Welcome to today's Pacific Basin 2021 quarter one trading results update conference call. I am pleased to present Chief Executive Officer, Mr. Mats Berglund, and Chief Financial Officer, Mr. Peter Schulz. For the first part of this call, all participants will be in listen-only mode, and afterwards there will be a question- and- answer session. Mr. Berglund, please begin.
Thank you very much, and welcome, everyone, for joining us today. My name is Mats Berglund, I am the CEO of the company, and with me here is Peter Schulz, available also to answer any questions you may have. Please turn to slide two. This slide shows our core fleet TCE earnings, with the Handysize earnings to the left and the Supramax earnings to the right. You can see very clearly that the positive trend continues. Since the low first half of 2020, things have been steadily improving. In the first quarter, we made $10,950 per day on our Handysize ships, and we have 77% of our days in Q2 covered at $16,100 per day. On our Supramaxes, we made $14,630 per day in the first quarter, and we have 79% of our Supramax days for Q2 covered at $18,000 per day.
These levels in Q2 that we have covered, 16 a day for Handy and 18 a day for Supra, are fairly similar to today's spot market rates as well. We are adding and continuing to fill up the second quarter at roughly these rates, and we will show you the spot market developments on the next slide. We also remind you of our P&L break-even levels, the dotted line on these graphs, with the Handysize break-even level at about $8,700 per day and the Supramax break-even level of about $10,100 per day. We also remind you that we have about 90 core Handysize ships and about 40 core Supramax ships. It's easy to do the math, and you can very clearly see that we make very attractive returns, especially in the second quarter this year.
I do want to highlight to you that the Atlantic rates were significantly stronger in the first quarter, stronger than the Pacific rates. That benefits our Supramax segment in particular, because we have a majority of the Supramaxes exposed to the Atlantic market. You can see that our Supras, we made $14,630 in Q1, and on the Handys, $10,950. A fairly significant difference benefiting the Supramax, and that is much to do with the strong Atlantic market in the first half. Very encouragingly, recently, that has now shifted, and we now have a significantly stronger Pacific market than Atlantic market, and that is already visible in the cover rates for Q2. We have a majority of our Handysize fleet positioned in the Pacific, the second quarter is benefiting our Handysizes in particular.
You can see that the Handysize rates are catching up very nicely in the second quarter, and we're making $16.1 so far on the Handys and $18 a day on the Supras so far. Slide three shows how the index spot rates have developed and how much higher they have been this year compared to prior years. This is proof of a very tight supply and demand balance. We'll talk more about why on the next slide. Just a reminder of the lag between when we fix a ship and when that voyage is performed. It's a one to three-month lag between fixing a ship and executing the voyage. The strong rate spot fixtures in February and March is mainly appearing in our second quarter TCE earnings.
It is not meaningful when rates change so dramatically to compare actual Q1 earnings with the index rates in Q1. Now, we're, and we said in the annual results call that we did expect rates to settle a bit from the extremely high levels. We continue to believe that they will settle and find support well above prior year levels. We are seeing that now, actually. Rates are finding support, definitely in the Pacific, also in the Atlantic at close to these levels that we are showing here. Those are still very attractive levels. Turn to slide four. We'll talk about why are the rates so strong this year. It is very clearly a demand-driven upturn. We have split the market drivers here into three sections. First, the core, the main market driver is, one, China.
Chinese demand for dry bulk imports is very strong. It was also strong through Chinese New Year this year. It's also good demand from non-Chinese destinations that explain the strong markets. Global grain loadings, for example, in the first quarter, were 15% indicatively higher than the same period last year. We have seen record U.S. soybean exports in the fourth quarter that continued well into 2021, and as well as a very significant corn export from the U.S. to China. This is a new and very encouraging trend. China used to be self-sufficient on corn, but in recent four or five months, they've started to take a lot of corn into China, and that's a new and very positive supportive trend in our market.
