Welcome to today's Pacific Basin 2020 A nnual Results Announcement call. I'm pleased to present Chief Executive Officer, Mr. Mats Berglund, for the first part of this call. All participants will be in the listen only mode, and afterwards, there will be a question and answer session. Mr. Berglund, please begin.
Thank you very much, welcome, ladies and gentlemen, and thank you for attending Pacific Basin's 2020 annual results earnings call. My name is Mats Berglund, CEO of Pacific Basin, and I am joined by our CFO, Peter Schulz. Please turn to slide three. This is obviously a 2020 results presentation, as you can imagine, it's a lot more fun to talk about 2021. You can understand why when looking at the graphs on this slide. We will get back to this later. 2020 was a year of two very different halves for dry bulk shipping. Measures to contain the COVID outbreak, initially in China, and then elsewhere around the world, severely impacted the dry bulk market in the first half, driving Handysize and Supramax index rates down to their lowest second quarter average in 50 years.
However, dry bulk demand and freight earnings started to improve significantly from May 2020 and have continued to strengthen into 2021. Handysize and Supramax market freight rates have quadrupled since May to 10-year highs now. While the recent very sharp increase in spot rates is not expected to continue going up, it does demonstrate that demand and supply is finally balanced. When the current extreme tightness eases, we believe that rates will settle at substantially higher levels than in recent years. A vaccine and stimulus-powered strengthening of economic activity, coupled with reducing dry bulk fleet growth, make us optimistic about the freight market in 2021 and in the years ahead. Please turn to slide four. We delivered a positive EBITDA of $184.7 million and an underlying loss of $19.4 million in 2020.
Our TCE earnings were below breakeven in the first half of the year, resulting in an underlying loss for that period. Our net profit was further impacted by a non-cash $198 million impairment of our Handysize core fleet, primarily our smallest and oldest Handysize vessels. Our TCE earnings recovered in the second half of the year, resulting in an underlying profit of $7.2 million for the period. We also improved our available liquidity to $362.5 million, and net gearing reduced to 37% from 41% in June. Slide five. Our core fleet generated average Handysize and Supramax daily TCE earnings of 7,860 and 11,140 net per day. While down 18% and 5% year-on-year, these TCE earnings outperformed the Handysize and Supramax spot market indexes by 1,140 and 3,360 respectively in the year.
Our outperformance narrowed in the second half, which is typical in a rising freight market due to the effect of existing cargo contracts committed earlier at lower levels and the lag between spot market fixtures and the execution of voyages. Our Supramax outperformance was particularly strong due to our successful management of our scrubber-fitted ships and the bunker price spread that was especially wide early in the year. So far, we have recovered 44% of our original scrubber investment, including realized bunker price spread hedges. Our Supramax outperformance also benefited from a relatively stronger Atlantic market where the majority of our Supramaxes are trading. Our operating activity generated a healthy margin of $1,080 net per day over 15,500 operating days in the year.
Slide six shows the positive development of market rates and our earnings from loss-making levels in the first half of 2020 to breakeven levels in the third quarter and into profitable levels in the fourth quarter, and more substantial profitability in early 2021. The dotted line across the charts illustrates the indicative breakeven level after G&A on our core fleet. We have currently covered 94% and 100% of our Handysize and Supramax vessel days for the first quarter of 2021 at $10,150 and $13,380 per day net respectively. The red bars to the right show last night's Handysize and Supramax index rates to give you a sense of the current very attractive spot market levels. Please turn to slide seven. The solid blue line represents 2020, and note the recovery in market freight rates over the last seven months of last year.
The red lines show the remarkable and unseasonal further strengthening in 2021 to date. Handysize and Supramax rates have quadrupled since May 2020 to 10-year highs. The recovery is driven by strong Chinese dry bulk imports, which grew 8% year-on-year overall in spite of the pandemic. Global shipments of grain, which grew by more than 8%. Recovering demand for Asian coal, Indian coal in particular, and construction material, and unlike the fourth quarters of 2018 and 2019, that were negatively impacted by U.S. tariffs and swine fever in China, U.S. grain exports, including to China, were very strong in the fourth quarter of 2020. This has continued into 2021 and is partly why Atlantic rates are significantly above Pacific rates.
