Ladies and gentlemen, welcome to today's Pacific Basin 2019 Q3 trading update call. I'm pleased to present Chief Executive Officer, Mr. Mats Berglund, for the first part of this call. All participants will be in a listen-only mode, and afterwards, there will be a question and answer session. Mr. Berglund, please begin.
Thank you very much for joining us today. As mentioned, my name is Mats Berglund. I'm the CEO of the company, and with me is also our CFO, Peter Schulz. We'll go straight into our numbers and look at slide number one. In the third quarter, we made $9,480 per day on our Handysize ships and $11,580 on the Supramax ships. In the first nine months of the year, we made $9,270 per day on the Handysize ships and $11,120 per day on the Supramaxes. Our outperformance for the first nine months was about $2,750 per day on the Handysize ships and $1,920 on the Supramax ships. Don't be alarmed by the lower outperformance in the third quarter alone.
That has to do with the sharp increase in index rates during second half August and September, because the earnings of those higher index rates do not come to us until the fourth quarter. You have to look at outperformance over a longer period, and if you look at the nine-month period, our outperformance is stronger than the five-year average and significantly higher than the last few years. If we do look at the fourth quarter so far, we have covered 67% of our Handysize days at $11,450 per day and 74% of our Supramax days at $13,660 per day. As you can see, the coverage rates so far for the fourth quarter is about $2,000 per day each higher than the third quarter actuals. For 2020, we have covered 17% of our Handysize days at $8,980 per day and 22% of our Supramaxes at $11,330 per day.
As we normally do for the longer-term cover, we highlight that those rates are backhaul heavy, because those are the contracts that we primarily protect and renew even in weaker times, as we have had in the early part of 2019. Don't worry, these lower cover rates will combine with higher fronthaul rates and combine to higher TCEs. Look at some other highlights for the quarter. If you look at the box to the right, in the third quarter, we operated on average 236 ships. As we announced in September, we committed to buy 4 modern Japanese vessels for $74 million, 33% to be funded by new equity. Note that 3 of these 4 ships we had on charter already, so we're continuing the strategy to reduce the number of long-term charters and own the ships instead.
This year, we have sold two older, smaller Handysize vessels. Following the delivery of these bought and sold ships, our own fleet will grow to 117 ships. As you can see, we are continuing to do exactly what we said we would do, grow our Supramax fleet with modern Japanese ships and trade up our Handysize ships by buying modern larger Handysize ships and sell a few of our smaller, older Handysize ships. We continue to reduce the long-term charter in number of ships. Turn to slide two, you can see the rate development by quarter a bit easier in these graphs.
As you can see, we are well below last year in the first three quarters of this year, but the fourth quarter looks strong, and that's when we get the effect of the stronger index rates that we have seen in the last few months. Turn to slide three, you see market rates in more detail. Just to explain the increase, why have we seen the increase in the third quarter? Well, it's really due to strong grain export volumes out of South America and the Black Sea, combined with strong minor bulk demand, robust demand for bauxite, nickel, and manganese ore. These are the commodities growing the strongest percentage-wise. Also a return to normal levels of exports out of the Mississippi River as regards grain, and out of Brazil and Australia after the one-off supply disruptions in the first half of this year.
We have seen a little bit of a softening of rates, as you can see on the graph, leading up to and through the Chinese Golden Week holiday. You can hardly see it on these graphs because rates have actually increased a bit again in the last week, primarily in the Pacific, on the Supramax and Panamax side. A good sign of a stronger fourth quarter in front of us. Slide four. In the graph to the right, we make the point that it's really minor bulk that is driving overall dry bulk demand. Look at the blue field in the bar graphs to the right. Minor bulk is growing quite solidly with about 4% in 2017, 2018, 2019, and is expected to grow at 3.7% in 2020, in spite of a weakening world economy.
If we look at China in particular, demand and import-wise so far this year, look at the second bullet point below the graphs. Minor bulk and coal in the first eight months of the year grew at 17%, that's minor bulk, and 8% coal. Actually coal grew 10% if we include the September numbers that were just released. While imports of grain and iron ore fell 13% grain and 3% fall of iron ore. The grain reduction is due to the US-China trade war and the effect of the African swine fever on the demand for soybean. Note that both grain and iron ore volumes returned to positive growth in July and August. We also just saw positive import numbers for iron ore in September, just released.