The third main reason is minor bulk is bouncing back very nicely after the pandemic year, and it's construction material in particular that's coming back strong. Minor bulk loadings were up indicatively 11% compared to the first quarter last year. The fourth reason is that coal is also back. Coal is not increasing, but it's back to prior year levels. Indian coal, in particular, is back, and we are about 20% higher now than we were during last year. Coal back to prior year levels as well due to economic recovery. Other than these main and core drivers, there's a couple of temporary market drivers that we highlight here. One, we got some help from the cold winter, the cold northern hemisphere winter, which drove coal. We had the trade friction.
We still have the trade friction between Australia and China, and that tied up some Capesize ships with Australian coal off the Chinese coast, causing some inefficiencies in the fleet. A third factor, which may actually not be temporary, at least not so far, is the very high container rates. We think bulker rates are high, but container rates are even higher, and it's triggering cargoes that can shift to bulk to make that shift. We have breakbulk cargoes like bagged cargoes, some steel and logs and so on, shifting to dry bulk ships, which would otherwise have moved in containers. The fourth reason we mention is a little bit of COVID inefficiencies in the fleet.
It's still very tricky to shift crews. We have to wait, we have to quarantine, we have to deviate. That is causing a little bit of inefficiency in the fleet, which helping on the supply-demand balance. Not big, but it has some helping effect. Going forward, we do want to highlight that this is the time of year when the South American grain season kicks in. There's no indication that that will not be a good Brazilian export season. It was a little bit late to started in Brazil, the export, but March was strong. Indications are for a good South American East Coast export season also this year. It's encouraging to see GDP forecast revised up. It's encouraging to see the economic stimulus being rolled out, including infrastructure projects. It's encouraging to see the rollout of vaccines, although, of course, COVID uncertainty remains.
The third going forward factor that we mention is that the supply side is much more benign than in prior years, and we are expecting reduced net fleet growth, and especially so in our segments. Slide five, we're just showing this demand a bit more in detail. This, w hat we're showing here is indicative data, right? Not 100% certain, but it's based on GPS signals, AIS signals, etc, and it's fairly reliable and is indicating total global dry bulk volumes up roughly 8% the first quarter 2021 over the first quarter 2020. By cargo commodity, grains is up 15%, minor bulk is up 11%, iron ore is up 9%, very strong growth percentages. While coal, as mentioned, is not growing, but it's back up to prior year levels, as you can see on the down left graph here. About 20% since last summer.
Turning to slide six on the graphs here, we show Clarksons demand and supply forecasts for the full years of both 2021 and 2022, with demand growing faster than supply, and especially so in our segments, where the fleet is expected to grow with below 2% per year, while demand for minor bulks is around double the fleet growth at 4%-5%. I would actually not be surprised to see it actually turn out higher because it's very unusual that minor bulk growth less than GDP growth. With GDP growth forecast now at 6%, I would not be surprised to see minor bulk, in fact, growing a bit faster than what Clarksons is forecasting here. On slide seven, we want to emphasize how much we have grown our owned fleet over the years, from 34 ships in 2012 to 117 owned ships now.
In particular, we have grown our Supramax portion. We have done that consciously because the larger vessel sizes, Supramaxes, tends to have more upside in strong markets, and that's where we are now, and it gives us great leverage towards the better market that we are now experiencing. We have continued to grow our Supra and Ultra fleet in the last two quarters. As already announced, we bought five Ultras, whereof four from Scorpio, and those were five-year-old ships, all with brand new scrubbers installed for $16.7 million each in November last year. They're delivering to us now. Two are already delivered, and two are delivering later this month. You can see how the price of such ships have developed nicely up in the graph to the left here with some 20%, 30% in only the last three, four months.
We also bought one more Ultra early this year, that's also been announced earlier, but we did also buy one large Handysize, 38,000-tonner some five to six weeks ago that we have not previously mentioned, and that's to replace one of the smaller, older Handys that we sold. We continue to gradually sell the older 28,000-tonners as they approach 20 years old, and we are replacing with 38,000-tonners. On slide eight, we just show this remarkable recovery. Again, this is the market now. We are back to 2010 levels, in the last quarter. It is only a quarter yet, but this is the market that we have been working so hard over so many years to set up for. Our current core fleet of some 90 Handysizes and 40 Supramaxes is now making very attractive returns.