Recent market strength has also been supported by slowing net fleet growth since the second half of 2020, and fleet inefficiencies due to COVID quarantines, trade tensions, and a fleet imbalance between the Atlantic and Pacific basins. Please turn to slide eight. In view of the generally much improved conditions and outlook, we resumed our strategy to grow and renew our own fleet with the acquisition in November of four high-quality 2015-built Ultramax ships, followed by another secondhand Ultramax early this month. On the back of the improving freight market, asset values have rebounded by around 15% since the lows of last year. We consider our five recent Ultramax acquisitions to have been well-timed. We have grown our own fleet significantly in recent years.
In particular, we have grown our Supramax fleet with the acquisition of Ultramax vessels, and we continue to sell our smaller, older Handysize vessels to trade up to newer Handysizes with larger carrying capacity. Supramax and Ultramax vessels offer a larger earnings upside in strong markets, and this, combined with our overall fleet growth, gives us really good leverage to the market improvement we are currently seeing. On slide nine, we show indicative cargo loading data for each of the main dry bulk cargo sectors, which supports some of the points I made in slide seven about the drivers of this recovery. Grain volumes grew the strongest at over 8% compared to 2019, as people and animals need to eat in spite of the pandemic.
Minor bulks were down 2% compared to 2019, due primarily to weak demand for construction materials in the first half, but loadings have recovered strongly since June. Healthy iron ore volumes out of Brazil and Australia drove a 3% increase in ore shipments year-on-year, driven by strong Chinese economic activity and domestic steel production. Coal was the weakest performer in 2020, affected by lower energy consumption due to the pandemic, but coal volumes, Indian coal in particular, have gradually recovered since July. All four commodity groups were up year-on-year in December, and our two key cargoes, minor bulks and grain, have started 2021 strongly. Slide 10. New ship ordering in 2020 remained concentrated in the Panamax and Capesize segments, but was significantly lower than in recent years.
The overall dry bulk order book at 5.7% of the existing fleet is now the smallest it has been in decades, which means continued support from fundamentals in the next few years. The combined Handysize and Supramax order book is even lower at 4.6%. Please turn to slide 11. Scheduled new building deliveries for 2021 are 30% lower compared to actual deliveries in 2020. We expect new ship ordering to remain muted despite stronger freight rates, discouraged primarily by the uncertainty around environmental regulations and future technology. Our segments continue to benefit from lower fleet growth than the larger vessels. Slide 12. IMF projects global GDP to rebound from a 3.5% contraction last year to growth of 5.5% in 2021. Clarksons estimates minor bulk demand to rebound from a 1.5% contraction last year to growth of 4.9% in 2021 and 3.7% in 2022.
While the combined Handysize and Supramax fleet is expected to grow by only 1.8% in 2021 and 0.4% in 2022. This tighter supply and demand balance is already benefiting the dry bulk market. I now hand you over to Peter, who will present the financials, and I will be back afterwards with a wrap-up. Peter.
Thank you very much, Mats. Good afternoon, ladies and gentlemen. Please turn to slide 14. The weak freight market in the first half of the year, coupled with the Handysize fleet impairment in June, negatively impacted our annual results in 2020. The performance in the second half of the year was considerably stronger, and in this period, we returned to positive underlying and net profits. OpEx and G&A were very well controlled in 2020, and Handysize depreciation reduced in the second half due to the effect of the impairment. Since the group posted a full loss for the full year, the board has decided not to declare any dividend. Please turn to slide 15. Our core Handysize fleet posted a negative annual contribution in 2020, albeit with the second half of the year showing a significant improvement over the first half as rates recovered.
