need to service our clients. In the container market, that's not necessarily the case. They need to order ships to service their customers because they don't have the sizes. Also, container ships are obviously very large, generally speaking, and in many cases, it's easier to retrofit these with more future-proof fuels than we can do on bulkers, especially smaller bulkers as well. I think a lot of the container guys, their market is more concentrated. They're fighting for market share in a completely different way from what we're doing. We're not fighting for market share necessarily in dry bulk because it's so fragmented. Whereas it's more concentrated there, so they're fighting for market share.
They don't want to wait to find the perfect ship five years from now that they can invest. What they want to do is they order a ship today that they feel they can retrofit or use future-proof fuels on down the line. They feel more comfortable about that for technical reasons as well. I think those are some of the different aspects between the industries. While the container guys feel that they need to add particular sizes for capacity and the competitive dynamics are slightly different. It doesn't mean that there won't be a slight increase in ordering in dry bulk. We make it sound like there won't be any ordering, and that's not correct. There will be ordering. We are seeing orders coming in, but not similar to what we've seen in recent market spikes, I should add.
It is much, much more muted than it has been in the past. As Mats said before, knock on wood, we hope for that to continue. There will be some orders. Peter or Morten, if you want to add anything on the container segment, please feel free to do so or anything else.
Yeah, no, I think just to add, the container order book basically was dropping from 2008 basically until the mid-second half of 2020. It dropped nominally back to 6% of the fleet, which doesn't sound that low, but actually that is substantially lower than what has been at lows in the past. If you go back to the period from 1996, it never dropped below 15%. Container order book historically was much lower than what the lows have been in the past. Therefore, I think that sort of spurred them on to ordering more. Whereas dry bulk has just recently dropped back to the lows that we had in the '90s and early 2000s.
Yeah, I think we've never been low down, yeah.
Yeah. The other side of it is also the deliveries. The container deliveries have dropped back to about just under 3%, whereas in the past, it never sort of really dropped much below. I think in the 1990s, it dropped back to about 6%. You have sort of record low actual deliveries out of the yards, whereas bulk carriers, looking at the last 12 months, we're about 4.5%-5% delivery pace. We've been lower before. We have been down to 3% in the past. We still haven't sort of breached the lows in terms of deliveries. I think lastly, also, bulk carriers are less profitable for the shipyards. It's much more difficult for them to make money, particularly on smaller ships, and that makes it more attractive for them to get orders for-
Yeah
containers.
Yeah. There seems to be a stronger strategic rationale to order container ships today. There is no strategic rationale to order dry bulk ships today. I think there is a difference. Time will tell.
Okay.
Thank you. As time is running short, it is the end of this session of Q&A session. Now we will have a 10 minutes break, and the call will start again at 4:25 PM. Thank you.
[Break]
Mr Brrar , please begin.
Thank you very much. As Mats says, this is the market we've been waiting for. If I can go to the first slide, overview. I'll be discussing the Pacific Basin business model again with a chartering sort of overview. A little bit update on the chartering market, as well as what's happening in the two basins, the Pacific and the Atlantic basins. We'll talk about cover, explain a little bit about the backhauls and how the backhaul cover actually works, and give you a conceptual model on when we need to lock in front haul cover. When is the right time? It's a conceptual model. I'll go through fleet optimization, what we are doing at the moment, and then wrap up with the TCE outperformance discussion, and we'll have the Q&A questions after the session. First, can we again go to the Pacific Basin business model?
Our business model has been refined over many years. In the longer term, we are able to generate a TCE earnings premium over market rates because of our high laden percentage with minimum ballast risk, which is made possible by combination of fleet scale and interchangeability. With the Handysize fleet, we are trading up in size and getting younger ships as well. With Supramax, we are growing their fleet in number and size as well because the newer ships coming in are larger. Overall, we have a versatile ships in our fleet, and the trade that we do as well is diverse in minor bulks, with a large proportion of own fleet. The reason for that is the large proportion own fleet means there's low fixed costs, and that is super important in this market. We also have experienced staff and global office network.
We've discussed that over and over already, so I won't spend too much time on this, but we operate globally. We connect with the customer locally. We speak the local language, and we are in the same time zone as our customers. Importantly, we will discuss about the backhaul later on. We need to position the fleet where our customers want it. The arbitrage, the cargo position with multi-dimensional requirements, the size of ship, location, the type of ship, the time, the duration of the voyage, and the values we can get by positioning those ships. Also, we want to make sure that we honor our cargo contracts, and this is part of positioning the fleet.
