Welcome to today's Pacific Basin 2018 interim results announcement call. I am pleased to present Chief Executive Officer Mats Berglund. For the first part of this call, all participants will be in listen-only mode. Afterwards, there will be a question-and-answer session. Mr. Berglund, please begin.
Thank you very much. Good afternoon, ladies and gentlemen, welcome to Pacific Basin's 2018 interim results earnings call. As mentioned, my name is Mats Berglund, CEO of Pacific Basin, I'm joined by our CFO, Peter Schulz. I will start with an overview of our results and business activities before Peter talks you through the financials. We will invite you to ask any questions. Please turn to slide two for our interim results highlights. The minor bulks freight market strengthened again in the first half of 2018, which, combined with our continued outperformance and larger owned fleet with competitive cost structure, enabled us to record much improved results year on year. We made a net profit of $30.8 million, compared to a $12 million net loss in the first half of last year. Our EBITDA improved 75% to $99.3 million.
In view of the recovering market conditions, our return to a meaningful level of profitability, we are recommencing dividend payments. The board has declared an interim dividend of two and a half Hong Kong cents per share, in line with the dividend policy of paying out at least 50% of net profits, excluding disposal gains for the full year. As announced in May this year, we acquired a further five modern vessels, including four funded 50% by equity, which will grow our own fleet to 111 ships by January 2019. Having more than tripled our own fleet since 2012, we now own approximately 50% of the ships we typically operate overall. We continue to maintain good control of our owned vessel operating expenses, which were kept substantially flat at an average of $3,810 per day.
In June, we closed a $325 million, seven-year secured revolving credit facility, which significantly extends our overall amortization profile, further enhances our funding flexibility, reduces our already competitive owned vessel P&L breakeven levels. As at June 30th, 2018, we had cash and deposits of $317 million, net borrowings of $657 million, which is 36% of the net book value of our own vessels at the midyear. Despite ongoing trade tensions, we remain cautiously optimistic for a continued market recovery, although with some volatility along the way. Slide three. Our Handysize and Supramax net daily TCE earnings of $9,750 and $11,730 per day were up 23% and 32% year on year, outperformed the Baltic Handysize and Supramax spot market indexes by 19% and 11% respectively.
As at the 24th of July, we had covered 54% of our Handysize days for the second half of 2018 at $9,610 per day and 67% of our Supramax days at $11,010 per day net. Please turn to slide five. Market rates in 2018 are so far following a similar seasonal pattern as the last two years, with a short seasonal decline at the start of the year, recovery after Chinese New Year, with a stronger March and April, and a bit of summer weakness thereafter. As you can see in the graphs, the solid year-on-year improvements continue. The Atlantic market is starting to show promising signs, particularly in the Supramax segment, as you can see on the graph to the right.
Handysize and Supramax spot market rates averaged $8,200 and $10,560 per day net respectively in the first half of 2018, representing 24% and 32% improvements in average spot market earnings year-on-year and the strongest first half rates since 2014 and 2011 respectively. Slide six. Complete demand data for the first half of 2018 is not yet available, we show in this slide to the left Clarksons Research full year volume forecast by commodity. Clarksons estimate that overall dry bulk ton-mile demand grew in the first quarter, slower compared to a year ago, mainly due to reduced Brazilian iron ore exports. However, key positive drivers in the first half included 3% and 4% increases in Brazilian export volumes and U.S. export sales of grain and other agriculture products, supported by record soybean volumes from Brazil and corn sales from the U.S.
U.S. coal exports also grew strongly to a five-year high in April. Pacific demand benefited from increased trade in bauxite, nickel ore, copper concentrate, forestry products, and other minor bulks in which we specialize. In spite of a 7% growth in steel output to an all-time high level, Chinese steel exports declined 14%, primarily due to strong domestic demand and high prices. Warm weather in China contributed to increased electricity generation, driving 9% year-on-year growth in coal imports in the first half, Chinese imports of minor bulks grew 8%. This excludes bauxite and nickel ore, for which data is not yet available, indications are for strong growth also in nickel and bauxite as you can see in the graph to the left. Indonesia is back big time exporting large volumes of both bauxite and nickel.