We're obviously keeping our fingers crossed for more grain from the U.S. to China if Trump and Xi can agree the deal that is talked about right now. Going back to the graph on the right side of this slide, see that, in this case, Clarksons is estimating a bounce back to growth for all the four major dry bulk commodity types in the year of 2020. Overall dry bulk growth is expected to grow at 2.9% next year in spite of a slower world economy. Slide five, we go to the supply side. In the graph to the left, we're showing the overall dry bulk supply situation with newbuilding deliveries is the bars going up and scrapping the bars going down. The line is the net fleet growth. We're seeing a net fleet growth of about 3% per year at the moment.
If you look at the graph to the right, where we have carved out the two segments that we are invested in, which is Handysize and Supramax, you see a very clear reducing trend of lower net fleet growth from a growth of 5.7% net per year in 2015, down to an estimate of 2.4% net fleet growth for 2019, and an estimate of 1.8% net fleet growth for next year, and an even lower number for 2021. Much better favorable fundamentals on the supply side for our segments. That's further illustrated on slide six, where you see that it looks much better for Handysizes in particular. Handysize segment has an order book which is about 5% and twice as many ships over 20 years old, 10% of the fleet is more than 20 years old.
You'd much rather have that than the Capes and larger vessels, where the order book is much bigger and the number of older ships is much smaller. We much prefer exposure to our segment, both supply and demand-wise. This is what we're showing in slide seven, where we combine the line graphs here, showing both demand and supply in the same graph. The chart to the left shows the overall net fleet growth of about 3% that I mentioned, but it looks much better for the smaller vessels with minor bulk demand well above the Handysize and Supramax net fleet growth. This is the chart to the top right and the highlighted box there. What we're showing here is the demand growth for minor bulk going from 5%, reducing down to 3.7% for 2020.
We put against that the net fleet growth of combined Handysize and Supramax reducing to 1.8%. The point here is that we can afford slower world economic growth and still get a tighter market in our segments, since the net fleet growth is reducing more than what demand is growing at. In addition to these fundamentals, we also have the IMO effect that we will get to in a minute. Remember that there's more factors than supply and demand that can affect the tightness of the market, such as speed and off-hire. Before going to that, look at slide eight, where we show the development of vessel values. Handysize vessel values to the left and Supras to the right. The upper line is typical newbuilding prices, and the lower line, the price of a typical five-year-old ship.
Secondhand values remain low, as you can see here, both historically and relative to newbuilding prices. This, together with the uncertainty about future technology, is discouraging newbuild ordering, which bodes well for the years ahead. We expect the supply side to remain disciplined because of these two factors. We see upside in secondhand values, and we will continue to cautiously grow by looking opportunistically at good quality secondhand ship acquisitions of both modern Supramax and Handysize ships while we will trade likely out of some of our older and smaller vessels, just as we have done earlier this year. Slide nine. We mentioned how the factors newbuilding and scrapping can affect the supply side, and here we show one such example. The graphs here show the number of ships.
This is the worldwide fleet, not our ships, but the world fleet of Handysizes and Supramaxes that are positioned to the Pacific region compared to last year levels. As you can see, we have unusually many ships positioned to the Pacific, and in particular to China to do work in dry docks preparing for IMO 2020, fitting ballast water treatment systems, scrubbers, and regular dry docking and repair works. This effect is even more visible on the larger ships. Here we show it for our sizes, but as you know, a larger proportion of the larger ships are fitting scrubbers, and a larger proportion than normal are therefore in the Pacific. We're showing this to explain partly why the rates have increased recently. At the same time as we have more ships off-hire in Chinese dry docks, we had a bounce back in Atlantic demand.
I mentioned the grain demand out of Black Sea and South America. We mentioned the Brazil iron ore bouncing back. More demand for ships in the Atlantic while we have fewer ships than normal in the Atlantic. We got a significant increase in freight rates, primarily in the Atlantic market. We're also highlighting here that the repair yards are overbooked. The waiting time is high. We have delays. There's shortage of labor and pipe workers in particular, et cetera. This is causing also more off-hire than normal. This will go on through at least the first half of 2020. Again, the point here is that this is contracting supply compared to a normal year, and we're feeling the effects of that already, and we think it will continue at least through the first half of next year. Turn to slide 10, starting to wrap up.