In order to get the maximum of our cargo contracts, we need to position the fleet to where the customer wants it and where the relationships and the direct interactions with end users are. This allows us to strategize where to position our fleet. As Mats earlier on mentioned that the Handysize fleet is larger in the Pacific, and the Supramax fleet is larger in the Atlantic in general. Also, we discussed about ongoing optimization process. In terms of technical, we're doing a lot of speed management and fuel consumption. That is so important, especially with the sustainability requirements coming up. Operations, in the operations team, we're doing ongoing processes and cargo care. For chartering, we are improving contract clauses. The higher market allows us to discuss the contract clauses that we had to swallow early on because with the poor markets, we didn't have much leverage.
Now we do. We're focusing on improving our port stay management, trying to reduce and find the areas where we can improve that and simplify our systems and processes. What's also important that we are doing is the data analysis including big data and small data, the data that's already in our systems. I think it's worth mentioning again, the chartering market, the positive TCE trend is continuing. If you read the line at the bottom, last year, the core fleet P&L breakeven, including G&A for Handysize is $8,720, and for Supra, it's $10,120. As you can see, the current market is substantially above that.
The trend is definitely in our favor at the moment, and according to our view, with the demand and the supply situation, it may last a lot longer than we originally thought earlier this year. In terms of the chartering market, Morten has spoken about the big picture about demand, but I like to spend a bit more about the underlying demand. Firstly, quite important to what we're seeing on a day-to-day basis in the chartering desk globally. Firstly, it's a strong synchronicity in this demand in almost all global markets. I will discuss later on one market came a bit later in the Pacific, and when that came in, the whole market got a really big boost. What we haven't discussed is the decontainerization from box into bulk.
The MPVs who used to compete with the smaller Handysize ships, they are largely out of the dry bulk sector because the container market is much more heavier, much more better paying. The decontainerization of box into bulk, I'm getting calls now from people I haven't spoken for 15 years, because they want to come back to bulk because they can't get containers, they can't get enough containers, they can't get containers to arrive in time for their customers. The issue is we don't have a firm number of how much cargo is actually moving to bulk, but certainly the anecdotal experience at the desk globally we're hearing is strong. There is a lot of movement from box into bulk. The volume wise, we don't have a clear handle on it. The third point here is the Pacific spring cargo, the Indonesia China coal demand.
Initially, I wrote here in this presentation, it may add fuel to the demand story, and you probably remember seeing Morten's presentation where he said the coal was down in the first three months of the year. We're now seeing a lot of demand coming up. The big demand in this spring cargo, it comes in and out, which is almost impossible to predict. It is back, and you can see also the Chinese coal prices going up. a lot more demand is coming up from Southeast Asia, from Indonesia into China. the market is strong despite many ships speeding up. that is a very, very positive sign. Also, some inefficiencies we're seeing in the trading pattern. Firstly, crew change crisis. Many ships now have to divert to Manila, sometimes some other ports, including Guam as well.
We're seeing quite a lot of ships diverting just to make sure that the ship can get their crew changed, and the old crew gets on rest at home with their families, and new crew gets some employment to earn enough money to send back to their families. Vessel quarantine requirements, it's a big disparity in different ports. Even in Australia, some ports allow to berth without a quarantine, some ports don't. In China, same thing. Some ports have the limits, some ports don't. Those requirements make it more complicated. Of course, the China-Australia trade dispute. That's been going on for a long time, and there's numerous reports on how many ships are still waiting in China. The last I saw was 36, but we don't really have a firm handle on actually what that number is.
the issue is, the Australian coal going to China is no longer there. Australian logs going to China is also no longer there. That's causing a lot of inefficiencies in trading patterns, and it's really helping demand. In the front haul trades, in the Pacific, we see very strong demand in the Indian Ocean, in Australia, in New Zealand, and the Southeast Asian market. North Pacific is the last to join this demand story. it only started in the last week, so all the key markets now in the upswing. In the Atlantic, market turned positive after just a few weeks of slight weakness, I'll call it. certainly it dropped from where it was in earlier March, caused by the U.S. Gulf grain season concluding, despite the highest fleet counts of Handysize and Supramax ever in the basin.
We'll go through the fleet count later on as well. Backhaul trades, our customer requirements really are in the front haul regions. We need to make sure that we position the fleet to capture the large front haul premiums available, especially in strong markets. Also, the cost to position a ship on a backhaul voyage is reducing significantly. In my view, this is a fantastic opportunity to capture strong backhaul rates and then capture the front haul positioning, which is bringing a large premium. The alternative, of course, is to go empty, to balance in empty, and we very rarely do that. We are 90% utilization rate. In terms of fleet positioning, also, we use a dynamic approach in pricing and positioning our fleet in Atlantic and Pacific for both Handy and Supra.