U.S. related trade dispute actions to date impact only a small fraction of the trades in which Pacific Basin is engaged. Total U.S. soybean exports to China in 2017 represented only about 0.6% of total dry bulk seaborne trade, commodity trading patterns tends to shift rather than cease as a result of trade tariffs. The trade conflict between the U.S. and its key trading partners might get resolved, may also escalate. This uncertainty weakens sentiment, which could undermine trade and global trade war could impact global GDP and dry bulk demand. China has recently increased stimulus measures to counteract a potential slowing in Chinese GDP. All things considered, we continue to believe that any negative impact the protectionistic actions have on the dry bulk trade will be largely outweighed by positive dry bulk supply fundamentals and continued global dry bulk trade growth overall.
For the full year, Clarksons Research estimates 3.4% growth in ton-mile demand. Fundamentals are more favorable for our Handysize and Supramax segments, with minor bulks ton-mile demand estimated to expand by 4%. Please turn to slide seven. As expected, due to the declining order book, newbuilding deliveries in the first half of 2018 reduced to about 15.4 million deadweight tons, or 1.9% of existing dry bulk capacity, the lowest level since 1988. Scrapping reduced to 0.3% of existing capacity due to the much improved freight market conditions. As a result, overall dry bulk capacity grew 1.6% during the first half of the year, and note that newbuilding deliveries are typically significantly slower in the second half of the year. New ship ordering was limited, with most new orders being for large bulk carriers. Handysize and Supramax new ship ordering is down to an historic low of around 1%.
On slide eight, you will see that total dry bulk new ship deliveries in the first half of 2018 fell short of the scheduled deliveries by 29% and by 39% in our combined Handysize and Supramax segments. Looking ahead, newbuilding deliveries are set to continue to shrink. Scheduled deliveries for this year are smaller than they were for last year. We expect actual deliveries will be around 27 million deadweight tons compared to 38 million deadweight tons in 2017. In the right-hand graph, you'll see that the combined Handysize and Supramax order book has reduced to 5.5%, the lowest level since the 1990s. Scheduled deliveries in our segments, this is before any shortfall, are 2.1% for 2019 and 1.5% for 2020 onwards. Significantly smaller than for dry bulk overall.
On slide nine, we contrast in further detail both the order book and age profile of the smaller ships with the larger vessels. Handysize benefits from the smallest order book among the dry bulk segments and more older ships, pointing to a better balance between new deliveries and scrapping going forward for the smaller ships. On slide 10, while we are on the subject of the supply side, we would also like to touch on the new regulations. Following a comprehensive assessment of available ballast water treatment systems, we have committed to retrofit 50 of our own vessels with a system based on filtration and electrocatalysis, and nine of our ships are now fitted with ballast water treatment systems. We are negotiating systems for our remaining 50-plus owned vessels and remained well-positioned to complete implementation across our own fleet by 2023, one year ahead of IMO's mandatory schedule.
The global 0.5% sulfur cap takes effect on 1st January 2020, which owners can comply with by burning more expensive, low sulfur fuel oil or by burning cheaper high sulfur fuel and installing exhaust gas cleaning systems, so-called scrubbers. We lobbied for a mandate for everyone to burn low sulfur fuel, as this would be an environmentally more effective solution and supporting a level playing field, lower speeds, and lower emissions, including lower emissions for CO2. However, it appears there is now no scope to change the rules, and some owners of larger vessels, including some Supramax owners, are planning to install scrubbers. We continue to assess both the low sulfur fuel and the scrubber options, but continue to believe that the vast majority of the dry bulk fleet, especially smaller ships like Handysize ships, will comply by using low sulfur fuel.
On a new front, the IMO announced in April an ambitious strategy to cut total greenhouse gas emissions from shipping by at least 50% by 2050 compared to 2008, and improve average CO2 efficiency by at least 40% by 2030, and 70% by 2050. The easiest first step to decrease carbon emissions is by reducing speed. We believe these new IMO targets will in due course lead to the accelerated development of new fuels, engine technology, and vessel designs that are not offered or practical today. The uncertainty about these existing and coming regulations makes it very difficult to order new ships, and this helps to keep the supply side limited.
We believe that combined, these regulations will, over time, encourage scrapping of poor quality ships and be positive for the supply-demand balance and benefit larger, stronger companies with high-quality fleets that are better positioned to adapt and to cope, practically and financially, with both compliance and new technology. In slide 11, we show Clarksons' yearly demand and supply levels combined in one chart. For the full year, and as mentioned in slide six, Clarksons estimate 3.4% growth in ton-mile demand for dry bulk overall, which is well above the 2.5% expected net growth in global dry bulk capacity. Again, fundamentals are relatively more favorable for our Handysize and Supramax segments, with minor bulk ton-mile demand estimated to expand by 4% this year against combined Handysize and Supramax net capacity growth of about 2%. Slide 12.
