Freight rates for dry bulk cargo, as reflected by the benchmark Baltic dry bulk index, have crashed in the past two months. The index, at 1,930 on December 12, fell 66.5 per cent to 647 in early February and moved up marginally, to 695, in the past few days.
Industry leaders say the crash was due to lower demand, along with new capacity having been added in the segment recently. The crash was echoed by the wet bulk index, down 17 per cent in the past two months.
A R Ramakrishnan, MD, Essar Shipping, said, “There was an extended holiday period as Christmas was followed by Chinese holidays. That has affected demand and that too at a time demand from Europe was already low and new capacities in the segment were entering the market.”
Freight movement was affected, as this year the Chinese New Year holidays lasted longer due to the Dragon year celebrations and certain restrictions on food grain export.
Essar will not be affected by the crash much, as it has tied up most of its dry bulk vessels for the long term. But, it will hurt companies like Shipping Corporation, which has a larger fleet and some vessels for the spot market.
Vishal Ajmera, deputy manager, research, at rating agency CARE, said, "While the demand for cargo was lower, what added to that was the constant flow of vessel deliveries during 2010 and 2011. Vessel deliveries in this segment globally aggregated 13.1 million gross tonnage during 2011.”
Adverse climatic conditions in Brazil and cyclones in Australia during January also affected the flow of dry bulk commodities. The cyclones affected Australia’s iron-ore mining operations and, subsequently, the loading of ore at ports. With major miners BHP Billiton and Rio Tinto suspending their shipments, the demand for dry bulk vessels remained affected.
Meanwhile, the Baltic tanker index was at 939 prior to the Christmas holidays and is currently at 795 — a drop of a little over 15 per cent.
According to Ajmera of CARE, “The segment is likely to remain in overcapacity in 2012 and 2013, as the order book is 17.5 per cent of the existing capacity. Vessel deliveries in the next two years will keep freight under pressure. However, some demand from developed nations for the import of heating oil in winter (it being severe this time) is providing support as of now.”
An official from a private shipping company, who wished not to be named, said, "Although the fall has been sudden and a sharp one, we don't expect it to continue for long. As you can see, the Baltic dry index has already started to recover and is hovering around 700. We expect it to go higher in the coming days."
Ajmera said, “We expect the recent fall to be a short-term phenomenon. The resumption of manufacturing activities in China would require the import of dry bulk commodities such as coal and iron ore, thereby propelling the index from the current level. In addition, the ports in Australia and Brazil are also expected to resume shipments once the adversities of weather go."
Dry bulk vessel deliveries are expected to comprise during 2012 and 2013 nearly 25.5 per cent and 6.8 per cent of the existing fleet, respectively. That will keep freight rates under pressure.