The Indian Ocean is becoming a premium trading area as well because it's being pulled by the two strong basins. Both the Pacific and the Atlantic are pulling it, and that's creating a huge dynamic where ships can go almost anywhere, and depending on where the highest return is for that ship at that time. As a global operator of the two basins, we can trade anywhere, anytime, at any duration. I'd like to go through this next slide now a little bit slowly. If you have a look at the top two graphs, you notice the first quarter, there is a big Atlantic premium for both Handy and Supra, for the 38 and the 58. The Atlantic premium dropped dramatically in the last few weeks in April and started in late March. Similarly for the Supra as well.
The difference is now $6,900 between the Handy at Pacific paying more than the Atlantic, and similar for the Supra as well. This is a very, very rare occasion. I think it's probably a 12-year high where we've seen. Just to recap again, in quarter one, Pacific didn't gain as much as Atlantic. We improved, but we were always behind the Atlantic, and that's reversed dramatically in the last few weeks. Why is that? If you look at the top two graphs, you see the record high levels of the Handysize ships in the Atlantic, and you look at the very low levels of Handysize ships in the Pacific. If you look back into the last year, which is 2020, if you look at the red line, you see the Atlantic fleet size growing.
In terms of the Pacific, the fleet size reducing, the number of ships in the Pacific reducing and the Atlantic growing. Eventually that just went up because a lot of owners wanted to position their ships in the Atlantic, which is what is causing this sudden disparity. In terms of Supra, the story is almost the same. You can see the large amount of Supramaxes in the Atlantic, and in the Pacific, only slightly higher than normal. Despite all this, the market is actually still quite strong. In terms of cargo management, I'd like to spend some time to explain the front haul and backhaul, just in case some analysts here need for me to go through it. The best example would be the, for example, if you look at Tokyo and Vancouver in the chart.
Vancouver going to Tokyo is actually from the North Pacific going into Asia. That is a front haul. That is where the majority of the cargo is. From Asia back to Vancouver or North Pacific, that's a back haul. Not many cargo go back that way. The direction front haul means it's more cargo going in, coming out of Vancouver and that region into Asia, and less cargo going back. A normal cargo system comprises of one ballast leg, which is empty, and one laden front haul. We try to combine the back haul and front haul cargoes in order to achieve high utilization and outperform the market in the long term. How is it calculated? In fact, I put in a calculation here, which I try to make it as easy to understand as possible.
In a $10,000 a day market, the backhaul voyage will be discounted, and assuming this voyage is an average of 35 days, the discount of $100,000 on that voyage. Instead of a $10,000 TCE, you earn $7,143. The front haul, on the other hand, similarly, because of the position value, you gain $200,000 for similar average duration of 35 days. The TCE for that voyage is $15,714. On a round voyage basis, because you've given up the position value of 100,000 before and gained 200,000 at a front haul place, you're left with $100,000 premium. If you divide that by the total duration of 70 days, you get about 1,429, and that is our premium. That is better than no backhaul. That is better than going empty. We go to the next slide. This is a perennial question. When to lock in cover?
The conceptual model is that in the low markets, we do tend to do spot business only, and if we see the market picking up, we start looking at longer term COAs, longer term cover. At the top of the market, if you can find somebody who can say, "This is the top," of course, we don't know that, but we feel that when the market is quite strong, it's time for us to take a longer term contract of cover. On the other side of the cycle, when it starts dropping, we can still take medium-term COA at decent numbers, but when it starts to come down, we need to start reducing our charter in exposure and just go spot, and keep playing on the front feet.
We watch the cycle very carefully, and we stay close to customers, and we take cover as they come step by step, choosing shorter term cover when the market is low and longer term when the market is higher. We continue to position our ships to where our customer base requires us. The fleet. Customers like the fact that we have the scale. We turn up when we say we will. Overall, Mats also mentioned the total fleet we have is 117, with 16 long-term chartered in, 138 short-term chartered in and total of 271 ships in our fleet. We've grown a large owned fleet, which of course has lower fixed costs. We are continuing to reduce the long-term chartered ships.
strategically, we are topping up the short-term chartered in ships to allow for higher vessel utilization to help to position the ships and make sure we have enough ships if we anticipate a larger requirement, larger demand out of a certain region. We can start positioning ships into that region before the market comes up. It also allows us the ability to execute on arbitrage opportunities. Of course, we maximize TCEs by optimizing our vessel position. Part of this discussion also is that we also have some optionality on some long-term charters to extend them. It's in our option, well below current market rates. This is a big potential upside. We do operating activity to opportunistically capture value in the market, and customers always look for strong counterparties with large in-house and owned managed fleet who can meet the obligations in all markets.