The improved freight market conditions and more optimistic sentiment supported sale and purchase activity and increased vessel values in the year to date. Newbuilding prices have increased 7% over the period to $23.5 million for a Handysize today. That's an average yard price by Clarksons, and in Japan, you would need to pay at least $25 million for a Handysize ship newbuilding. Clarksons currently values a benchmark five-year-old Handysize at $16 million, up 14% since the start of the year. Note that the value of a typical five-year-old ship is still nowhere near the price of a newbuilding, which is typically the case in a strong market. Hence, we see still upside in secondhand values in parallel with a continued gradual freight market recovery.
The large gap between newbuilding and secondhand prices, along with the uncertainty about new regulations, continues to discourage new ship ordering, which bodes well for the supply side demand balance in the longer term. I will be back shortly with a wrap-up, now hand you over to Peter, who will present the financials. Peter.
Thank you very much, Mats. Good afternoon, ladies and gentlemen. Please turn to slide 14. The group's underlying profit improved to a positive $28 million in the first half of 2018, compared to a loss of $16.7 million in the same period in 2017. The improvement in underlying profit was driven by better dry bulk market rates, combined with our continued outperformance and larger owned fleet with competitive cost structure. Owned vessel costs increased in absolute dollars during the period as we added more owned vessels to our fleet, but continued to reduce on a dollar per ship day basis. Our G&A overheads increased due to an increase in our staffing overheads. Charter cost increased due to the increased cost of chartering in short-term vessels in a rising market.
The profit attributable to shareholders of $30.8 million was higher than our underlying profits due to $4.4 million of non-cash mark-to-market income, mainly on our bunker swaps, offset by a $1.6 million write-off of loan arrangement fees relating to refinanced loans upon closing of our new seven-year revolving credit facility. Please turn to slide 15. We generated a Handysize contribution of $38.4 million, driven by a 23% improvement in TCE earnings to $9,750 per day. We generated a Supramax contribution of $15.8 million, driven by a larger owned fleet and a 32% improvement in TC earnings to $11,730 per day. This increased contribution was despite a 10% year-on-year decrease in our Supramax revenue days because of fewer short-term chartered ships, mainly due to lower Chinese steel export volumes. The Post-Panamax contribution remained stable as the two vessels in this segment are on fixed-rate long-term charter out contracts.
On slide 16, you can see our Handysize-owned vessel cost reduced to $7,380 per day, benefiting mainly from a reduction in finance costs, but also in operating expenses and depreciation. Our cost of inward chartered Handysize ships increased to $9,170 per day as the charter market strengthened. The breakout table shows our chartered vessels' daily cost split between long-term, short-term, and index charters. Our overall G&A overhead increased to $690 per ship per day, due primarily to an increase in our staffing overhead spread across a smaller total fleet comprising fewer chartered-in ships, partly offset by a larger owned fleet. On slide 17, you see the story is similar for Supramax, where our owned vessel cost reduced to $8,090 per day, mainly due to a reduction in finance costs.
Our cost of inward chartered Supramax ship increased to $11,740 per day, again reflecting stronger charter rates in the improving freight market. Approximately $8,300 and $9,000 per day respectively, including G&A overheads. This is a slight reduction. Comparing these levels to our TC earnings actually achieved in the first half of 2018, you can see that Handysize contributed about $1,400 per day. On slide 19, at mid-year, we had vessels and other fixed assets of over $1.8 billion. 26 Supramax vessels with an average book value of $21.9 million and an average age of 6.5. Stood at $317 million, giving a net borrowings position of $657 million. Our net gearing remained below 50%. Please turn to slide 20.
In the first half of 2018, in June, we closed a $325 million, seven-year reducing revolving credit facility secured of fresh capital on previously unmortgaged vessels at a very competitive interest cost of LIBOR plus 1.5%. This new facility significantly extends our overall amortization profile. It further enhances our funding flexibility and reduces our already competitive P&L breakeven levels. Including the effects of the refinancing, our borrowings increased by $91 million after we drew down net $145 million under our new committed loan facilities while making net repayments of $54 million of secured borrowing and revolving facilities. Our average interest rate is 3.8%. CapEx of $78 million during the period included cash payments for our five vessel acquisitions. We have further CapEx commitments in the second half of 2018 of $36 million, of which $22.5 million will be paid in shares and $13.5 million in cash.
