Nautical squatters to be a common sight soon

The Economist ran an interesting piece on the growing numbers of nautical squatters and the annoyance they are causing to the host countries, including China. The problem has started manifesting itself here too, though it is still not a nuisance. But, what is nautical squatting all about?

Succinctly put, it means that as enough cargo is not available for a fleet, which has been quite heavily expanded in the last few years, the idle ships, mostly containers, are found to be floating outside the harbours of the world’s major ports. This is more prominent in Asia.

China, which in the first place is mainly responsible for the global fleet expansion, thanks to the rapid pace at which its economy and trade grew, now seems to be most affected by the nautical squatters.

China was the only country to produce over 500 million tonnes of steel last year, when the global production fell 1.2 per cent to 1.33 billion tonnes. For the shipping trade, this meant that China had to import 410 million tonnes of iron ore last year to supplement the domestic raising of the mineral. India’s annual exports of around 100 million tonnes of ore were mostly to China.

Of all the dry bulk commodities, iron ore claims the maximum amount of shipping space. We have seen that the global steel industry has applied production brakes since August. China is no exception, being back to a single-digit growth rate after many years. This is confirmed by the fact that in the first two months of 2009, China’s ore imports fell 33.7 per cent to 79.474 million tonnes.

What this could do to vessels carrying dry bulk cargoes and the Baltic Exchange Dry Index (BDI), which measures shipping rates on 40 global routes, is understandable. As for container ships, as many as 453 of them are sitting idle across the world. They account for 10.7 per cent of the world’s box tonnage or 1.35 million twenty-foot equivalent units (TEU).

While trade shrinkage is increasing the number of nautical squatters, pollution of territorial waters by idle ships is becoming an environmental issue.

China has commented that ships idling away outside the harbour of the Hong Kong port are not welcome. In case it persists in clearing its waters, the ships will have no option but to move into the harbour areas of other south-east Asian ports. However, there is no guarantee that the other countries will be any more welcoming.

The Economist says, “Only five years ago, huge demand from China meant that all these ships, and more, were desperately needed. This had a dramatic impact first on shipping rates and then on supply. Between the end of 2006 and July 2008, shipyards received enough commissions to double the world’s fleet. Now these new ships – more than 9,000 – are taking to the water just as demand has collapsed. The world is awash with ships.”

An industry official here laments that every trade sector – dry bulk, liquid and box – has come under unprecedented bear hammering as new huge capacity got commissioned coinciding with big falls in all kinds of cargo movement. The extent of setback the shipping sector has suffered is evident from the more-than-90-per-cent fall in BDI from the record high of 11,793 points in May 2008 to December.

Nothing tells you about the shipping industry’s health more honestly than BDI. According to a median of 10 estimates by Bloomberg, the BDI will average 1,786 points in the current quarter. This means there will be hardly any change from where the Index is now.

Bulk cargo rates are influenced the most by iron ore and coal movement. Not much should be read into the fact that ports in China are no longer clogged up with vessels to deliver ore and the country’s ore imports are rising once again. It should be noted that Chinese steel prices have fallen 13 per cent since February as the $585 billion stimulus package led steel mills to raise production.

Goldman Sachs says in a report that the global iron-ore shipments are expected to contract by nearly 70 million tonnes as all major ore importing countries, excepting China are likely to “register large double digit percentage falls in crude steel production.” In case the stimulus package fails to boost economic activity, then the Chinese steel industry will also be required to cut production.

In the meantime, the scope for steel exports is shrinking what with falling industrial and construction activity.

With idle capacity staring in their face, shipowners are desperate to book cargoes at falling rates. Who needs to be told that when cargoes move in an environment of falling rates, the supply of shipping capacity far exceeds demand. Hence nautical squatting. And the squatters are not going to disappear too very soon.