We have the low fixed costs. This is really the key part here. Low fixed costs, a very good fleet, in-house managed to really benefit from the stronger market. In terms of what is our core business and operating activity, so Peter will talk about it as well, but I wanted to clarify what is core business. It's contracted cargo and spot cargoes on owned ships, long-term chartered ships and short-term chartered ships carrying contract cargoes. The cost of our business there is largely fixed, and we also disclose it. The key thing to measure here is the TCEs per day. We have significant leverage and profits in strong markets as we're seeing it now, and maybe this market has legs. It might last for longer than just a short period of time that we think it is. We think it's going to be long.
It's an asset-heavy business model. It's predominantly our own crew, quality, safety, cargo care as well. The customer wants his cargo to arrive in the destination in as good a condition when he loaded the cargo. It enables us to sell our reliability cargo, be a first choice partner for our cargo contract partners, and also it provides brand equity, brand name value in the industry. Currently, it's about 80%-85% of our total vessel days. About 15%-20% of the vessel days come from the operating activity. That's short-term ships carrying spot cargoes. The cost, of course, will fluctuate with the market, and key measure there is the margin per day. It can generate profits in weak markets. That's very important for our business. It's why we do it, and can be a bit more challenging and risky in higher markets.
It's an asset-light model with third party crews, quality, safety. It's harder to control quality. allows us, though, we actively participate in this side of our business is because it allows us to enhance and expand the service to our customer, because we might not have a ship in place when our customer requires it, but we can pick a ship up from the market to execute on that cargo. in terms of TCE outperformance, wrapping up really, our outperformance has been developed over time to primarily optimize in lower markets. Now, we are quickly changing it to readjust to optimizing higher markets and using our low fixed cost base as a tremendous strength. There will always be a lag in both rising and falling markets because we fix ahead of time.
If it's a rising market, we fix now and two weeks later when it's being executed, there is a lag in that. Similarly, when the market comes down, we always get a much better number, a much better TC than a falling market. With the rising market, there is a lag. The market dynamics itself necessitates re-optimization of routes. Key part is, for example, like NORPAC was weak for early part of this year compared to the rest of Asia. Still very strong, but compared to the rest of the Pacific, it was weaker. We dynamically adjusted the fleet and kept more fleet in Asia rather than open in NORPAC. Now it's up, it's increasing again. We adjusted that. Our fleet interchangeability together with in-house management, global office network, positions us to capitalize on cover opportunities.
Customer service levels of fleet size also allow us to offer an unprecedented opportunity to lock in solid, profitable TCE over long term. The backhaul business for us leads to higher utilization rates, which in turn leads to long-term outperformance. As I mentioned before, the alternative is go empty. We choose to backhaul our cargos in order to get a better margin. Next, if I can remind you again, Mats said this is a market that we've been waiting for. For a chartering, this is a market every chartering manager in Pacific Basin has been waiting for. We look forward to seeing this market go through the next coming few months. For any questions for the Q&A session.
Thank you. We will now begin our question and answer session. If there's a question for any of today's speakers, please press star one on your telephone keypad and you will enter a queue. After you are announced, please ask your question. If you find that your question has been answered before it is your turn to speak, please press star two to cancel the question. Again, please press star one if you have any question or you can raise your question through our online platform.
I have a question coming from online from Deepak Maurya from HSBC. He asks, "How long will we continue to see container cargo moving to bulk ships? If the shift continues, what impact could this have to rates for dry bulk?
Of course, we don't know the future, but from what I can see, basically the container guys are reporting a high market for rest of this year and maybe substantial part of next year as well. This could continue for much longer than initially thought last year. Of course, we don't know the future. We think there's this market has a lot of legs. The container demand is very, very strong. New ships, as Peter mentioned early on, it will take some time, two, three years to come. The longer it comes is better for us.
Once again, ladies and gentlemen, if you'd like to register for question, please press star one on your telephone. Thank you.
I have one more question coming from online from Nathan Gee from Bank of America. He asks, "What is your strategy around forward contracting now? are you prepared to secure medium, long-term COAs yet?"
Thank you, Nathan. Yes, we are ready to fix long-term and medium-term. The real change will come when the market feels that this sustained highs will be here for longer term. That's when we see a sustained push by our customers to fix longer. At the moment, the market's only risen and our customer base, I think every customer base in the dry bulk business don't yet have a belief that this market will stay. It'll need some time, and we look forward to seeing that time. Usually, the contract season is in fourth quarter, so it could be later this year.
A question comes from Andrew Lee from Jefferies. He asks, "Do you know any other commodity types that are currently being decontainerized and moving to the bulk side?
I've heard of the grains. There used to be a large grain shipment out of Australia in containers, and also heard of logs. Actually, third thing is I've heard of steel being moved out of containers into bulk. Those are the three cargos I personally heard, but I'm sure there's others as well because Sorry, timber. That's a demand that I've got from my old friend 15 years ago, who contacted me because he can't get containers for putting his timber in anymore. Based on, I think there's a big swell of demand that's unmet there, which will come to bulk. Volume details, it's too hard to get.
