Just as global trade starts to recover, the shipping market is crashing for the second time in a year as China reduces raw-material imports and record numbers of new vessels set sail.
The rate for leasing capesize ships, boats three times the size of the Statue of Liberty, will drop about 50 per cent from the current price of $37,865 a day to as low as $18,000 before the end of the year, according to the median in a Bloomberg survey of six analysts and fund managers. Forward freight agreements traded by brokers show the fourth-quarter average price will be 7 per cent lower.
Shipping rates, which already fell 59 per cent from this year’s high, are retreating as the Organization for Economic Cooperation and Development predicts a 16 per cent drop in world trade for all of 2009. China’s State Council called for curbs on steel and cement production last week. A record 146 capesizes will be added this year, equal to 28 per cent of the fleet, according to Fearnley Consultants A/S.
“The pressure of the new ships will be overwhelming,” said Andreas Vergottis, the Hong Kong-based research director at Tufton Oceanic Ltd, which manages the world’s largest shipping hedge fund, with $1 billion of assets. “It will take a lot of time and a lot of pain before shipping recovers.”
The biggest-ever order book for new carriers, according to Lloyd’s Register-Fairplay, may hurt profits at shipping lines while providing higher returns for traders.
Rates for capesizes have fluctuated more than 50 per cent in seven of the past eight years. Mitsui OSK Lines Ltd and Nippon Yusen KK, both based in Tokyo, and China Cosco Holdings Co operate the world’s biggest bulk-shipping fleets, Mitsui says.
Nippon Yusen forecast its first full-year loss in 23 years last month, citing lower demand for container shipping, and expects capesize rates to average $55,000 in the six months through March 31. Mitsui cut its full-year profit estimate by 25 per cent last month. China Cosco said on August 27 its commodity ships lost money in the first half.
Estimates in the survey ranged from $10,000 to $25,000. Sverre Bjorn Svenning, the analyst at Fearnley Consultants who correctly predicted last year’s collapse in the Baltic Dry Index, which fell 92 per cent, was at the lower end.
The drop in capesizes is consistent with the Baltic Dry Index, a gauge of the cost of carrying dry bulk commodities such as iron ore, coal and grain. The index, which includes four types of vessels including capesizes, more than tripled this year. The index is 44 per cent off its high for the year.
“We’ve seen several yards that have delivered their first ships, albeit delayed, and we expect them to increase the pace of deliveries in the second half,” said Svenning, who is based in Oslo. “We will see more next year than we see this year.”
Even at rates of $18,000 a day, most owners should make money, with daily operating costs estimated at $7,555 by London- based Drewry Shipping Consultants Ltd.
A rebound in trade may also limit the tumble. The Paris- based OECD said August 19 that the economies of its 30 members collectively stopped shrinking in the second quarter.
Japan, France and Germany emerged from recessions prompted by the collapse of US real estate that froze credit markets and left the world’s biggest financial companies with $1.61 trillion of losses and writedowns.
Economies are showing signs of improving after the Group of 20 industrialised and emerging nations pledged about $12 trillion to combat the first global recession since World War II, according to International Monetary Fund data.
U.S. Economy
The U.S. economy shrank less than economists anticipated in the second quarter and German business confidence exceeded their expectations in August. The median of 56 analysts surveyed by Bloomberg shows America will expand this quarter and the euro zone will grow in the first three months of next year.
World trade rose 2.5 per cent in June, the biggest advance in almost a year, the Netherlands Bureau for Economic Policy Analysis said Aug. 26. Ships carry about 90 per cent of world trade, The Round Table of International Shipping Associations estimates.
Rates for capesizes jumped to a record $234,000 a day in June last year as demand for commodities congested ports. In Newcastle, Australia, the world’s biggest coal export harbor, as many as 43 ships waited to load that month, Newcastle Port Corp. data show. Lined up end to end, that many capesizes would stretch more than 7 miles.
Credit Markets
Charter costs fell 99 per cent in the following six months as the global economy slumped. The record 36 per cent drop in the Reuters/Jefferies CRB Index of 19 of commodity prices last year destroyed demand for ships and the collapse in credit markets curbed bank financing for trade. At least 20 per cent of capesizes were empty by November, Lorentzen & Stemoco A/S, a shipbroker, estimated at the time.
Industrial Carriers Inc. of Ukraine and Armada (Singapore) Pte were among shipping lines that sought protection from creditors amid the slump.
From their low of $2,316 in December, rates rebounded to $93,197 in June as China imported record amounts of everything from coal to iron ore, used to make steel. Almost two in every five tons of steel are made in China, according to the Brussels- based World Steel Association. The nation consumes the same proportion of the world’s coal, BP Plc estimates.
Rates are poised to keep falling, the survey shows. China’s State Council, the nation’s cabinet, said it’s studying curbs on overcapacity in industries including steel and cement. The government will provide more “guidance” over parts of the coal, glass and power sectors, the group said in a statement.
Iron-Ore Purchases
Imports of refined copper fell 23 per cent in July from the previous month. Coal shipments shrank 13 per cent, customs data show. Iron-ore purchases will likely average about 16 per cent less in the remainder of the year than in the first seven months, according to Will Fray, an analyst at Maritime Strategies International Ltd. in London.
“China could very easily turn the taps off,” Fray said. “Rates will keep sliding.”
