Iron ore bulk shipments | Owners of large dry bulk ships are seeing some recovery but demand for smaller vessels is still in the doldrums
LONDON/SINGAPORE (Reuters) — A glut of vessels is keeping shipping rates well below their pre-financial crisis peaks, but the cost of shipping industrial commodities recently approached two-year highs, helped by Chinese demand for iron ore and growing political risks.
The shipping industry is now in the fifth year of a deep downturn after firms ordered large numbers of new vessels between 2007 and 2009, just as the global economy hit the skids.
However, average earnings for capesize ships, among the biggest dry bulk ships used to transport commodities such as coal and iron ore, have spiked to their highest levels since December 2011, reaching nearly $30,000 a day.
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That is a long way from their peak of $233,988 a day in June 2008, but also substantially above a record low since 2008 of slightly more than $2,000 a day, which is barely a fifth of the operating costs for a capesize ship.
The rise in rates has mainly been driven by healthy bookings in recent weeks from China for iron ore, which is used to make steel.
“While the capesize market has benefitted greatly from strong de-mand for imported iron ore cargoes from Chinese buyers, panamax, supramax, and handysize (smaller ship) rates have been aided by a moderate amount of coal, grain, and mineral cargoes surfacing in the market recently,” said Jeffrey Landsberg of Commodore Research.
“We do not expect this to be a full-blown recovery for capesizes or for the entire dry bulk segment, but we see windows of opportunity presenting themselves to owners becoming more common,” said Peter Sand, chief shipping analyst with trade association BIMCO.
“The fundamental balance is improving almost by the day. But we are coming from a very low point.”
The Baltic dry freight index, which gauges shipping cost, touched 1,541 points in early September, its highest since January 2012 and more than double its record low of 647 in early February.
Political turmoil in the Middle East is also affecting shipping costs.
An attack on a container ship in the Suez Canal and growing turmoil in Egypt in recent months has focused attention on the possibility that vessels might opt to take the longer and costlier route around the Cape of Good Hope.
The 192 kilometre Suez waterway, the quickest sea route between Asia and Europe, is used by container ships but also by dry bulk vessels carrying cargoes including grain.
“I do believe the Egyptian authorities are very aware of the importance of keeping the Suez open and safe for the sake of their own economy, and they will do their utmost to keep it as such,” said Marc Pauchet, lead dry bulk analyst with ACM Shipping.
Even so, shipping fuel costs are on the rise.
“Bunker fuel prices have increased in response to tensions in the Middle East,” said Peter Norfolk, research director with ship broker FIS.
“There has been some scrambling to cover against further rises.”
Such tensions have helped drive hedging activity by ship owners and others on freight derivatives contracts. The instruments enable investors to take positions on freight rates at a point in the future.
However, the weaker market conditions have offered opportunities to buy ships more cheaply, which has lured some in recent months to place orders or pick up older vessels in anticipation of recovery, which is tempering any talk of a new dawn for the industry.
“The restocking may last for a couple of weeks, and with finished steel prices lacklustre, I am not very optimistic this uptick will be sustained as new building (ship) deliveries and orders are still fairly much a concern,” said Tan Chin Hee, executive director of leading dry bulk ship owner Pacific Carriers.
Khalid Hashim, managing director of Precious Shipping, one of Thailand’s largest dry cargo ship owners, said a dry bulk market recovery “could take more solid root” in the first and second quarters of next year, “if the current (level of) imports of iron ore into China continues at this breakneck speed.”
Companies that have placed orders or acquired dry bulk vessels in recent months include U.S. agribusiness company Cargill and Norway’s Golden Ocean, the bulk shipping arm of billionaire magnate John Fredriksen’s business empire.
“We do not expect a proper sustained recovery to settle in before the second half of 2014,” said Pauchet.
“By then, whether the world economy has gone back on a structural growth path or carried on stuttering, a large chunk of the current order book will have left shipyards and deliveries will start slowing. That is, if owners don’t start an ordering frenzy again, of course.”