I don't think, if I may add, we should overemphasize the importance of it in the overall market context. This is a help, but it is not one of the bigger drivers of the current market strength. Things like Chinese continued strong import of corn, the quality and size of the Latin American grain exports will have a far bigger impact on the market. This is a very nice to have, don't get me wrong, but it's not-
It's not a key driver
it's not a key driver at all. Yeah.
Thank you. We do have a question here, and that is coming from James Teo with Bloomberg Intelligence. Please go ahead.
Hi. To follow up on the question earlier on forward cover management. You mentioned that you are open to medium and longer term contracts now and maybe that's heavily in the fourth quarter. What length of contracts would you be referring to by medium and long term? Would you be aiming to secure, say, 50% or more of 2022 cargoes then? Could you give us any guidance on what you're looking at in terms of length and percentage that you would want to or target to aim? I know you said that the market's not quite ready yet, but assuming that you can by 4Q, what would be your targets like?
Yeah, I think it's too early to mention a target because it's driven really by our customers and the market as well at that time. We can't really share that because it's entirely dependent on many, many factors, customers, competition as well. We haven't mentioned that, but there will be competition, not just because the basin will be keen for that. We're not in a position to say anything at the moment.
In terms of the length, what is medium and long term to you? Is it one year? Is it two years is long term, or could you elaborate a bit?
There's also a defined definition, right? we think under three years is medium term, and longer than that is long term.
I see. Okay. Thank you.
Thank you. Now we will move on to the forecasting our business session. Mr. Schulz, please begin.
Okay. Thank you very much. I'll just wait for that camera to come to me. Good afternoon, everyone. I will just have a very short session on two topics. One is how to forecast our business. You recall that we changed the disclosure last year, and we went through a lot of teaching on how to look at that. We thought it'd be worthwhile just to repeat the key methodology on how to look and analyze our business so that if you just take a view on TCE, you can get our underlying profit almost on the dollar. We think that is very helpful. We will go through that again and reiterate how this is done. The second area I wanted to cover is a little bit about capital allocation, because we get a lot of questions about that.
It's also, of course, very topical as should the market continue to rebalance in our favor, our cash flows will strengthen. What do we do with that, right? We'll cover those two topics quite quickly, and then we'll take a few questions if there are any. If you turn to page, I think number 15. Surinder went through what the core business is and what the operating activity is, so I don't need to reiterate that. What I would like to say, though, that sometimes confuses people a little bit, is that we have short-term ships which are not operated. The key to understanding these, what we call core short-term ships, is that we put them into our core business, and we deal with them. We bake them into our overall TCE, and that's the key thing to remember.
if you actually turn to the next slide. There's a lot of text on this one, but the core business is, as Surinder has mentioned, is to optimally combine our owned and long-term ships with cargo contracts and spot cargoes. the purpose is to achieve the maximum TCE. in order to achieve this optimization, sometimes an older long-term charter ship is not optimally available to carry, say, a contract cargo. we will then use a market ship, i.e., a short-term chartering ship, to carry that cargo. we do that so we can optimize our whole trading system. The way we deal with that ship in our disclosures is that the margin on that ship, the difference between, say, the voyage rate and the time charter rate, is simply added on to the TCE of the core fleet.
we don't disclose separately the cost or the revenue on those ships. They are baked into the core TCE. That's important to remember. The operating activity is in a way completely separate. These are short-term ships for spot cargoes. We do this. This is sort of an opportunistic business. It's a business we engage in to make sure that we are not complacent, that we are always in the market. It's also a business where the market is going up or is going down, we have the opportunity to make a good return. The core business has the operational leverage costs are fixed. Market go up, we make more money, market come down, we make less money. In the operating, the idea at least is over the cycle, we can always make money on this business.
It is worthwhile pointing out, though, it's always a bit more difficult to make money when the markets go up a lot like they have recently, and you see that in our disclosures as well, that the operating have not had particularly high margins in the last quarter, et cetera. That is because I think we always then we match it with the ships. If ships are getting progressively more and more expensive, the margins are squeezed. You saw, for instance, last year when the situation was different, the markets were coming down like this. Our operating margins increased a lot because we took cargo and then we got cheaper and cheaper ships that we could use. Simply thinking, right? Those two businesses, remember the short-term core ships sits in the core business, but we only bake it in as a margin.
At the bottom of this page, you see the calculation of our core TC, which is the revenue we make on owned and long-term chartered ships, plus the short-term core ships with margin over the number of owned and long-term revenue days. If you want to model our business, you never have to worry about how many short-term core ships do we have? What's the margin on those? Are you losing money? Are you making money? It doesn't matter from a modeling perspective because the TC that we give you includes all of that stuff. The operating activity, even simpler, basically the profit on the operating ships over the number of operating days. Very simple. Simple margin business. If we move on to the next slide. This is the very simple way of estimating our underlying results.