Our core Supramax fleet, boosted by the scrubbers on 28 of our vessels and our highest share of vessels in the Atlantic, achieved almost $2,000 per vessel per day profit, yielding an overall positive Supramax contribution of $25 million in 2020. This is an extraordinary result in what was generally a very weak dry bulk market year and validates the investments we have made in growing our Supramax fleet in recent years. Our operating activity contribution was a strong $17 million or $1,080 per day, a continued improvement over recent years. Please turn to slide number 16. Our Handysize core business costs are well controlled and blended cost reduced by $370 per day or 5%. Our owned vessel cost reduced by $270 per day, mainly due to lower depreciation from the mid-year impairment. OpEx was well controlled and remained the same as in 2019.
The cost per day of long-term chartered ships also reduced as legacy contracts expire. We replaced them with primarily owned ships at lower breakeven levels and with short and medium-term chartered-in ships. Please turn to slide number 17. The overall blended cost per day of our core business Supramaxes reduced year-on-year as the daily long-term charter cost decreased in 2020 as we delivered more expensive chartered ships. Our Supramax owned vessel daily cost increased by $240 per day, mainly because a large proportion of the Supramax fleet trades in the Atlantic and cost increased due to more expensive crew changes and spares deliveries from Asia. Finance cost per day also increased slightly, partly due to a cost reallocation between our Handysize and Supramax fleet following the Handysize impairment. On slide number 18. The operating cash flow for 2020 was $181.5 million.
That is inclusive of all long and short-term charter hire payments. Despite lower TC rates, this was higher than 2019 due to positive movements in working capital. Our borrowings decreased due to net repayments of $178 million, offset by drawing down $166 million on committed facilities. CapEx consisted of $38 million paid for three vessels delivered in the first half of 2020 and $65 million in dry docking, scrubbers, and ballast water treatment systems. We docked some 32 vessels in the year. Including the net interest and the dividend payment in May 2020, our cash position increased to $235 million at the end of the year. In addition, we have $128 million of undrawn committed facilities. Please turn to slide number 19.
We ended 2020 with a strong balance sheet, as evidenced by the $362.5 million of cash and committed liquidity, as well as lower net debt compared to the beginning of the year. This despite the market volatility. We achieved this through careful managing of our liquid resources and the leveraging of our sector-leading access to funding. During the year, we raised a total of $63 million in new secured borrowings from banks and owners and renewed our $50 million unsecured 364-day facility at very competitive costs. We have the capital resources to continue our strategy of growing and renewing our fleet when we see attractive opportunities. I now hand you back to Mats for his wrap-up.
Thank you, Peter. Please turn to slide 21, our strategic direction and priorities. We are continuing to develop our somewhat unique business model of having both a core asset-heavy model with owned and in-house managed ships and an asset-light model where we use short-term chartered in ships to provide a service to our customers while making a margin. This is important, especially in weaker markets. In rising and strong markets that we are currently enjoying, it is of course our now much larger core fleet that is the engine and provides the leverage and profitability to us. We continue to assess opportunities to acquire secondhand vessels at attractive prices, and our plan is to continue to grow primarily our own Supramax fleet. While in Handysize, we continue to sell our smaller, older vessels and trade up to newer Handysizes with larger carrying capacity.
Like most other shipowners, we are not contracting new buildings now with existing technology, as secondhand ships yield higher returns, and because of the uncertainty over new regulations and technology. We will wait until low-emission ships become technically and commercially viable. We are investing in further optimization, systems, and process improvement on our ships and in our offices. Please turn to slide 22. Our owned fleet's carbon intensity continues to reduce and is on course to meeting our IMO-aligned target of a 40% improvement by 2030. Customers prefer freight partners who own and operate their own fleets, and while always focusing on safety, we are progressing our decarbonization initiatives, including, one, maintaining our very high laden to ballast ratio. Two, continuing to modernize our fleet by gradually trading up to younger, larger, more energy-efficient ships.
Three, investing in fuel efficiency technologies and operating practices such as slow steaming, engine tuning, weather routing technologies, trim and draft optimization, and many other optimization initiatives. We're also neutralizing our carbon emissions from our global shoreside activities by carbon offsetting. We have an outstanding technical team and are actively involved in the industry-wide discussion about how shipping will decarbonize and meet the IMO's longer-term goals. There is no doubt in our minds that IMO's decarbonization rules will lead to lower speeds, further supporting the demand-supply balance. It is comforting to know that as the world decarbonizes, we will continue to carry the non-fossil fuel commodities that will be the mainstay of future trade. Wrapping up on slide 23. Although some COVID-related uncertainty remains, the demand outlook is positive, with vaccines and economic stimulus expected to lead the demand recovery.
