Baltic index sinks, shipping firms in troubled waters

Shipping companies are sailing in rough seas with London’s Baltic Dry Index falling sharply in the last three months. The index, which measures freight rates for bulk commodities — mostly iron ore, coal, and grains — has fallen by a whopping 67 per cent to 2,990 points till October 2 from its average peak of 8.936 points in July.

The index, widely regarded as a barometer of the world economy, has fallen further since then, igniting fears that China’s demand for commodities may be cooling.
 

TOP LOSERS Share price in Rs
	30 Jun 2008	3 Oct 2008	% chg
Essar Shipping	94.90	59.35	-37.46
Shreyas Shipping	55.80	36.10	-35.30
Chowgule Steam	46.95	32.04	-31.76
Mercator Lines	81.15	56.15	-30.81
SKS Logistic	27.15	19.10	-29.65
Shipping Corp	217.45	153.10	-29.59
SEAMEC	130.00	93.90	-27.77
G E Shipping	372.05	298.80	-19.69
Varun Shipping	65.59	55.60	-15.23

This, industry experts said, was sure to affect the earnings of domestic shipping companies and would put pressure on operating profit margins.

The Street is worried. The shares of most shipping firms have plummeted 15 to 37 per cent, sharper than the 13 per cent fall in the Sensex in the same period. Varun Shipping has fallen 15.23 per cent, while GE Shipping has slumped 19.69 per cent and Shipping Corporation of India (SCI) 29.59 per cent. Essar Shipping has been the biggest loser, falling 37.46 per cent.

China, the world’s biggest consumer of coal, iron ore and industrial metals, expanded at the slowest pace since 2005 in the quarter ended June 30. In July, it closed steel mills and other factories to cut pollution during the Beijing Olympics that ended on August 24. China also held the Paralympics on September 6-17, which kept the polluting plants shut.

Analysts expected the situation to improve by September-end, but it has worsened. “It is an alarming situation,” said Vikram Suryavanshi of Karvy Stock Broking, a Mumbai-based brokerage. “In the last two years, companies have acquired new ships at higher costs and it would be difficult to recover that amount if the freight rates continue at a low level.”

Mercator Lines, a Mumbai-based shipping company, which has the largest tonnage in the dry bulk segment in the private sector, is one such company. It started its Singapore-based subsidiary which bought dry bulk carriers in the last two years.

However, Nitin Kolhatkar, vice-president (finance and accounts) at Mercator Lines, says: “Our costs of new ship acquisitions have been comparatively lower, and we have also recovered a substantial portion of that in the last two years.”

The market isn’t impressed. The company’s stock has lost 29 per cent on the Bombay Stock Exchange since September 1. The Sensex has fallen by 13.6 per cent in the same period.

Anil Devli, executive director with Shreyas Shipping and Logistics, says there are a lot of uncertainties regarding where the global trade and commerce is heading. The rates will stabilise once some clarity emerges.

Most of the companies, however, say the fall is temporary and freight rates will bounce back soon. State-owned SCI is in a slightly advantageous situation as it is diversified in tanker, container and offshore businesses.

“The US financial crisis has impacted the overall global trade and commerce resulting in a steep fall in the Baltic Dry Index,” said SCI chairman and managing director S Hajara. Terming it a temporary phenomenon, Hajara expects the freight rate for bulk carriers to rise in a month.

A R Ramakrishna, the chief executive officer of Essar Shipping Ports & Logistics, says the company expects the dry bulk rates to remain low for three to six months.

A senior shipping analyst with a leading brokerage house said China was sitting on a huge inventory of iron ore and was waiting for Brazil to complete the renegotiation of iron ore prices with the leading steel makers in Asia. “We expect a strong buying demand from China, which will again push the Baltic Dry Index northwards in the short term,” he said.

One reason cited for this standoff between Brazil and Asian steel makers is the higher iron ore prices being charged by Australia than Brazil. Since the freight rate is lower between Australia and China than that between Brazil and China, Australia is charging a higher price for its iron ore. This has prompted Brazil to renegotiate iron ore prices with leading steel makers in Asia, says a senior executive of a domestic shipping company.