The only thing that is highly variable here is the core TC that we earn and the operating margin. The cost, the G&A, the post-Panamax contribution, they're all prefixed. If we go through it from top to bottom. For instance, to calculate our Handymax contribution, you take the core TC, which we disclose. You multiply that with the owned and long-term charter revenue days, which we also disclose. Then you have your revenue in that business. You need to deduct the cost, which is a blended cost, times the owned and long-term chartered cost days. All of those are also disclosed. The uncertainty here is what's the core TC going to be? It's important to remember, it's not always as simple as just taking the long-term cover, because as Surinder has explained, often that is backhaul heavy.
That is where we invest a lot in these ships. We call it investing. We're taking a cost, a positioning cost, to earn the high transport going back. Often, we're almost in an extreme situation at the moment because the market is so high and many of our long-term COAs, which form part of our backhaul cover are much lower. The difference between the cover and what we will actually achieve later on is quite large, and I think you've seen that when we disclosed sort of covers for forward quarters recently versus what we then actually achieve. I think you'll see a quite big difference. Handymax and Supramax both work in exactly the same way. You can add those two up. You add the operating activity. You need to make an assumption.
Well, we provide you with a margin and the number of days, because historically, you have the information. You need to make an assumption about what the operating margin is and how many operating days we will have. This will fluctuate, of course, in the days less than the margin. What we're trying to achieve is a profit over the period of time, in a way, not shorter than a year, right? You can't measure this business on a quarterly basis, because sometimes you have to take positions and all these kind of things. It's trying to optimize it over a slightly longer period than on a quarter-by-quarter basis. That's why we show you what the average margin has been in the last 12 months always in addition to what it's been in the last quarter.
Yeah, obviously, there is a certain amount of estimation that has to be made. Fret not, this is also difficult for us, right? We have no greater visibility than most people even going out a year what this is going to be because they are market dependent. Same goes for the core TCEs, actually. It's a notoriously difficult market for us to actually try and forecast. After operating activity, we have now we have one Panamax ship. We used to have two. One will be redelivered at the end of this month. We have one Panamax ship. I think the annual contribution there is a little over $4 million a year because it's a steady contract, a bareboat contract that just ticks along. That's very simple. The G&A, I think is also quite simple.
We disclose what it is, it increases sort of with inflation generally. You add that up, and you get your underlying results. The sensitivity, we will go through now how to calculate that. If you move to the next slide. Mats mentioned before that for every $1,000 increase or decrease in the core TCE, our underlying profit moves up or down by between $35 million and $40 million. The way to calculate that, again, is quite simple. You start, you take the number of owned and long-term chartered ships, which I think at the moment is around 135, something like that. You multiply that with the number of cases in a year that they're on hire, 360. Remember, there's always a bit of off hire there where they are dry docking or something breaks down, et cetera.
You multiply by $1,000 a day, you also multiply by, in the next 12 months, not all days are open because we always have some base cover, and we estimate that this base cover is between 20%-25%. The open days is the inverse 75%-80%. You have to adjust for the fact that we always have some base cover, in our book. You do get that sensitivity coming out. You can try that at home. This, of course, assumes that there is no change in the margin number of days in the operating activity. That will obviously impact your underlying profit, and it can go up and it can go down. Last year, we had a phenomenal year in operating activity. It was a strong revenue contributor, likely to be a bit less this year.
Don't forget that, it doesn't play into this particular sensitivity. The G&A changes do not play into this particular sensitivity. From there, I think the G&A is reasonably stable. We add at the bottom of this slide just the cost so that you get a sense for where we are at the moment. On the left, you have Handysize owned long-term cost, then they are blended, and the same for Supramax on the right-hand side. Of course, you can contrast that with the second quarter forward rates, $16,000 for Handysize versus $7,800 cost, before G&A, and $18,000 Supramax versus $9,200 cost before G&A. Again, you saw the numbers that Max showed before on profits on that is very attractive. That's just a quick recap on how we calculate our sensitivity.
Now, lastly, I wanted to talk a little bit about capital allocation on the next slide. We get questions about this quite a lot. Of course, the future is unknowable, but should the market continue to recover and rebalance, we will earn a very healthy operating cash flow. We are doing that today. For every month that the market are at these levels, we are continuing to earn a phenomenal operating cash flow, thanks to the operating leverage predominantly in the core business. Of course, what happens if the market continues to be strong? We are still looking to buy a few ships. We are inspecting ships. We are looking at that as per our long-term strategy, particularly of growing our Supramax fleet, as you all know.
