Drewry forecasts dry bulk freight rates in 2016 will be, on average, lower than in 2015, as the medium-to-long term fundamentals for dry bulk shipping will remain challenging, according to the latest edition of the Dry Bulk Forecaster report published by the global shipping consultancy Drewry.

The dry bulk sector has seen a period of recovery in recent months based on higher iron ore, coal, and grain trade. The boom in iron ore trade that has resulted in record exports out of Australia and Brazil is expected to be a short-term phenomenon as it has mainly been based on iron ore restocking due to low inventories. Seasonal iron ore restocking activity in China will relax over the next few months as inventories increase, according to Drewry.

“Drewry forecasts that rates in 2016 will be, on average, lower than those in 2015, though some improvement in rates will be seen in subsequent quarters in the current year,” said Rahul Sharan, lead analyst for dry bulk shipping at Drewry. “Smaller vessel segments such as the Handysize and Supramax vessels have comparatively better prospects going forward as minor bulk demand is set to firm up in the coming months.”

Demolition activity ramped up in the New Year, especially in the larger vessel segments—37 Capesize, 49 Panamax and four VLOC vessels—in total amounting to more than 12 million dwt tonnage in just a quarter. This is double the volume compared to the previous quarter, which enabled overall vessel supply to contract quarter-on-quarter for the first time in 10 years, according to the Drewry report.

A sharp increase in layups, order cancellations, and demolitions are currently playing a major role in correcting the massive tonnage supply problem in the dry bulk market. This will result in modest improvements in freight rates in the coming quarters. However, the supply of 30 very large ore carriers (VLOCs) ordered by Chinese companies which are scheduled for delivery from 2018 risks depressing rates of the larger vessel segments around in the 2018 to 2019 time frame.