The dry bulk order book is now the smallest it has been in decades, and fleet growth is expected to slow further because of the effect of environmental regulations and on new ship ordering and on vessel operating speeds. All this presents real potential for a continued beneficial demand-supply balance in the next few years, from which we are very well-positioned to benefit. I'll finish up with a reminder that our now much larger owned fleet has largely fixed costs, and a change in freight rates will directly impact the underlying profit. We say that for each $1,000 change in daily TCE, the underlying profit and operating cash flow of the group will change between $35 million-$40 million annually. I really encourage you to do the math with the strong rates we are currently seeing.
Remember the lag between fixing ships in the spot market and the execution of voyages. It takes a few months before the current strong rates show up in our P&L. Before we move on to questions, I would like to mention that this is my last annual results presentation with Pacific Basin. As announced in January, I have decided to retire at the end of July and return to my homeland, Sweden. I am very proud of the way we as a team have developed and positioned our business during my nine-year tenure as CEO, and it has been an honor serving the company over this period. I do look forward to speak to you again at the 2021 interim results announcement in July.
I think it will be an exciting interim report, and we will then also introduce you to my successor, Martin Fruergaard, who I am confident will be an excellent new CEO for Pacific Basin. Ladies and gentlemen, I will now hand over to the operator who will open up the lines for any questions you may have. Operator, over to you.
Thank you very much. Certainly. We will now begin the questions and answer session. If you have questions 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 hash to cancel the question. Again, please press star one if you have any questions. Our first question from the line comes from Andrew Lee of Jefferies. Please go ahead.
Hi. Thank you very much for your time. Mats, congratulations on your retirement. As you said, the last nine or 10 years have definitely been some interesting times, right, with folks at Pacific. It's been an amazing start to the year, right? Sorry if I ask some of these questions that you repeated, as I dialed in late. You talked about the fleet inefficiencies. How much capacity do you think has been taken out because of the problems with docking into China from Australia? Is that sizable? That's the first question. The second question is on the fleet. Could you give me the date of the fifth vessel that you purchased? When is the expected delivery date? Going ahead into this year into next year, how many more of these vessels do you think you would like to purchase? Third question is on the scrubber side.
The spread between the fuel has actually been increasing. Do you think that is sustainable? I'd like to see your outlook on that. Maybe those are the few questions first.
Thanks, Andrew. Your first question is regarding the coal that's been stuck on ships off China, prohibited from discharging due to the Australia-China trade dispute. They have started to discharge there. It has primarily impacted the Capesize market and the iron ore market, since Capesize primarily carry iron ore. It has maybe had a little bit of a positive impact for us, because Australian coal have moved to India instead, and other places, and that sometimes goes in smaller ships. Not a real significant factor. There are the other drivers that we mentioned that really drives our markets. China's strong growth overall, and the very strong U.S. grain exports, are the real underlying drivers of the recovery. Your second question was on the fifth Ultramax ship that we bought in early February, that will deliver to us in the second quarter of this year.
How many more will we buy? Well, we never define that exactly, because it depends on what opportunities presents itself to us. We are saying that we are continuing to actively assess good opportunities, but we are continuing to be very disciplined, and will only buy the right ships at the right prices. The scrubber spread has expanded a bit again. Yes, that's correct. The difference between low sulfur and high sulfur fuel now is, call it $130-$140 per ton. That represents, if you take into account a little extra cost, you have a net benefit of call it $1,200-$1,500 per day at the moment. I hope those answers your questions, Andrew.
Thank you. Maybe one final question is on page 12 of the presentation, on vessel days. Your Supramax off-hire days, it dropped from 1,000 days in 2019 to 280. What was the reason?
You're asking about off-hire days?