Wrapping up on slide nine, we do believe that we have a healthy demand outlook in front of us. We are seeing vaccine and stimulus roll-outs, including infrastructure projects, typically very beneficial for the dry bulk market. We are seeing GDP rate forecast being adjusted up. Clarksons have their minor bulk forecast at 4.8% for 2021. Could be more. We are having a favorable supply situation. The fleet growth is much more benign than it has been. The dry bulk order book at 5.6% overall is the lowest in living memory. It is only 3.5% for Handysize. The Handy and Supramax fleet combined is expected to grow 1.8% this year and significantly lower than that next year. The risk is, of course, that we do get another wave of new build ordering driven by the strong rates. So far, we are not seeing that.
There are some new build orders, but not many. The order book is actually continuing to slowly shrink rather than increase. We're watching that obviously carefully. The reason for people holding back on new building orders, including ourselves, is, of course, that the environmental regulations will change the technology. It seems extremely strange to order a new ship today with a fuel oil engine. It just makes more sense to wait for real new technology to come. That will come. It will take some time. Also, we do want to mention that what is coming is IMO regulations that will dictate not speed limits, but power limitations. That will force lower speed. That is the only practical way for the existing fleet to meet the reducing CO2 targets that is gradually going to come in from 2023 and onwards.
Those regulations are currently being formed by IMO, it will definitely lead to lower speeds, which is also good to keep the supply limited, good for the market, and good for the environment. The third column here, we do want to emphasize again that we have great leverage towards this better market. We have a larger owned fleet, significantly larger. We have an increasing Supramax proportion, the Supramax rates tends to go up higher in higher market situations. We have a competitive cost structure that we worked extremely hard with over many years, we have a strong balance sheet. The sensitivity and the math is quite easy. $+1,000 per day means $35 million-$40 million on our bottom line, I do encourage you to do the math.
I also encourage you to dial in again July 29th, when we will have our six months first half report. I think that will be an exciting report. We will also then be introducing you to our new CEO, Martin Fruergaard. He comes here to Hong Kong, planned for June. He will start here July 1. He takes over from me on August 1. On July 29th, interim call, we also look forward to discuss restarting our dividend again. With that, I open up for questions. Thank you.
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. Our first question comes from James Hill with Bloomberg Intelligence. Please go ahead. Thank you.
Hi. Two questions from me, one is on the rates. If we look at the Handysize index, it was over 3,000, I think, back in 2007, 2008. What's the likelihood that the rates, this cycle, are we at the very early stage of the cycle? Could we ever go back to those highs again? What kind of conditions would we need to get back there? Because we are, as I understand, record low in terms of order book and all these very favorable conditions, right? Would this be enough, you think, to bring us back to those days, is my first question.
Second question is on ton mileage in terms of maybe shifting supply, demand, or import, export, nations, maybe Australia, China relations causing some of this shift. Do we expect this to affect Pacific Basin and maybe positively in terms of ton mileage demand increase, or how should we see it in terms of ton mileage? Yeah. Thank you.
Thank you. The first question, will we see Handysize rates as high as we did in 2007, 2008? It's certainly nothing that we are planning for. Things were just exceptionally high those days. We are seeing rates back to the 2010 levels, right? 2010, we averaged $16,000 a day, or index rates was around $16,000 per day. As you can see, we are at these levels now for Handysize. 2007, 2008 rates were $30,000 per day. It's just astronomically high, and I don't think we should expect to come back to those levels. We'll take it if we get it. The difference then was that the world's fleet was operating at absolutely full speed, and there was zero spare capacity left.
What we have now is still a little bit of spare capacity or elasticity, if you will, in the fleet, by way of we're not at absolute maximum speed. That's why we think it's realistic to assume a little bit lower than these astronomically high numbers that we saw in 2007, 2008. Your second question on fleet utilization and inefficiency caused by the Australia, China trade spat, and is that affecting Pacific Basin? Not directly. That coal moving from Australia to China who got stuck was primarily Capesize ships and not affecting us. Maybe a little bit positively indirectly, because again, it does tie up capacity when these things happen and congestion is tying up ships, and that's tightening the supply-demand balance a little bit. Not a big factor for us. We do not see anything on the horizon now.
