Shipping firms look for operational equilibrium as Baltic Index recovers

The benchmark for dry bulk segment expected to rise with scrapping of old and fuel-consuming vessels correcting supply issues

Shipping companies are breathing easier as the freight market reflected in benchmark Baltic indices has doubled in the past two months and is expected to rise further. The Shipping companies now expect freight rates to remain firm so that they can achieve operational equilibrium.

The spike in Baltic Dry Index (BDI), the benchmark for dry bulk shipping freight, is expected to continue on the back of scrapping of vessels, which has pulled down the supply to some extent, and rise in front-haul due to the ongoing harvest season in South America.

BDI has risen 67 per cent in the past month to above-670 level and is expected to touch 900-levels by May-end. The index was below 300 points barely two months ago.

“Old and more fuel-consuming vessels, whose performance is poor, are getting scrapped. This is helping correction in the supply side of vessels and balance their supply-demand equations to some extent,” said a top official with Equator Maritime. “Freight rates for front-haul - South America to China or Japan - have improved thanks to the harvest season in the US. This has allowed grains to sail across, thus reducing availability on other routes. All this is helping BDI rise.”

Besides, with some vessels getting laid off in Singapore and Europe, the freight rate for dry bulk could rise further, he added.

Industry officials are of the view that although a further rise in BDI is likely, the upside could be limited due to lower rates on backhaul from China to South America. On this route, there isn’t much trade taking place as China is on a slowdown and not much exports are taking place from the dragon nation, said officials.

In industry jargon, backhaul refers to trips that generally lose money. Here, the ship owner needs to take a discount to reposition itself for a better-paying cargo. Front-haul refers to the legs of a journey, where ship owners can make better returns but usually end up in a less favourable area.

Meanwhile, industry officials said the continued rise in BDI is expected to help shipping companies break even at the operating expenditure level. Typically, the operating expense for a dry bulk shipping vessel is about $5,000 a day.

“Currently, although our three vessels are employed, we are in losses,” said a top official with M Pallonji Shipping. “Our vessels carry minerals in the Indian Ocean and though the Baltic has moved up, it is yet to show its positive impact for Indian shipping companies. If the rising momentum continues in BDI for a month, we’ll be able to break even at the operating expense.”

The Shipping Corporation of India, Great Eastern Shipping, and Essar Shipping are leaders in the domestic market.

Analysts say covering operating expense is not a challenge for most domestic shipping companies because they fix contract price accordingly. However, vessels in the spot market will have to meet higher operating expenses.

Brokers vigilant
Brokerages suggest that investors don’t exit at current level even though prices have recovered in sync with the Baltic index. “Given the current situation in the shipping industry and the non-consistent performance of shipping companies, we do not recommend ‘buy’ in any of the stocks at present,” said an analyst with a brokerage.

Since January 1, 2016, domestic shipping stock index has outperformed the Sensex and moved in tandem with BDI.

Brokerages say BDI near 1,500 levels would allow domestic shipping companies to break even at ease, but given the outlook for global economic growth, the index touching that level is doubtful.

The International Monetary Fund has projected global growth at 3.4 percent in 2016 and 3.6 percent in 2017, compared. Forecasts for 2016 and 2017 have been revised downwards by 0.2 percentage points, it said. Growth in China, the world’s largest producer and consumer of most commodities, is expected to slow to 6.3 percent in 2016 and 6.0 per cent in 2017.