On page 12, yes, the off-hire days, the owned off-hire days for the Supramax. It was 1,000, 1,050 in 2019. For last year, it was fell to 280 days.
This is not slide 12. This is some other page you're referring to.
No, page 12 of the results announcement.
Of the results announcement.
Okay.
Okay. Maybe Peter can take that up separately. Off-hire days on Supras, probably higher in 2020 due to all the scrubber installations. That's probably the answer to your question.
Yeah. We preponed a lot of dry docking to get the scrubbers ready for IMO 2020. That would have driven up the off-hire days for the Supramax fleet. Of course, if we prepone dry docking, we don't have to do the year after. That's probably the reason.
Okay, thank you.
Thank you for the questions. Once again, if you would like to ask question, please press star one on your telephone and wait for a name to be announced. We have our next question from Parash Jain from [USR] HSBC. Please go ahead.
Thank you. Hello Mats and Peter. Mats, again, congratulations, and we shall meet as much as possible before you depart from Hong Kong. I have three questions. First, as you already alluded in the past, what will trigger the new building wave? The gap between the secondhand vessel and new build have started to narrow. How far are we, or you think that we will definitely not see a surge in new build? After a record 2020, we have seen a surge in the new build activity in container as well. If these spot rates are to sustain for a quarter or two, do you think that the gap between new build and secondhand is still wide enough, which would discourage ship owners to order new build? Any thoughts on that? Secondly, on these spot rates, can you help us visualize them?
How much of that you would owe due to supply side constraint or condition, when do you expect those things to normalize? On the demand aspect, I think I'm fairly comfortable. Lastly, on scrubber, just picking from where Andrew has left. Now that we are pretty much an year out of scrubber. In your experience, i.e., is it delivering the results that you are hoping? Is there a two-tier market developed for the vessels with the scrubber and without scrubber? Thank you.
Thank you, Parash. Good questions. Will there be a new build ordering wave? We do not think so for the reasons that we outlined. Nowhere close to what it would have been if it wouldn't have been for these new environmental regulations and the uncertainty about technology. Let me repeat that who in his right mind will go to his board today and recommend that I want to order a ship today that's going to deliver two years from now, that I need 25 years of life on, and this ship that I'm going to order have an engine that is built and designed to burn heavy fuel oil. Would you, as a board member, be all excited about that? I don't think so, right? We don't think that we will see a lot of this.
The yards are, of course, doing what they can to market new buildings, but what we will see instead is slower speeds, and it will be forced by the IMO rules, et cetera. The difference in fuel consumption between the latest design ship and a good secondhand ship at 11 knots is very small, right? It's just a much better, safer bet to buy a secondhand ship. We will definitely not see any new build ordering in any volume before first, at least secondhand values have to go up, right? You can buy a seven or eight-year-old ship for half the price almost, and you have a much shorter payback time, and you can have your money back well before 2030, so to speak. It's just a much more attractive proposition. How much of the spot rate increase today is due to supply constraints?
Not that much, right? It's a little bit of fleet inefficiency. I would say probably the biggest impact is that due to this very strong U.S. grain exports in the fourth quarter last year and into this year, that has kind of drained the Atlantic market on ships. We should highlight to all of you that there's a very wide discrepancy between the Atlantic rates and the Pacific rates. It's a shortage of ships in the Atlantic that has driven up freight rates to these levels, and Atlantic rates are much higher than the Pacific. It is the U.S. grain exports combined with China's very strong imports that has pulled ships into the Pacific, and that is the driver of the strong rates, not really supply constraints. The scrubber experience, we are very happy with how we have handled it. We had them ready on time.
We took advantage of the wide fuel spread early in 2020. We installed them on time, on cost, on budget. They have been operating well, and enjoying even today a $1,200-$1,500 premium is significant, right? Yeah, we are very happy. This is kind of over and done with as regards in the market. Nobody talks about scrubbers. Customers don't ask about it. The freight rates are set based on low sulfur fuel. Again, it has developed the way we thought it would, and we have benefited from it.