We are cautiously optimistic on the markets in our sectors. We saw an increase in market freight rates in August and early September. As mentioned, rates moderated a little bit through the Chinese Golden Week holidays, but rates are still at around the peak levels of last year, and Pacific rates have improved in the last week. We expect to see the continuation of generally tight market conditions in the fourth quarter. This is the normal peak season, and we have the effect of more ships in dry docks. This also goes for us, by the way, and we have successfully installed scrubbers so far on 15 of our Supramax vessels. This is causing more off-hire than normal, especially in the second half of 2019, but it sets us up for what we believe will be stronger years ahead.
Very importantly, as we go into 2020, a majority of the world's ships are not installing scrubbers. That goes for us as well, right? We are not installing any scrubbers on any of our Handysize ships. The majority of the world fleet will be switching to more expensive low sulfur fuel. This lowers ships' optimal operating speeds, which we expect will have a positive effect on the dry bulk supply and demand balance. Note that this is not a temporary effect, but a permanent one. The cost of the more expensive bunkers is passed on to the customers, and the effect is a contracting effect on the supply side, which of course, subject to the underlying oil price, all things equal, is positive for the supply-demand balance.
Clarksons estimates minor bulk demand growth of 4.6% this year versus Handysize and Supramax net fleet growth of 2.4% 2019, and 1.8% for 2020. All this combined means that we remain cautiously optimistic about the minor bulk markets, despite the continued uncertainties about the US-China trade war and prospects for slower global economic growth. Slide 11, our business model continues to outperform. It takes all the components listed to the left of this slide to achieve that. It's not so easy to copy. It takes a long time to build the platform that we have built. We're beating the Handysize rates on average the last five years with almost $2,000 today, and on Supramax with about $1,400 today. Note that year-to-date, we are well above this five-year average on outperformance.
Turn to slide 12, remember that it's not only on TCE revenue where we outperform, but we also compare really well with our listed peers as regards our competitive cost structure. This goes for OpEx and G&A, which has a lot to do with our scale, and we also borrow and have low finance costs thanks to being able to borrow at very attractive terms. This means that we are well-positioned to benefit from a stronger market, and we have significant leverage due to our now much larger owned fleet. Remember, as you do your modeling, looking at the sensitivity box to the right, that $1,000 per day means $35 million-$40 million on our results. Note, though, that we no longer have the owner's contract utilization rate back with $16 million last year. That no longer exists, so don't forget to build that in.
We feel there's a lot of things going for us. We keep our fingers crossed for a US-China trade deal on agricultural products, which would be very valuable to get the U.S. soybean moving again to China. We have the IMO effects that we are already feeling the effects of as regards the docking time, but the slower speeds we have in front of us soon as the low sulfur fuel regulation comes into effect close to year-end. We have attractive fundamentals for minor bulks and in our segments. Peter, any balance sheet highlights?
Thank you, Mats. I just wanted to remind the listeners again that after the close of the interim period, 30th of June, we paid back in full our $125 million convertible bond. Pro forma for that repayment and the drawdown on our final facilities, we have about $212 million of cash, which is a very robust cash position. However, bear in mind, as Mats mentioned before, 2019 is a big investment year for us. We are dry docking over 60 vessels. We are putting ballast water treatment systems on all the vessels we dry dock. We are also investing in scrubbers on a majority of our Supramax fleet. We will have more capital expenditure this year than what we've had in the past. The flip side, of course, is as we go into 2020, capital expenditure will be lower.
In general, we continue to operate with a very solid balance sheet. All right, operator, let's open up for questions.
Thank you, sir. 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's your turn to speak, please press the pound or the hash key to cancel your question. Once again, it's star one on your telephone keypad and wait for your name to be announced. We have the first question from the line of Parash Jain. Please ask your question.
Thank you. Thanks, Mats and Peter. I have actually two or three questions. I'll try to put that together. First, maybe if we, Mats, if we can go to slide seven, the story that the demand and supply fundamental look significantly better in case of minor bulk compared to the major bulk. When we look at the freight rate direction, it tells us that it's the overall demand and supply or rather major bulk demand and supply, which has a bearing on the overall freight rate environment, i.e., for the first three quarters, we have seen the Handysize, Supramax rates are trailing that of 2018, despite over 220 basis point of spread in terms of demand and supply. How should we think about it going forward?