In 2019, our CapEx commitments of $14 million will be settled fully with shares. All our commitments relate to modern secondhand vessels, and we do not have any owned new buildings on order. In addition to our cash balances of $317 million, we will have six unmortgaged vessels with a total market value of about $120 million. I now hand you back to Mats for his wrap-up.
Thank you, Peter. We recap our business model on slide 22. This is a strong platform that continues to deliver a 90%-plus laden versus ballast ratio and a premium over index earnings. I will not go through this in detail, but will just emphasize that it takes all the components of our business model listed to the left in this slide to deliver these results. As shown in slide 23, we have worked hard over several years to streamline and focus the company and to grow our core business. With our outperforming business model, including experienced staff and very importantly, a much larger owned fleet with competitive cost structure, we are now well-positioned for a recovering market.
Based on our current fleet and commitments, and importantly, all other things being unchanged, including our G&A, the margin on our operating business, et cetera, a change of $1,000 per day in annual average TCE market rates would be expected to change our net results by about $35 million-$40 million per year. Finally, please turn to slide 24. To wrap up, the favorable outlook for widely spread global dry bulk trade growth bodes well for demand. Supply is expected to be kept in check by the continued gap between new building and second-hand prices, and the uncertain impact of new regulations on ship designs, both of which cause many ship owners in our segments to refrain from ordering new ships. Clarksons Research estimates that ton-mile demand for minor bulks this year will grow at double the pace of expansion of the combined Handysize and Supramax fleet.
We continue to believe that any negative impact the ongoing trade conflict has on the dry bulk trade will be largely outweighed by positive dry bulk supply fundamentals and continued global dry bulk trade growth overall. We remain cautiously optimistic for a continued market recovery in our segments, although with some volatility along the way. We see upside in second-hand vessel values and will continue to look at good quality second-hand ship acquisition opportunities as prices are still historically attractive, resulting in reasonable breakeven levels and shorter payback times. Our healthy cash and net gearing positions enhance our ability to take advantage of opportunities to grow our business and attract cargo as a strong partner. Ladies and gentlemen, that concludes the results presentation. Lines will now be open for any questions you may have. Operator, I hand it back to you.
Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your first question comes from the line of Andrew Lee of Jefferies. Go ahead, Lee. You can ask your question.
Yeah. Hi, guys. Thanks again, Peter, for the call and a good result. Scrapping in the first half, as you mentioned, was actually quite low. Do you expect that to continue for the second half and into next year, mainly because rates will be high? Second question I have is, could you guide us a little bit in terms of your full year, like revenue days? Will it be flat on a year-on-year basis, or do you think it will be higher? Thanks.
Thank you, Andrew. Will scrapping continue to be low? Yes, we believe so, given our market view, right? We do expect a continued market recovery. The medium term scrapping may well go up as we get into the deadline for these regulations, et cetera, and poor quality ships may then choose to go for scrapping. In the shorter term, we do expect scrapping to continue to be low. It's almost good news, we feel, right? Because scrapping can no longer shrink. It cannot go lower. So any continued demand outpacing supply will have to have an effect on rate, right? Because scrapping can no longer shrink. Scrapping serves as a bit of a cushion. That's the first thing that happens is that scrapping reduces, so that limits the effect on the tightness of the market, and that can no longer happen.
Regarding the guidance of full year number of days, we do not give any such guidance. The short-term activity that we do is very opportunistic, as you know, so it's difficult to predict. We have reduced the short-term Supramax days, as you can see there, mainly as a result of the lower Chinese steel exports. We mentioned in the presentation, right, that in spite of massive growth in Chinese steel output, they reduced their exports, right? We have reduced our activity there as a result on that export side. We can't give any detailed guidance on that. Focus on the larger owned fleet-
Okay.
We would recommend.
Okay, final question. Can you give us an update on the vessel speeds? Has that been increasing?
Been kind of flat recently because freight rates have not changed that much, right? A little bit of summer weakness, we are still at around 12 knots and the average world fleet, as far as we can see, a little bit lower than that. No big change in the speed. There's still a little bit room for increase and definitely room for decrease As potentially as a result of the more expensive low sulfur fuel coming in the years ahead, speeds can definitely reduce.
Okay, thanks. Thanks for your time.
Thank you.
Your next question comes from the line of Rahul Kapoor from Bloomberg Intelligence. Go ahead, please ask your question.