Thank you, Mats. Just if I may ask another follow-up question on scrubber. Given that 100, 150 perhaps is a new normal with respect to spread, do you see any merit in extending your scrubber drive into Handysize? If not you, are you seeing that your industry players are thinking of installing a scrubber into a smaller Handysize vessel? You think that Supramax is pretty much as low or as small as they can get?
Very few ships today consider installing scrubbers, right? The opportunity was early. You had to be out there early, and plan it early, and order the scrubbers early, and be there to take advantage of the $300 per ton spread that we had early in 2020. Now it is $130, $140, but the forward curve, as you know, the Brent crude oil is in backwardation, and so is the spread a little bit. It doesn't make sense to install a scrubber now. The opportunity was there. We took it. It is gone. We're very happy with the ones we have. We do not see a second scrubber wave unless the spread, of course, goes significantly up again. With the environmental uncertainty going forward and everything, we think it's over, so to speak, right?
We are not planning any new scrubber installations, and definitely not on Handysize ships. You can almost count the scrubbers on Handysize ships in the world on both of your hands, or maybe you need three hands. Extremely few of the 3,500 Handysize ships in the world have installed scrubbers because the consumption is too low, and now the spread is too small.
Thank you.
Thank you, Mr. Jain. Do you have a follow-up question?
No, I already asked my question. Thank you so much.
Thank you for your questions. Allow me to go to the next question from Yang Liu from Pinpoint. Please go ahead.
Hey. Hi, Mats. Congratulations for the fantastic results and outlook. I've been following your company for over 10 years. I've never been as excited as today, to be honest. My question, I think enough has been said regarding your core assets, core fleets. How about the other smaller parts of your business, like Panamax? That seems to be under a long-term contract, but is the contract going to be restrike to higher rates? Is there any potential for that? That's number one. Regarding your business strategy, I think we understand you primarily focus on the spot market, but given the very high rates, is there any possibility at a certain market rate level you would consider shift a part of the fleet if there's a demand to the long-term contract? Those are my two questions. Thank you.
Thank you. We own one Panamax, and it's really a long-term deal with many years left. It's bareboated out, so we're not involved in operating the ship, neither technically nor commercially. It gives us a very good and stable contribution, and that will continue. The second we have been a ship that we time-chartered in and time-chartered out and made a profit in between. That time charter expires later this year. Those are two deals, our legacy deals, that have been very good, still are very good. We do not expect to expand into Panamax. We are focusing fully on Handysize and Supramax. The strategic question, spot versus fixed contracts. The spot market has extreme strength today, and it needs to stay there for a bit longer before people are considering fixing contracts at these levels.
It's the spot market strength that is there, and we are watching that very closely. I would absolutely not rule out that we cover a portion of our fleet. On a 12-month forward basis, we would typically have 20%, 25%, sometimes a little bit more percent of our days covered by contracts. It's too early for customers to fix contracts at these very heated levels. Right now, we're just watching it, enjoying it, and again, just a reminder again, that it takes a little while before those very high rates hit our P&L, because what we fix today, we don't execute that voyages until one to three months forward. Yeah, we will definitely consider taking cover at attractive levels when we see this settle a little bit, and customers are there to do long-term contracts. They're not there yet to do that.
I hope that answers your questions.
Thank you. Yeah, thank you.
Thank you for the questions. Next question comes from the line of James Till from Bloomberg Intelligence. Please go ahead.
Hi. I'd like to clarify more also on the contract cover. You mentioned that it is 46% and 63% for 2021. I think follow up on the earlier question, when these contracts expire, are you going to stay on the short-term or spot contract rates? I mean spot rates for now, as you said, to try to enjoy it, or will you try to fix it, or is it depending on the customer preference? Is there a target in terms of a ratio, or is that a flexible thing depending on the market situation in terms of what level of long-term contracts that you would like to have?
Yeah, thank you. The majority of our cargo contracts are what we call backhaul contracts, and they are there for very specific reasons, and it is to facilitate the high laden percentage system that we have built up over many years. You should expect us to renew many of these contracts when they come up for renewal, because they serve a very important purpose. The key reason for why we have a long track record of outperforming is that we have a very high utilization of our ships, and the backhaul contract is a very important ingredient in that business model. Again, if you look at the cover for the rest of the year, especially the third and fourth quarter 2021, those are contracts that were taken previously at earlier lower rates. Importantly, they are backhaul heavy.