The bearing of overcapacity in iron ore and coal will continue to have a significant impact on the smaller vessels? My second question, and then you can respond to both of them together. Going into the fourth quarter and more to 2020, the supply side story is well understood. On the demand, if you can share some color with respect to the news surfacing around the coal import restrictions again in the fourth quarter of 2019, similar to what we saw in 2018. The potential medium-term impact of the African swine fever in China, does it reshape the soybean demand into China going into the remaining 2019 and 2020, even if we see a cordial dialogue or a more positive interaction between U.S. and China? Thank you.
Thanks, Parash. As regards minor bulks versus major bulks and rate development this year, on the slide seven, we're only showing yearly numbers, right?
Yeah.
That hides a lot of what's going on. In the first half interim report, we try to explain why was the market weak in the first half, and why is it stronger in the second half. The first half, you had a lot of one-off negatives that happened. You had the Brazilian, Australian supply disruption. You have floodings in the Mississippi, et cetera. We're getting a bit of a bounce back in the second half where people were reducing volumes in the first half and now filling up again, right?
Yeah.
There is a correlation between the two segments, but there has also been long periods where minor bulk rates have been much higher than Capesize rates in spite of being five times smaller. The fundamentals simply look better, both supply and demand-wise for the smaller vessels and minor bulks. We had negative disruptions from both. Grain is important for the smaller vessels, and we had grain problems in the first half. We are kind of through, we believe, the effect of the swine fever and that can potentially come back. We took the hit of the trade war primarily last winter. This is now the high season normally for U.S. soybean exports that starts in October, right? More upsides than downsides on these things. We've been through these negative disruptions. Coal imports to China may, yes, there's talk about restrictions.
There's no sign of that so far, right? September was also up significant.
Yeah.
Again, there are other commodities that are growing very solidly, bauxite, manganese ore.
Yeah. Cement imports as well.
Forest products, et cetera. We enjoy the benefit in smaller vessels of an extremely diverse set of demand drivers and a change in one
Commodity does not necessarily have that big impact because there's other factors offsetting. Again, U.S. grain exports, there was really zero soybean moving in the fourth quarter last year. It cannot be a negative change this year because it can't be less than zero. Peter, anything?
Yeah. It would be nice if the rates were only determined by headline demand and supply, but there are a lot of other things going on in the market. Speed is obviously a crucial factor, and that we've seen increasing amounts of off-hire in the last couple of months is obviously another very important factor. I think if you look at the effects of off-hire and speed on the supply and demand balance, these effects can often be much greater than changes up and down in demand, so they can have a very big impact. At the moment, most of these sort of non-market or non-supply and demand directly related factors have probably more upside than downside. A lot of that is IMO 2020 driven, of course.
Whereas last year, say, coal restrictions had a cooling effect on the market towards the end of last year, what's happening at the moment is we're starting to fill up our ships with more expensive fuel at the same time, which has an improvement in the balance because of the slow steaming. It doesn't necessarily mean that the negative effect last year will give a negative effect this year. There are many things that are driving freight rates.
Perfect. Thank you.
We have the next question from the line of Andrew Lee. Please ask your question.
Yeah. Hi, thanks for your time. I have a few questions. The first question I have is, could you provide a little bit of detail in terms of the revenue recognition lag? Is that four weeks, six weeks, two months? That's the first question. Second question I have is on the 15 scrubbers now installed. Have there been any surprises, both on the positive, on the negative side, on how it operates, et cetera? At the interim results, I think you mentioned that the scrubbers were taking around 15-18 days additional time to be installed above the dry docking time. Is that still the same, 15-18 days, or is that taking a little bit longer? Next question I have is, the switch of trading out of the older and smaller Handysize vessels.
How do you define older in terms of what age, and also what's the size of the smaller vessels? Thanks.
Revenue recognition, the average lag between fixing and voyage is about 45 days, we calculated before. I don't know, Peter, if you want to add anything on revenue recognition.
It depends on the length of the voyage, of course, but I think average length is about 45 days. Of course, there is time to get from fixing to the load point as well. Say, two months maybe on average, but we haven't done any sort of very detailed analysis. Two months is between one to three months, I think we say somewhere in our papers. There is a bit of a lag there.