Again, there's always an uncertainty with geopolitical things going on. We are through, it seems like, the negative impact. We had a significant negative impact of the U.S.-China trade spat on soybean. With the tariffs that came in, that reduced the soybean trade from U.S. to China significantly in 2019. Starting in late 2020, we're back up to really solid levels. As mentioned, corn has also started to move, and the swine fever herd is back. It seems like demand is very strong from China on grain. I hope that answers your question. Next question, please.
Thank you. Our next question comes from Mike Stone with Aquati. Please go ahead. Thank you.
Hi. Congratulations on a great set of numbers. Could you just give us a little bit more detail on why we've seen the volatility? You've given a very good explanation about why things have improved. Why did they overshoot, and why have they come back? I know it's volatile, a little bit more color there would be useful.
Yeah. I think the volatility is just proof of a tight supply-demand balance. It's been a long wait. It's been a long period of too much supply, and we're finally, with the combination of demand, it's primarily demand-driven, we should say. Again, supply side is also coming down. What drove rates up in the fourth quarter and early this year was the Atlantic market, as mentioned. It was demand from the Atlantic, primarily driven by very strong U.S. exports of grain to China and also corn.
Again, elsewhere, pent-up demand after the pandemic. Other countries also coming back, filling their stocks again. Grain demand, very strong. Construction material bouncing back, as we mentioned. Why is it coming off a little bit? Well, again, we did expect it to come off. It was just maybe a little bit overheated for a while. Again, it's finding a floor now, and again, at significantly higher levels than we've had in earlier years. I think it's just proof of a stronger demand supply balance.
Thank you. As a follow-up, it sounds like from what you've said that we could go back to those sort of peak rates of a few weeks ago, given the very strong demand supply as we move through the balance of the year. While you wouldn't predict that, is that something that is possible or you think that's a one and done, it's not going to happen?
I think it's certainly possible, and we should expect maybe a bit more volatility, and that is a result of a tighter supply-demand balance. The U.S. Gulf market has tapered off now. That's seasonal, so i t's kind of natural that it comes off a bit, and we probably have to wait a little bit before we see the South American grain season kind of pushing at its peak. That's probably at its height in May or June. A little bit early to that, so maybe a little bit of a wait before we have a potential new firmness again. Rates are finding support at current levels.
Thank you very much.
Thank you.
Thank you. Our next question comes from Gorak Singh of HSBC. Please go ahead. Thank you.
Hi. This is Parash here. I'm not sure if the operator got the name wrong or if somebody else is on the line. Let me know if I can go ahead because I'm also in the queue.
Go ahead, Parash.
Okay. Hi, Mats. Thank you so much. It seems like even the market is conspiring to give you a send-off at the peak. I have three questions. First, on the demand side, can you talk about what does Biden's stimulus mean to the market? I understand that the Chinese stimulus has a direct correlation with probably the amount of commodities will be consumed. With U.S., is it more like repair and maintenance and therefore the impact may not be pronounced in the dry bulk market? Second is, in the past you used to show us a slide where you used to show that, look at the return and even on a five-year-old vessel, the return are dismissive, so we will not see a surge in new build.
Now, by that math, it looks like the returns are more than sufficient to not only cover the cost of capital but to make a decent return. Apart from the regulatory aspect, do you think is there anything else which is holding the ship owners from ordering this? My last question is on 2023, the EEXI, which you touched upon on limiting the speed of the vessels through the power. I understand that Handysize, Handymax, or even dry bulk in general, typically sails at 13, 14 knots. Even do these vessels speed will also be impacted because of this regulation? If so, isn't that an excuse for ship owners to order a vessel now to get it delivered in 2023 to replace their existing fleet? Thank you.
Thanks, Parash. First question on demand effect by the Biden stimulus. I think overall it's very positive. It's difficult to be extremely specific on what it will mean, but again, infrastructure projects is very good for dry bulk overall. It drives steel, it drives cement, it drives all kinds of minor bulk construction material. Logs is used to pour cement in, to build cement forms and so on. It drives a lot of the minor bulk commodities. We are very happy to ship the material to the U.S. We do carry a lot of it already, some by way of contract and some by way of spot cargoes. Chinese steel exports have increased significantly in recent months. Again, we carry cement, we carry gypsum, we carry clinker, slag. Exactly specifically what that will mean is just difficult to quantify, but obviously positive.