Thank you. Hi, Mats Peter. Good results. Congratulations. Just want to talk about, we have low debt to equity, significant funding. You said you are cautiously optimistic on the market. What is stopping you from kind of going into an aggressive expansion? What is stopping you guys back? If you see the market do well pretty well over the next few years, what exactly is the thinking around that?
I would say that we have aggressively expanded the fleet, going from 34 ships in 2012 to now 111. One reason is that we have expanded the owned fleet massively. Prices have also gone up, right? We are looking at more acquisition opportunities. We say that, and we will continue to do that. We bought five ships in the first half. We bought ships during the later part of next year. It is more competitive out there today. More people are inspecting ships. What is critical for us is to continue to be extremely disciplined in the ships that we buy. Right? There's plenty of ships to buy out there, but they're not the right ships. We are focusing heavily on ships that are equipped the way we want them, of the designs and the specifications that we want. We focus almost exclusively on Japanese-built ships.
Every single owned Handysize ship, all of the 83 ones, every single one is equipped to carry logs, for example, right? Only one third of the Handysize fleet is logs fitted, so that takes away two thirds, so to speak, right? We continue to be very disciplined. We have bought a lot, and we're also making sure that we maintain a strong balance sheet, that we can pay a dividend, that we have cushion to repay our CB should it be put to us, et cetera. We will continue to look at expansion.
Sure. Thank you. Just to follow up on that, the Japanese quality or as in the Japanese-built ships, right? We are hearing that the shipyard capacity is just not available for Japanese-built ships. Can you throw some light on that, please?
Yeah. Our view on newbuildings is that this is not the right time to go for newbuildings because of the unprecedented uncertainty on regulation and the new regulations that will come. We fear that a new ship today, you will not get the 20, 25 years out of it that you need because of changed technology and changed regulation. Many others shares that view, and that's why we're seeing not too much new build ordering. We are instead focusing on buying secondhand ships where we do see that we can get our money back during a much shorter time. Our focus is on existing ships on the water and not new build orders.
Sure. Thank you.
Your next question comes from the line of Varun Ginodia from JPMorgan. Please ask your question.
Hi. Yeah. Thanks for the call, and congratulations on a good set of results. I have two questions. First question is, when I look at your future cover for both segments, Handysize and Supramax, I saw that your second half cover freight rates, they are lower than what you achieved in first half for both the segments. Is this a kind of your view on the second half freight rates that you expect them to be sequentially lower? How should we read into that? The second question is on trade war between U.S. and China. Considering that it's becoming a more of a baseline scenario right now. So if you can throw some color like how exposed Pacific Basin is to U.S.-China trade route of its total volumes, and do you see any impact if U.S. ends up imposing tariffs on entire imports coming from China? That's it.
Thank you. Yes. Second half cover rates are slightly lower than first half actual. That's really a result of how the market has developed. There's a little bit of lag between spot rates and our earnings, right? If you study our rates graphs there on, where is the slide? Slide five, you will see that the strength was in March and April, and those stronger earnings, we come into the second quarter. What's in our cover is a lot of spot activity during the recent summer period, which has been a little bit weaker, and that makes the forward rates slightly lower. We've also not proactively gone after too much cover because we do believe that rates will come up. Typically, the fourth quarter is the strong quarter of the year. The cover is not that high still.
We still have exposure for the fourth quarter, which is typically the strongest part of the year. On the second question on trade wars, still the effect is very limited. The biggest commodity affected, as we mentioned before, is the soybean. It's yet to be seen what will happen, because the U.S. export volumes is really starting to pick up now towards the fourth quarter. It will be interesting to see what happens. Rest assured that the players in this business is scrambling to readjust. Again, trades tends to shift. You should expect maybe some soybean went earlier than otherwise. Some soybean from U.S. will go to other buyers, including Europe and other Southeast Asia, and China is looking to buy from elsewhere. We expect to see shifts in the trades rather than the trades stopping.
Such shifts can even lead to longer distances overall at times if you disturb the natural flows. Again, we wouldn't say that this is positive, obviously, because the negative effect of the trade war is on sentiment, it is on uncertainty, and people holding back a bit on long-term plans. We see very limited effects so far. It's a much bigger deal for container shipping than it is for dry bulk. We continue to see steel shipments. We continue to see cement shipments into the U.S., et cetera, and we haven't really seen any changes on that so far. Steel is moving in, including the tariff. U.S., I just saw some stats today. U.S. output has not increased. It increased with 0.8% or something. Again, Chinese steel output is at, by far, all-time high levels. China is just massively producing steel and still reducing their exports.