When we execute the backhaul contract in combination with a higher paying front haul, the average TCE that we achieve is higher than what you see in these cover rates. The other thing you should be aware of in the Supramax cover is that there's no scrubber benefit included in that forward cover TCE. There's another scrubber benefit coming on top. Important to note that we are not catching 100% of this very enjoyable freight increase, but we're catching a lot of it, and more for every month that we go forward, right? We have high cover in the immediate months, but as we go forward, our open days are increasing, and we're able to take more advantage of these higher rates. We will always continue to have a portion on contracts, and it's for the reasons I mentioned. Thank you.
An online question coming from Sally.
Okay. If I may follow up.
An online question-
Yeah, if I may clarify again. The 94% and 100% for the first quarter then is achieved because you also cover the forward cargo on the, not the backhaul, but the forward haul as well. By that you will prefer to leave to spot rates, going forward, right? Is that the right understanding?
Yeah. The first quarter is pretty much done, right? That's why we say 94% and 100%. Since we fix forward, we have very few open days left for the first quarter, earning days. We have higher cover for the second quarter, lower for the third and even lower for the fourth, so to speak. We're showing you the cover for the first quarter, which is almost fully booked. We're showing you for the full financial year, and it's for the full financial year, you need to be aware of the fact that there's backhaul. There's more in it than what we're showing here. The first quarter is both backhaul and front haul. It's already done. Both front haul and backhaul voyages are in the first quarter cover numbers.
Okay. Thank you very much.
Thank you.
An online question from Sally Macdonald at Marlborough Fund Managers asks, "Please could you talk through the impact that the new Regional Comprehensive Economic Partnership treaty might have for the Asian region and your business in particular?
Peter?
Yeah. In general, Sally, more trade and freer trade is always good for dry bulk and for Pacific Basin. However, we shouldn't overestimate the importance of a treaty like this necessarily. It's a fairly thin trade treaty, focusing more on tariffs, than on deeper structural issues. Of course, commodities are not necessarily subject to a lot of tariffs. It's positive, but I don't think we should overestimate any short-term impact on Pacific Basin. I hope that answers your question.
Sally's follow-up question is, "Maersk has already announced and will consider hydrogen-based engines. Is this something you feel is feasible for your fleet yet?
Yeah. I think Maersk is working primarily with methanol as the fuel, and I'm sure they're looking at hydrogen as well. Our view on these low emission or no emission fuels and engines are that we are tracking it very closely, but it is way too early to think about investments. Some large companies are doing prototypes, the first prototype vessels with these types of engines and fuels will probably be built and operational 2024, 2025. Before vessels like this is technically and commercially available, we're probably into 2029 or to the end of this decade. Handysize and Supramax dry bulk ships will not lead this development. It is much more attractive for us to track it very closely. Of course, we have people watching this very closely, but way too early to consider investing in ships of this nature.
Now, remember that ships like ferries and container ships, they operate on fixed lines, so they know where they're going all the time, so they can build up a fueling infrastructure for that specific ferry. There have been methanol-fueled ferries in the Baltic for many years already. For the large cargo ships, tankers, and bulkers, we operate in what we call tramp segments, and you never know where your ship is going next. You need a worldwide infrastructure bunkering system for these new fuels before you can consider installing engines like this in our segment.
It's many years out, and meanwhile, we believe that we will see a better supply-demand fundamentals because people will wait with ordering new ships until they know which one of these fuels, which one of these technologies will be the winning ones, will be the most economical ones, and refrain from ordering ships with fuel oil engines in the meantime, and instead focus on the ships we have. We need to make money on the ships we have, and that's what's going to happen in the years ahead, as we see it.
An online question from Olivia Spore asks, "How will you allocate excess cash flow between dividends, share buyback, and shipping acquisitions? How long do you expect the tight market to last, given we are in the low-demand season?