The second question on return on vessels. I think the slide you're referring to is number 22. It's in the appendix there. It shows the secondhand values compared to the new building prices, and it's important to track that, right? We have previously pointed to the wide gap between these two. When a secondhand price goes up to the price of a new building, you've got to be worried that people start to order new buildings. New building prices are also going up at the moment, as you can see on that slide 22, so there's still a gap. Again, the absolutely biggest reason for why people are not ordering new ships today is the technology question, right? We see these new rules coming. We see an enormous push to develop real new technology ships, but it's going to take 10 years.
8-10 years before that is commercially viable in our segments and so on. It's not going to take 20 or 25 years. The depreciation time is normally 25 years for a new ship. Why not buy a 10-year-old ship for half the price, which you can comfortably depreciate until 2030? At these rates, you would have it depreciated in two years' time. Rather than to order a new ship that's delivering two years from now into a market that you don't know what it will be, and it will have a fuel oil engine. You're not going to get 25 years out of that ship, right? I just don't understand people going to the shipyards ordering new ships with fuel oil engines today when you can buy secondhand ships. It is still much more attractive to buy secondhand ships.
The return, if you do a proper calculation today, you got to use a much shorter depreciation time on a new building than you used to. Again, that just makes the secondhand investment alternative much more attractive. The 2023 EEXI and EEOI, more importantly, the operating index, that will affect all ships and new buildings as well, although they will have a little bit of an advantage, but it's not that dramatic.
What will drive out these fuel oil engine ships is more in a longer term when there will be other fuels available, other non-fossil fuels available. All ships will have to gradually speed down or slow down as a result of the EEOI rules. They're still work in progress, so to speak, so it's difficult to pinpoint exactly. To give you a feel, yes, dry bulk ships have a design speed of 14 knots, but dry bulk ships have not gone 14 knots since 2010 and 2007 and 2008. The current speed is 11.5 for the world's fleet, 11.2, 11.5. Our ships goes a bit quicker, but it's going to push ships gradually down to nine and 10 knots-
Oh, wow.
...towards the end of the century, sorry, decade. It kicks in, as it looks now, 2023 or 2024 may be the first year. Is it marked as 2023 or 2024? It's 2023, 2024, and then you're going to have to follow this trajectory of lowering your CO2 emissions. Again, the only practical way to do that is to gradually slow down to show that reducing trajectory. We think that will have a positive impact on the fleet. I don't think that will drive newbuild orders. That doesn't change my argument on your second question, right? I know you want to-
Yeah. We study very carefully the fuel performance of the very latest designs that the shipyards are trying to market, and they will be caught out by these trajectories as well. As Mats said before, even if you order the latest Japanese fuel-efficient, phase III design today, you cannot get 25 years out of that ship with the regulations, right? In order to pay the high prices, these are expensive ships, you need those long depreciation times.
The calculations are still secondhand ships make more sense, better return, lower residual risk, and if it was the case that you could get out of these rules and regulations by ordering these brand new ships, I think you'd see a lot of people doing that now. It would make a lot of sense. The proof is in the pudding. You're not seeing a lot of orders of these ships today because everyone can make the same calculations.
Okay. No, that makes sense. Thank you so much.
Thanks, Parash.
Thank you. Our next question comes from Andrew Lee of Jefferies. Please go ahead. Thank you.
Hi, good evening. Thanks for the call. I've just got a few questions. The first one I have is, the second half covered rate is low. You explained by the backhaul voyages. Is this a deliberate ploy, say, by the customers who think that rates could go down, so not willing to lock in contracts? Is this a ploy that the company wants to have a higher spot exposure, just because of the high rates? Is this within normal seasonality? That's the first question.