That tells you how strong the domestic Chinese demand is. Same thing with cement. A lot of cement production, but reduced cement exports from China. But again, we do recognize the potential effect of continued trade restriction and the effect that that might have on global economy overall, but so far limited. We believe that the big picture situation for our industry, i.e., a lot less supply, much fewer ships coming from the shipyards. Overall GDP growth is 3.9% or something. Even if that reduces to 3.7% or 3.6%, we still have more demand growth than supply growth in our view. We have this very interesting dynamics with the new regulations coming. That's why we say that all things considered, we are cautiously optimistic and we believe in a continued win for these fundamentals over the trade war, so to speak.
Peter, something you want to add there on trade war effects?
No, I think you've covered it.
Thank you.
Just one follow-up on the first question. 4Q is seasonally a strong quarter, but last year we saw that freight rates came under pressure primarily because of China's 2+26 policy during the winter months, which led to output cuts. Do you expect the same thing to pan out this year as well, and we might not see a seasonal trend that we normally see in 4Q that might not happen again?
I don't think so. We think that the fourth quarter will depend very much on what's happening to the Northern Hemisphere grain volumes and how that will pan out. The crop seems to be a bit early because of the very dry weather. It may drive some early, maybe it will top a bit earlier. It is very difficult to say. The most difficult thing to forecast about demand in China is the coal imports to China. We've seen them increase recently. Chinese electricity generation have been high, and they haven't had much rain, warm weather and so on. Coal imports to China have been very good. Coal imports can reduce due to policy issues, as you mentioned. It can be affected by price politics, et cetera. That is the most difficult.
There's no indications at this point that we can see that will point to something like that.
Okay. Thanks for that. Thank you.
Your next question comes from the line of Joseph Liu from Deutsche Bank. Go ahead, please ask your question.
Hi. Good evening, gentlemen. I have a question on funding. Given that you are looking for opportunities in the secondhand vessel market and you potentially also have a CB repayment in 2019, are you considering any sort of equity financing, either equity in itself or CBs, at any time in the near future?
Not in the near future. As mentioned, we've just concluded quite a big refinancing, which provided us with another $135 million of capital. That's a pretty sizable budget, a buffer over the cash we already have, for us to be able to be very flexible when it comes to acquiring good vessels, but also to be in a position that should the convertible be put back to us next year, which at the moment doesn't look likely, but that can, of course, change with our share price. If it should be put back to us, we are in a position to repay that fully in cash if we don't decide to refinance it. We have quite a lot of buffer at the moment, Joe.
Okay. That's all I wanted to ask. Thank you.
There are currently no questions over the phone. Please go ahead.
There is a question from Andy. Any plan for Pacific Basin to buy secondhand Ultramax bulk carriers? Yes. We are looking at both Handysize and Supramaxes. Ultramaxes are included in what we call Supramaxes. You will note that many of the ships we have bought recently are Ultramaxes, 64,000 deadweight tons ships. Again, we call them Supramaxes, but others call them Ultramaxes. We call the whole segment our Supramax segment. Yes, we are looking at Ultramax ships. We like them. Next question from Kiko. How would you forecast the future oil price, I guess, the question is. We basically cannot forecast the future oil price. We obviously look at the forward curve, et cetera.
In particular, we study that now for low sulfur fuel and for heavy fuel oil and look at the spread in between since that will impact the 2020 situation with the new regulation coming in. Our philosophy on our bunker cost, which is influenced by the oil price, is that we do not hedge the bunker price for our spot business because that business in itself very much influenced by and adjusted by the fuel price. We do, however, hedge the bunker cost against our fixed rate cargo contracts. That is our way to manage the oil price and the bunker price. Next question from Kendy. Can you tell us more about how U.S.-China trade war impact your business at the second half year? I think we spoke about that, and there's not too much more we can add compared to what we just said, right?
Again, there will be some impacts, but primarily in our view, a shift in trade flows rather than trades stopping. Again, some trades will continue with the tariff. That's also important to note, right? The U.S. soybean price has dropped, for example, significantly, arguably making up for the tariff, and same thing in some other commodities. Some commodity trades will continue like before, but with the trade tariff. Transportation cost continues to be a fairly low percentage of the total landed commodity. There's a question from Deepak. Is there a shift in approach to IMO 2020 low sulfur? You have now included a comment in the slides that you will explore scrubbers.