There will be some point where we might feel that values are becoming a little bit toppy, or they're not as attractive as they were before, perhaps I should say. Because we are under no obligation to buy ships, we have so many, we can kind of hold off a little bit if we feel we want to focus on making money on the ships we have rather than buying more ships. You should probably expect the pace of buying ships might reduce a little bit. We've been buying seven, eight, nine ships a year over the last couple of years, at least as long as I've been here. The pace of that might go down. There might be periods if the market is good and values are high, where we buy no ships because we don't need to.
You should also expect, of course, if values come up that we might accelerate some of the divesting of older tonnage. We've had a strategy of divesting ships when they get to about 20 years, or ships that for whatever reason don't fit into our trading pattern, or for whatever reason is not perhaps as good as some of the other ships. We have been selling ships. I think we've sold four in the last year, for instance. Of course, as values come up, we might sell a little bit more. All this points to is an increasing cash flow, right? There's more operating cash, more cash from selling ships, and less cash out from buying ships. What will we do with this cash? One priority, the first priority is to continue to delever the balance sheet in line with our amortization profile.
You might recall a year ago when the market uncertainty was very high, we did add on leverage. We did add on liquidity to ensure that we have the maximum possible cash runway should the world go into a prolonged COVID sort of winter. That didn't happen, of course. In hindsight, we could say COVID probably is one of the best things that could happen for dry bulk because it really, in a way, is driving the market, right? At that point in time, we were uncertain about the future. We and a lot of other companies took advantage of the liquidity being pushed out into the system, and we did increase our facilities and leverage as much as we can. Now is the time to do the opposite, to actually delever.
This also ties in very much with our fleet is getting one year older every year. It's about 10, 11 years on average now. As we go into the mid part of this decade, it's going to be increasingly difficult to finance some of our older ships. That's perfectly okay. They will be fully paid off by then. They will have earned more money than they were worth many times over, hopefully. They don't need to necessarily be financed. At that point in time, we want to have a lower leverage in general, which I think makes a lot of sense. De-leveraging is something that we will look at. We will always try to optimize, of course. We don't need more cash at the moment, so we're not necessarily going to go out and squeeze every penny out of the increased fair market value.
I don't think that makes a lot of sense. We can push out tenants if we can. That's something that we could look at. Again, it's not a do or die kind of thing. De-leveraging is priority number one. Priority number two is to maintain a strong liquidity position. We had about 360 of cash at the end of last year. We should have probably something around there, around $300 million, I think is a good, strong liquidity position to have. We do this because it underpins a number of things. Over time, as I mentioned before, as ships get older, we want to focus more on secured financing, which we are working on and we're getting at the moment, more of a corporate risk profile. Having a strong liquidity position enables us to get better and attractive terms on that type of financing.
we also always want to keep sufficient dry powder for good opportunities. Even in a strong market, we do come across ships which we feel are mispriced. We will eventually, of course, as Mats mentioned before, we will have to start making investments in future green technology at some point. Even though I would like to say, though, at that point in time, all else equal, the ability to finance green ships, I think will be incredibly good. This is something that every bank in the world, every sustainable bond investor in the world wants to do. Our ability as a big reputable ship owner to finance green ships when they become available to us, I don't think will be a problem, but I think we'll be able to do that even more attractively than what we've done on our older ships actually. Time will tell.
We still need to have a good cash buffer, because we want to have that kind of flexibility. As long as we maintain that cash buffer, and as long as we de-lever the balance sheet, we will, of course, then have cash to distribute. We have a policy today of distributing at least 50% of net profits. I would expect that to be the board's intention to do that for this calendar year. Longer term, should we have excess cash, then I think the board will have discussion whether we should distribute more. It's early to say, but if markets continue to be strong, and we do not grow the fleet as aggressively as we have in the past, there will be opportunities down the line to have a higher dividend. I don't think we should expect that in the short term.
I think it's more of a medium-term ambition. Even if we look at your consensus forecast for U.S. calendar 2021, and we assume we're going to pay half of that as a dividend, interim and a full year dividend, the yield today on Pacific Basin dividend yield, I think, is around 7-ish %. That, I think, is a good starting point for a company restating dividends. That's what I wanted to say about capital allocation, because I know there's a lot of questions around that. I'm happy to take questions.
Thank you. We will now begin our question and answer session. If you have a question for any of today's speakers, please press star one on your telephone keypad and you will enter a queue. After you are announced, please ask your question. If you find that your question has been answered before it is your turn to speak, please press star two to cancel the question. Again, please press star one if you have any question, or you can raise questions through the online platform. Our first question comes from James Teo with Bloomberg Intelligence. Please go ahead. Thank you.