Second question is on the secondhand vessel prices. As you mentioned earlier, the prices have actually increased. Does that mean that the returns from buying a secondhand ship today is not as attractive? I'm trying to get a sense in terms of, are you still going to be considering buying secondhand vessels going forward? Third question is the underperformance for the first quarter explained, as you said, by the lag. Do you think that will be recovered and you get flat or outperformance by the first half? Finally, would you say you're more optimistic now than when you were during the FY 2020 results conference call? Thank you
Thanks, Andrew. The second half cover rates are at around $9.3 a day for some 25% of our days, that's obviously low in the context of today's spot rates. If you look at where rates were in the first half of 2020 and second half 2020, they're not that low. It's obviously contracts taken during prior years when rates were lower. They're also looking a bit artificially low because of the fact that they are backhaul heavy. When we combine those cargo contracts for the backhaul leg with higher paying front hauls, it tends to result in higher actual earnings. Also on the Supra side there's no scrubber benefit included in those valuations because we don't know if we're going to perform contract with a scrubber ship or not. We're conservatively not including the scrubber benefit in the TCE estimate.
Again, they will end up being higher. I can tell you that we are obviously not interested whatsoever to take contracts at these levels today. Yes, there is an element of keeping the spot exposure large because we do fundamentally believe that we're in a much better supply-demand situation, and we are more optimistic about rates going forward. We have come from an extremely low rate period. The cargo customers are still a little bit hesitant to book cargoes at today's much higher levels. They're kind of hoping for rates to go down, but often that doesn't happen, and they need to get used to these higher rate levels for a while before they're prepared to book long-term contracts at these higher levels.
I should tell you that the cargo cover that we had, for example, going into the second quarter, was even lower than this cargo cover that we have for the second half. We still end up averaging 16 and 18 a day for Handy and Supra respectively. Those are the comments on the second half cover levels. Second question you're asking, secondhand values have gone up, and will you continue to buy? Are the returns still high enough? Rates are still attractive on secondhand ships, even at these levels that we're seeing now. At today's spot levels, it's extremely attractive, but you've got to assume a bit more conservative, longer-term freight rates. We are still inspecting ships. We mentioned we bought one Handysize five, six weeks ago. It hasn't delivered yet, but we committed it five, six weeks ago.
I think that's some proof that we're still willing to open our wallets. We have capacity to buy more. We will be very disciplined, and we will continue to only buy the right ships at the right prices. Maybe expect a little bit of a slowdown in the pace of buying, but it depends on what becomes available at what prices. Competition is very stiff today for secondhand ships. Lots of people are inspecting the ships. We were very fortunate to be able to secure ships in November last year from Scorpio and also the other Ultra that we bought at very attractive prices. Regarding the underperformance versus index in Q1, again, it is just comparing apples and bananas, right? It's a bit wrong to call it underperformance, but mathematically, yes, it is.
When index rates shoot up as strongly as they did in the first quarter, and we are counting those high index rates in the first quarter index, and then we're comparing them with the first quarter earnings, and those earnings are a result of fixtures done 45 days earlier on average, right? It really becomes apples and bananas. Do we expect that to come back? Yes, we do, but it depends on how the market develops. We tend to outperform in weaker markets, and that's when our outperformance expands, and in stronger markets, our outperformance is lower. There's a second reason for the difference, right? One is the lag. The second reason is that we do have these cargo contracts that are taken during periods when rates were significantly lower.
If rates just continue to go up, and if they go up so much as they did, right? It is tough to beat the index when you have 25% of your days covered at significantly lower rates from before. Give us a bit of time. You need to compare over longer rate periods. We tend to outperform also in strong markets, but that takes a period of some ups and downs. So far, we have only had ups, so to speak, right? Then we are kind of always lagging or having a bit of a handicap from contract rates. I know a lot of colleague ship owners who have all their ships on time charter outs for three years. They have zero exposure to this. We have 80% exposure to these stronger rates, right? We are in a very fortunate position.
Are we more optimistic now than we were at the annual results call? I would say that we're equally optimistic. I think we were optimistic then as well. It's not that long time ago. Again, it's very encouraging to see, definitely not more bearish, if anything, more optimistic now. That is supported by the cargo data that we see coming out of our sources, not only China, but also elsewhere, right? These GDP forecasts adjusted upwards. There are green signals in most places for our market right now. Peter, you want to add something?