Let me talk about the capital allocation first. Our dividend policy is fairly simple. We distribute at least 50% of our net profits, and we expect to continue to do that. When it comes to allocating capital on top of that, we have, for a number of years, considered shipping investment to be attractive, and hence, we have grown our fleet and invested in new ships. We have used our cash as well as issuing shares to do that. That has been, I think, the right strategy, which is now validated by improving markets. Should at some point the market continue to strengthen and values go up, there will be a point, of course, where ship values look expensive. At that point, we should also be earning a good cash flow if rates are high.
Then, of course, we have to reconsider that equation, whether to return capital to shareholders in other ways and buybacks and changes to the dividend policy at that point can always be considered. However, I think it's quite early days yet, and I think we're quite far away from that point. We'll have to see how 2021 develops. Today, we are still focused very much on growing and renewing the fleet with the excess capital that we have. Then I think there was a second question in terms of the market. Mats, maybe you want to talk about the tight market and how long it will last.
Again, it is very difficult to crystal ball on that, right? Again, we're seeing extreme tightness right now. We say that it can't go up forever, right? When it settles, it will settle at a significantly higher level than what we had in earlier years. It's driven both by underlying better supply-demand fundamentals and due to the strong U.S. Gulf grain exports and the other reasons that we mentioned. We're expecting certainly higher rates going forward, but how high is just impossible to predict.
We do have a few more questions on the line. The first one comes from Shawn of JP Morgan. Please go ahead.
Hi, Mats. I just got one question regarding the new vessel constructions. Do you mind if you share what is the typical payback period as well as the IRR between investing in secondhand vessel as well as a new vessel? On the follow-up on that, going forward with new environmental regulations, do we see the payback period actually increasing? Because potentially you need to do more retrofitting or dual fuel technology. Thank you.
Yeah, the economics of new technology ships is way too early to talk about, because we don't know how much they're going to cost. We don't know how much the engines will cost. We don't know what fuel. We don't know how much the fuel will cost. It will certainly be more expensive than current technology. There's no doubt about that. When we look at investments of secondhand ships, we are expecting returns that's well above our WACC. We're using, as an absolute minimum, 7% return on total capital, and that's based on borrowing at 4% or 3.5% and then 10, 11% return on equity. We're hoping to do, obviously, a lot more than that if we can enter at the right time and exit at the right time. As a minimum, 7% return on total capital when we look at secondhand ships.
The time horizon that we're looking at typically now would be to be very safely done with our payback well before 2030 when we buy secondhand ships, and that we can sell the ship at that point with a good return.
Okay. Thank you.
Thank you for the questions. We also have a follow-up question from Yang Liu of Pinpoint. Please go ahead.
Mats, you mentioned in the earnings report there could be some additional expenses related to tax due to what's going on between Hong Kong and the U.S. or China and U.S. Can you elaborate a bit more on this potential expenses or risk, please?
Just to repeat, the U.S., through executive action, have canceled the dual or double taxation agreement for shipping between Hong Kong and the U.S. Potentially, Hong Kong-based owners are liable to pay U.S. transportation taxes on freight revenue, which is simply calculated around 2% on the freight value. We are looking into how we can potentially minimize or not having to pay these taxes. There is a number of discussions going on around that at the moment. Had we had to pay this tax in 2020, just for your information, and we disclosed this, I think, as well in our annual report, it would be less than $150 per day across our business. The impact is quite manageable. We are looking into minimizing as much as we can, of course.
$150 per day, not per vessel per day?
Per vessel per day, yeah. Across the TC.
Per vessel per day?
Yeah.
Okay.
You can put that in context to current market rates of $15,000 a day, for instance.
Okay. Thank you.
Thank you for the questions. As there are no further questions, we will now begin closing comments. Please go ahead, Mr. Mats Berglund.
All right. I got some reports that slide three was not showing properly. It's an exciting slide. Please go back and look at the graphs on slide three if you haven't done so. Again, we thank you very much for dialing in to our call, and thank you very much for your interest and your support of our company. Thanks, and bye.
Thank you.