Bigger fleets cut cost of transport on seas

News was prepared under the information support of Online Daily Newspaper on Hellenic and international Shipping "Hellenic Shipping News".

30 Sep 2009

When there was a near-tripling this year in the Baltic Dry Index – a measure of spot charter rates for ships carrying bulk commodities – the rise buoyed the spirits not only of dry bulk shipowners but also many economists. The surge between April and early June showed, many analysts opined, that worldwide demand was picking up and the recession's end was in sight.
Similarly, a recent downward trend – the BDI closed on Monday at 2,192, nearly half the 4,291 peak for this year hit on June 3 – has caused an outbreak of pessimism. The fall is being widely seen as an indicator of the fragility of demand in China, which drives much of the worldwide demand for commodities.
Closer examination shows that the recent fortunes of the index are much more closely related to an increase in the size of the global shipping fleet, rather than a drop in China's growth rate or commodities demand.
The main effect is restricted to one class of ship: the Capesize vessels that carry the largest, heaviest cargoes such as iron ore and coal.
Most market participants expect current conditions to continue for some time, with dry bulk owners earning modest returns but making profits.
The key question is whether the vast numbers of ships currently on order end up being built and flooding the market for years to come.
"The market has come off in recent months but it has really been a Capesize story," says Guy Campbell, managing director of the dry cargo division at Clarkson shipbrokers in London.
"If you look at the earnings for the smaller ships, that has been fairly consistent for most of the year."
At the heart of events have been iron ore importers in China, by far the world's largest users of this key commodity.
According to Mr Campbell, the country is likely to import 550m tonnes of iron ore this year, significantly higher than last year's 444m. Importers bought significant quantities between April and June, creating congestion as ports struggled to handle the arriving ships. Spot charter rates for Capesizes surged from $17,000 a day on April 6 to $93,197 on June 3.
Demand has since slackened off as steel mills use stockpiles. Congestion has reduced as a result, making more ships available to take on new cargoes.
Capesize rates have fallen to a daily average on Monday of $23,974.
Quentin Soanes, an executive director at Braemar Shipping in London, says there was "speculative purchasing" by China earlier in the year.
"As a consequence of that, there has been stockpiling which they can live off in the coming months," he says. "I think you will see some drop-off in the second half."
He points out that, amid the wild gyrations of the Capesize market, markets for smaller ships which carry a range of commodities have barely moved. "The average earnings for the smaller ships have been fairly static," he says.
Michael Bodouroglou, chief executive of Paragon Shipping in New York, says that the summer's spike in rates resulted partly from the slower-than-expected delivery of many ships. He estimates that the fleet will grow 10 per cent in the second half of the year and 15 per cent over 2010.
As a result, he believes 2010 will be a far worse year in the dry bulk market than 2009 has been.
"I believe that this rate of increase cannot be counterbalanced by any increase in demand," he says of the fleet growth.
Mr Campbell says many of the ships delayed this year by a slowdown in shipyard working are likely to be delivered early next year, creating the risk of a glut.
Yet, for the moment, dry bulk shipowners remain less gloomy than their counterparts in many other shipping segments. While 90 per cent down from the record $233,988 per day average set on June 5 last year, current Capesize rates are nearly 10 times the low of $2,400 per day set last December.
Owners are able to cover operating costs of around $6,500 to $8,000 a day for a Capesize – for now at least.
Mr Soanes compares the dry bulk market favourably with other major markets such as oil tankers and container shipping, which face falling demand alongside over-supply of ships.
"There's more robustness in the dry cargo market," he says. "There's real growth in volumes year on year."

Source: Financial Times