Yeah, it is, of course, our duty to be extremely well-informed and have both options available to us because it depends on many uncertain things, and we must be extremely well prepared to comply with both methods. We believe that a vast majority of the dry bulk fleet overall will go for low sulfur fuel, and definitely the smaller sizes. Again, as mentioned, some Supramax owners are going for installing scrubbers, and we must be extremely well informed and have that option available to us as well. It depends on what the price will do for low sulfur fuel, what the price will do for heavy fuel oil, and how the price of scrubbers develops, right? There are established scrubber manufacturers, but there's also new scrubber manufacturers popping up, and we must be extremely well informed and prepared for all eventualities there.
Our view remains that we do not think that scrubbers is an environmentally very smart solution, and we much prefer low sulfur fuel. That will mean a higher bunker price, which will mean lower speed, which will have a much greater environmental impact than a scrubber. It will also contract the supply side of the supply-demand equation. It's got all the benefits. That's what we're hoping for. We obviously must be prepared to do what is best for our shareholders and take action potentially accordingly. We'll not answer specifically on that more than how I guided you right there. There's a question from Max. Why the signed orders?
Signed orders. I think it's coverage.
Signed or coverage less than the actual for the first half. The chartered ships didn't make profit in first half 2018. The charted ships do make a contribution, but it's not that big. It's tough in a rising market to make money on the short-term activity. Again, the short-term activity primarily came down due to the lower Chinese steel export volumes, but also partly because of the fact that the market is going up and short period ships are priced high, and it's tough to make them work against a spot cargo. We do expect a continued improvement in the market, and that the fourth quarter will come in higher than the third quarter. That's the expectation, and it's not surprising to find that what we have in the book so far may be being a bit lower than the actuals.
If I may add to that, if the question relates to the Supramax cover, last year at this time versus today, which has gone from 33% to 19%, a part of that is because we now have a bigger owned Supramax fleet. That means we have much more days committed. Even if we have similar cargo cover, the percentage comes down because the denominator is higher.
Yeah, that's the reason for the %, if it's the % cover you're asking.
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from the line of King Tan from Daiwa Capital. Please ask your question.
Hi, good evening. Mats and Peter, good results. Just two questions for me. They're more follow-up questions. One is on the trade dispute. You mentioned, I guess, the trade dynamics will shift, and I can see that. Just wondering whether you've done any preliminary analysis in terms of what the net impact would be, for example, on soybeans, on steel. Second question is on the refinancing that you just did. Congrats on the result. Just want to get more information in terms of, I guess, the key covenants in that facility and how that's changed, whether it's been sort of loosened or maybe a little bit more restrictive in some aspects. A bit more clarity on that would be great. Thanks.
Yeah, on the trade dispute, it is extremely difficult to model what will happen and the net effects. As regards to steel trade, for example, that trade has always been very fluid, and it changes a lot due to price changes. It's not like an earth-shattering change for the players there. People are shifting their sourcing from one country to another due to price developments all the time, so to speak. From what we can see so far, there is steel going into the U.S. from Turkey, from Italy, et cetera, also into the future with the tariff. As regards soybeans, very difficult to predict as mentioned, right? It's just logical that the price of U.S. soybean have come down a lot. Other buyers will obviously look to buy these cheaper soybean, since there's no tariff to these other countries.
They will look to buy them instead of from Brazil. China will do the reverse, et cetera. There will be every effort to readjust, but the volume from U.S. to China is so big. It's kind of a big task to adjust for that. You could even see soybean going from the U.S. to South America, and being used for domestic Brazilian purposes. The Brazilian beans goes to China, et cetera. You may have more soybean meal being shipped, right? You use the crushers to the max in different places. There will be plenty of reshuffling, but we cannot model that exactly. Safe to say, it is a limited portion of the overall dry bulk trade. Again, we quantify it, 0.6% of the total trade. For us, it's even smaller, but it is big for our segments, right?
That is the most important commodity affecting us, is soybean. It's minimal compared to the changes in Chinese coal imports. The change we see from this is smaller than the increase we've seen in U.S. coal exports, for example, right? The potential impact of lower speed as a result of the 2020 IMO regulations, model a 1 knot reduction in speed as a result of much more expensive fuel, and the impact on supply is massive, right? It just way overshadows a decimal point on the demand side, potentially because of soybean, et cetera. That's why we feel that overall, big picture, these underlying positive fundamentals that we have in the years ahead with low fleet growth and interesting dynamics on these new regulations, we think outweighs the negative impact that the trade war has. We hope it gets resolved.