The scrubbers that we have installed have gone as per plan, substantially cost-wise, time-wise, a little bit longer than expected, but not to that material. The time out of service for the Supramaxes where we're installing scrubbers would be between 30 and 40 days total. That consists of a normal dry docking time of around 20 days, and then an additional 10-20 days work for the scrubber. We're also installing then the ballast water treatment system, so a lot of work going on. The extra off-hire for the scrubber, yeah, 15, 20 days. The underlying normal dry docking, maybe a few days longer than normal due to the congestion and the yards being extremely busy. Those are the numbers. They are operating as per plan. They're successfully installed, successfully in operation. About $2 million per ship is the investment on our Supramaxes.
As regards to ships that we are selling or have sold, they are 28,000 tonners, our oldest ships built around 2002, so getting to about 18 years old.
Thank you.
Okay.
Once again, ladies and gentlemen, if you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. We have a next question from the line of Andrew Lee. Please ask your question.
Hi, guys. Sorry, maybe just one more question, as there's no questions online. The U.S. grain season has already started, right? It's probably close to ending. Has there been an inventory buildup? There's a lot of talk about the U.S.-China trade negotiations being concluded, and that could lead to stronger grain imports. I'm just trying to work out in terms of, are we going to see a strong rebound in terms of U.S. grain immediately, or do you think there will be a delay?
It all depends on how it goes with these negotiations. China has been buying some U.S. soybean in the last few months from the U.S., but not close to the normal high season volumes that's starting now. We do believe that there's more in the silos than normal. There have been disruptions in the Mississippi River barge traffic as well, right? That is back to substantially normal now. It's just extremely difficult to forecast how that is going to do. Obviously, the U.S. is selling to every other buyer they can find, but it's just impossible to replace China being the, by far, biggest soybean buyer. Again, more upside than downside there, certainly compared to where we have been seasonally before, because we're entering the high season. It's not ending.
It moves, it's harvested, it goes into silos and onto barges and stuff, and exports go on through the fourth quarter. Certainly upside compared to last year when there was very little, it was hard to replace China as a buyer straight away, so it took a while for the U.S. to develop other buyers of their soybeans. Okay?
Good. Thanks.
Thanks, Andrew.
We have the next question from the line of Holly Birkett. Please ask your question.
Hi, Mats. Hi, Peter. Thank you so much for the presentation. It's Holly from TradeWinds. I just wanted to ask a quick question, just confirming the names of the four vessels that were bought, was it in August? I have the two Supramaxes down as King Island and the Navios Ariana, and the two Handys, I have as Saldanha Bay and Seal Island. Is that correct?
I apologize, but that's the policy we stick to both when buying and selling. Those contracts are confidential with the counterpart, and we cannot breach that contract. I apologize for not being able to comment on that.
Okay. The deals have been completed then, I guess. It's just a case of waiting for them to enter the fleet.
Yes. The deal is signed, and I think we have announced that we expect that two of these ships will deliver to us in the fourth quarter, and two will deliver to us next year, latest by April.
Very cool. Okay, one more. It's less relevant for you guys, I'm going to ask you anyway. I just wondered if you'd been making any changes to safety and security on board your vessels with regards to what's happening in the Red Sea and in the Gulf, and attacks on Iranian vessels. I just wondered if that had changed your approach to how you operate vessels in those high-risk areas.
Sorry, we just kind of echo on your line there. Could you just repeat that question, speak as slowly as possible, see if we can hear your question? Sorry.
Oh, I'm sorry about that. I just wondered, with regards to the attacks on vessels in the Middle East and the Red Sea, has there been any way in which Pacific Basin has changed safety and security procedures on its vessels recently?
I think you're asking about the Middle East situation and security.
Yes.
That is not a big trading area for us and dry bulk in general. We do have ships there occasionally. The changes that we have made there is altering course to stay away from that coast, further away from that coast than normal. Obviously, be alert and following all our normal safety procedures, we have not significantly changed our trading pattern as a result of that. It is targeted or affecting tankers more than bulkers.
Sure. Okay. Well, that's it from me. Thank you so much.
Thank you.
Once again, ladies and gentlemen, if you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced.
Okay. If no further questions, thank you very much again for listening, and thank you for your interest in our company, and please don't hesitate to come back to us for any further questions or information. Thank you very much.
Thank you.
Thank you, sir. Ladies and gentlemen, this concludes our conference call. Thank you all for attending.