Hi there. Question is on core TCE. There was a mention just now that core TCE includes positive or negative margins from using short-term ships to carry contract cargoes. I suppose this was the reason for the underperformance versus the market index in the first quarter. Could you maybe give us some color on how the margins are for this type of business in the second quarter so far?
Yeah. No, short answer. No, that was not the reason for the underperformance. The reason is what Mats mentioned before. It's predominantly the lag between when we fix the voyage and when that voyage actually starts to impact our P&L and our earnings. That lag is between one and three months, depending on the voyage and the customer and all these kinds of things. When the market goes up a lot, the indices will run ahead of us, and our P&L will take time to catch up. That is the main reason. Of course, it is also more difficult on short-term core ships. If we have cargo contracts and then ships getting more and more expensive, it is of course the same dynamic as we have in operating. It's a little bit more difficult sometimes perhaps to make money on those ships in a quickly rising market.
Again, I think it's important to remember, we optimize the whole portfolio. We don't optimize these short-term ships as a part of the portfolio. We use them to optimize the whole core business, right? In that sense, they're not standalone ships. They are a is because the market went up, and we will need time to catch up, and that's very, very natural. It wasn't really purely on the, or too much on the short-term ships. Again, it's always more difficult to make money on short-term ships when the market goes up quickly. The other thing is, of course, you didn't ask about this, but like you mentioned also, the operating margins are negative in the first quarter. It's the same dynamic there, right?
That we and many other operators thought that there was going to be a slump in the Chinese New Year, so we take a lot of cover, and it didn't happen. Of course, then we need to find ships to meet that cover, and then you have, for a period of time, a negative margin. That over time also turns positive again as the market kind of stabilizes. Right. That's the reason for the underperformance. Surinder, anything you want to add to that?
No.
You're very welcome. Okay.
Thank you. Our next question comes from Andrew Lee with Jefferies. Please go ahead. Thank you.
Yep. Hi. Hey, thanks for this analyst day. It's very useful. I have two questions, right. The first is on the cash side. Is it fair to assume that the cash buffer would be $300 million? As long as you have at least $300 million in cash at the end of the year, that's the target you need, and the rest could be paid out as dividend. Second question is on divesting ships. What's the criteria you're looking for? Is it the age? It must be 20 years. What would you look for to divest ships? Thank you.
On the cash, I was deliberately a little bit vague on that, right? Because I don't think the board wants to tie themselves to a particular number. What I like to say is, if we have $300 million of cash, no one in management or the board or myself are going to worry about our cash position. I do think that gives us sufficient flexibility. That doesn't mean that $250 million isn't good enough, right? I don't think we want to tie ourselves to a particular number, and I think that's important. We think the positions we have today are good. We can come down a little bit. We're still very happy. We don't want to tie ourselves to a particular position.
I think you guys, as analysts, kind of can take a view what you think is reasonable and slot that into your model, and then you kind of think what you think is the excess cash, right?
Okay.
Yeah. On divesting of ships, Surinder and Morten will probably have views on this as well. Obviously, age is one factor, and a lot of that has to do with the dry docking schedules, right? When the ship is 20 years, you do a fourth special survey, and you don't necessarily want to do a fourth special survey on a ship that for whatever reason you feel maybe is too small for the trades you're having, et cetera. At 20 years, we have said that we would look at divesting a ship that is getting up to 20 years. There will be exceptions to that rule, so it's not an odd rule.
We have in the past, on occasion, divested ships that were not of good quality for whatever reason, but it's quite unusual because we tend to be quite diligent when we buy ships, but we have done that, but it's a while ago now. I think age is the most important factor. It is important to bear in mind at the moment, these sort of older ships that many people frown upon purely because of the issue of age, banks and other people, they are the most profitable ships at the moment. They are making half their value sometimes almost on a single voyage, right? If you do believe in the market strength, you could kind of say, well, maybe if you hold onto a ship just another year, it pays itself again, right? You can still sell it, right?
It is perhaps tempting to keep some of these older ships, right? I think the key thing is not to have too strict a rule about it. There is no doubt there will come a point where we feel the markets are a little bit toppy, at least on asset values, and we will divest a little bit. I think that will come. We're not there yet. As Mats showed before with his calculation model, we're not there yet.
Okay. My final question is, Mats mentioned earlier about if the rates were at the same level, right, as 2010, net profit would be close to $400 million.
Yeah.
What's the assumption for the Supramax? Because in 2010, the Supramax rates was higher, right, than the current levels. What's the assumption there?
I think the point is if we have the same average rate as we had in 2010 on Handys and Supras, we'd make $400 million.
Okay.
I think it's just an overall point.
Okay. No more questions. Thank you.
Great. Thank you.
Thank you. Again, please press star one if you have any questions. Thank you. This concludes our conference call. Thank you all for attending.