We think and hope that Trump is setting up for doing deals, et cetera. We don't control that. We think that the dry bulk market is used to adjust, and it will adjust this time as well.
I will just talk about the question around the refinancing. The covenants in the new facility are generally the same as in our existing facilities. In no facilities do we have any cash flow earnings. These covenants are generally around the balance sheet, the most important of which being the loan to value. I would say the new facility has got a better outcome than our previous facility. Generally, the covenant package is better than we had before on the facilities that we took out.
I just want to add one thing. I noticed two questions were about the forward cover being lower than the actuals. If we're talking about the TCE level, one thing I should add there as well is that we have a certain portion of cargo contracts going forward. When the market goes up, those cargo contracts that we have are typically entered into at a lower level than the current spot rates. Right? The first half is obviously 100% covered, and a lot of that is spot business. When we look into the future and look at our fixed days, that includes a much larger proportion cargo contract, if you understand what I mean, right? Those cargo contracts were entered into in previous periods, which are at a lower level now that the market is rising.
I think that's also one reason for why you see the covered rate TCE being slightly lower than the actual. What we're hoping, obviously, is that this will be filled up with higher spot rates in the days ahead.
Great. Thanks, Mats. Thanks, Peter.
Your next question comes from the line of Brian Lee from BMB Capital. Please ask your question.
Hello. Congrats on the great results. Hello, can you hear me?
Yes.
Yes. Congrats on the great results. Just a very quick question regarding presentation page number 15. I just saw that Supramax's revenue days are down by 10% on year-over-year. Is there any other factors that have driven such a drop on a year-on-year basis? Thank you.
You're correct. The biggest factor is the reduced steel export volumes out of China and us adjusting alongside. Again, the other factor that I mentioned is that it is getting tougher in an optimistic sentiment market to make money on this short-term activity. You're often starting with a cargo, right? The cargo is at a spot rate, we try to combine that with a short-term ship and make a margin. If the short-term ship rate is influenced by optimistic sentiment, often we cover these cargoes. We're starting with a cargo, we take in a ship on a six months time charter, a short period ship. The short period markets have been higher than the spot rates, right? Because the owners are expecting rates to continue to go up. It's simply tougher to make money on that business.
That's another reason, right? Again, don't draw too big of conclusions on this. Focus on the larger owned fleet in a rising market. You want a higher proportion owned ships because you have fixed rates. These short-term ships, when the market goes up, the cost goes up, right? It's difficult. Many operators are losing money on the short-term activity in a rising market. We have a great benefit now compared to many years ago of having a much larger owned fleet. We use our owned fleet much more. We schedule our owned fleet against our cargo contracts and so on, and it's more difficult to use market ships to use against our cargo contracts in a rising market. Peter?
Yeah. It's also important to point out that this reduction in Chinese steel exports were not linked to Trump's tariffs. This happened long before that discussion even started. This had to do with steel prices and local demand in China for this steel. You should not link the reduction in these revenue days with anything that has to do with tariff. That happened way before then.
Yeah. It has nothing to do with tariffs whatsoever, right? Again, as mentioned, China's steel output is all-time high. They're cranking out steel. U.S. is not.
All right. Thank you very much.
Yeah. There's one final question on the web. With lower speed while supply is absorbed, does it also not mean more charter days and thus higher charter expenses? This implies fuel consumption has to drop sharply to offset the higher charter expenses. Could you please understand this trade-off? That's not the way it works, right? Every operator is optimizing his speed based on two factors. One is the freight, and the second is the fuel cost. As the fuel is expensive, you save more on fuel by slowing down than you lose on time. Your net TCE, so to speak, TCE is after bunker cost, right? Your net daily contribution goes up if you slow down. That's what people will do.
That will tighten up the supply-demand balance, in turn, push up rates again until you find a new equilibrium, but that will be at the higher freight rate level. This market has a huge spot component, and that is adjusting with the fuel price. Hence, we highlight this point that a higher fuel cost has the effect of slowing down the fleet, which is reducing the supply side significantly, which pushes up freight rate by way of tighter supply-demand balance.
As there are no further questions, we will now begin closing comments. Please go ahead, Mr. Mats Berglund.
Thank you all for dialing in and for your interest in our company. Don't hesitate to revert to us and our team for any further questions. Thank you very much.
This concludes our conference call. Thank you all for attending.