No, we have another six weeks of evidence that the market is finally balanced and tight even if it's come off a little bit. As Mats said before, it's finding a floor. We're still not reading in TradeWinds every week that people are ordering ships left, right, and center, and that they are keeping the discipline. Yeah, I think on balance, things are evolving the way we expected at our full year announcement.
Okay. Final question on dividends. If you're unable to identify that many more secondhand vessels, right? Is there a level of cash that you need? What I'm trying to get a sense is, would you raise your dividend payout ratio above 50% if you hit a certain level of cash?
First of all, the key thing for us now in the good markets, we have to obviously delever and pay back our loans and these things, right? We still have capacity to buy good ships if we can find them, just as Mats said. Should the market continue up and ship values continue, maybe we will find it more difficult to find these really good opportunities.
Should the market continue to develop and we start to have a significant excess cash position, then what can we do with the cash, right? Obviously, distribution is the most obvious thing to do. At the moment, you should expect us to follow our dividend policy, which is at least 50% of net profits. Should the market continue to develop very positively, then of course, we would consider amending our dividend policy to distribute more if we feel we are deleveraging, if we feel there are no massive opportunities to buy ships, etc. We will keep an open mind on this. Absolutely.
All right. Thank you, guys.
Thank you.
Thank you.
Thank you. Our next question comes from Steve Wong of BlackRock. Please go ahead. Thank you.
Hello?
Yes, hello. Go ahead.
Hi. Thank you very much. I got two questions. On the container side, you mentioned that there's some spillover effect due to the fact that the container shipping is also super crowded at the moment. Some of the demand goes to bulk. Is it possible to quantify that a little bit? Just roughly speaking, how many percent of demand boost do you think it would come from that? That's my first question.
Yeah. Very difficult to quantify. There's been some broker reports mentioning a couple of percent, but I doubt it's that much. It's very difficult to quantify actually. We are identifying it as a positive, but exactly how much is very difficult. It's break bulk type commodities, rice, cement, some logs, some steel, aluminum sometimes goes in, but it's just hard to quantify. Maybe we can find a more specific number after doing more work on it after a couple of months and so on. It's too early to say. The good news is that container rates continue to go, right?
Yeah.
Similar size ships to ours are making 40,000 container ship, right, while we are making 20 or 16. Maybe that trend will only continue and increase, which is good for us.
Yep. Thank you. Interesting. Second question is regarding IMO. You mentioned that the EEOI route will dictate the speed of the ships so they are forced to slow down. That's my understanding. Can you also share a little bit more about the timing of the implementation, like when the ships need to be slowed down as a result?
Yeah. It's individual for each vessel design, so to speak, and it's simplified and it's not, again, I repeat, this is not finalized yet. It will be clarified at the next IMO meeting, I think it's in June.
January 2023.
Yeah. It's planned to kick in January 2023. It is to coincide with this trajectory of reducing CO2 emissions with 40% by 2030 from 2008 levels.
Yeah.
We have a graph in our sustainability report which kind of shows this trajectory, and that the industry is already well underway there, and that is because of speed reduction to start with. We need to follow that trajectory to eventually 2030 and that is in our annual report. Is it, as well, page 56? You can get a feel for it, right?
It's in the appendix.
It's in the appendix on slide 17, sorry. It's going to map every ship on this graph, and you're going to have to continue towards that target arrow of 2030, and the only practical way to achieve it is to slow down. It won't be a speed limit that ships can only go 12 knots that year and then 11.5 the next year. It will be more likely by power limitations and again, CO2 emissions. It will force the ships.
It will be a system of rating ships A, B, C, D, and E, etc , and if you're a certain distance below this trajectory, you will be rated as a D or an E, etc, and then you have to start to take action to get back up again, on top of this trajectory. This is kind of a simplified explanation, it's not fully done yet, but that's the way it looks to be designed. It's a rating, and it will be assessed each year, and you have to follow this trajectory towards CO2 reduction of 40% by 2030 compared to 2008.
Understand. Thanks for the clarification. If I got time to ask a follow-up question regarding the new ships? You mentioned that the incentive to buy new ships is not very high at the moment. Trying to summarize the reason. First of all, second-hand ships seem to be cheaper, highly more attractive. On the other hand, two years later, you don't know where the rates are, so it's not very competent to make the order yet. Regarding the technology or IMO, how does it impact the incentive to buy ships at the moment? Is it the technology is not ready yet or is it more expensive?
The technology is not ready yet. We simply can't order real new technology ships because there are none. You read about one or two new technology ships, and they are kind of showcase prototypes by either ferry companies or container lines, which operate on fixed lines. They are experimenting with prototypes, and that's great, and we are all for that, and we are contributing in work groups with the industry to develop new fuels. It's really ships with new engines, new fuels, that we are waiting for. It just makes a lot more sense than to order a ship with a fuel oil engine. The fuels that are being looked at is methanol, ammonia, hydrogen. LNG is what you can order today. You can order a dual fuel engine ship that can run both on LNG and conventional fuel oil. LNG also emits CO2.
It doesn't emit sulfur, but it does emit CO2, right? We don't think LNG engines is a long-term solution. It's just kind of a bridge solution. It certainly sounds a lot better, kind of. It's a fossil fuel and you hardly reduce CO2 with an LNG engine. It's some of these other fuels, but there's a lot of work to be done. You've got to produce these fuels in a green way, right? Theoretically, you would use solar or wind to produce electricity. From electricity, you would make hydrogen. It's very difficult to have hydrogen on your ship because you have to cool it to 253 degrees below Celsius. It's highly explosive. It's more than four times less energy efficient than regular fuel oil. Very complicated to use that as the onboard fuel.
You can go from hydrogen, you can synthesize into ammonia or methanol. Ammonia or methanol is slightly easier to accommodate on board, but it's still a lot less energy efficient than fuel oil, and it takes much larger bunker tanks, etc. Ammonia, you also have to pressurize and cool down, etc. There's a lot of work to be done, and you have to produce the bunkering infrastructure worldwide, before we can go out and order a ship like this, right? Even if we could order a ship which had an ammonia engine, there is no ammonia to fill up your tank with on our ship. Tankers and bulkers are the 2 large merchant ships types, and they operate in what we call the tramp trade. You never know where you go next.
You go up the rivers, you go to every country in the world, and you need to have the fuel available, and there's no such fuel available now. Between two coastal cities in Norway, you can maybe run a ship like this as an experiment, and that's all positive and all good, and we all support that. It's difficult for us in the tramp trading, Handysize segment, to do something on this now other than to track the development very closely and to do everything we can on improving our existing ships. We're doing so much.
There's a very good graph in our report, in the sustainability report on page 17, that image of a ship and all the text around it with things we're doing from propeller fins and new ducts and LED lighting and shaft generators and all kinds of things that we're doing. That's what we can do now, and we're working very hard on that. The new fuel and the new engine ships will be practically, we think, available six, seven, eight, nine years from now, and we can't buy them today even if we wanted to.
Better to save your money, and make as much money as we can on these existing ships. We prefer to buy a 10-year-old ship, which we can comfortably repay and make a very good return on before we get to 2030, rather than to order a new one, right? The new ship will not be kicked out by these A, B, C, D, E ratings, but it will be kicked out 15 years from now, maybe by rules saying, you can't have any fuel oil ships more, period. This is only moving in one direction, right? Much better to wait. That's our thinking and most people's thinking.
Yeah. The key is really the tightening of the emissions standard, and isn't clear, like 10 years down the road, how it looks like.
Right.
The technology of the ships are not ready, to significantly reduce those CO2 emissions. It's rather safer to wait and buy the secondhand ships instead
Correct.
Understand. That's very clear. Very interesting development. Thank you very much.
Thank you.
Thank you. As there are no further questions, we will now begin closing comments. Please go ahead, Mr. Berglund.
Now, just to thank you again for your interest in our company and for being with us today. Again, we look forward to speak to you, anytime. Don't hesitate to come back to us. If not before, we will be back on July 29th with our interim report. Thank you very much.
Thank you. This will close our conference call. Thank you all for attending. Goodbye.