Thursday, May 07, 2009
Economic storm to batter shipping rates
Thursday, 07 May 2009
A triple assault of weak consumer demand, vessel oversupply and global recession is set to keep shipping rates under pressure this year and batter any prospects of a major rebound. Over 80 percent of the world’s traded goods by volume are transported by sea, with many pinning hopes of a world economic recovery via a resurgence in freight activity.
The Baltic Dry Index, which gauges the cost of shipping resources including iron ore, cement, grain, coal and fertiliser, collapsed to a record low in December and has remained volatile since then.
"Underlying supply/demand fundamentals for the dry bulk shipping industry appear to have worsened over the last two months," J.P. Morgan said in a report.
The London-based index, which is heavily exposed to Asian economies, has been hit by worries of weaker prospects in China.
Container shipping, another industry sector, which transports finished goods from electronics to toys has also been affected on key routes from Asia to consumers in the West.
"Demand is dismal and the outlook for container demand remains clouded by global macro-economic concerns," Goldman Sachs said in a note.
Strong appetite for iron ore and coal in India and China helped push the Baltic index to a record high in May 2008 of 11,793. But global turmoil and recession drove it back down to as low as 663 in December.
While the index has posted a high of 2,298 this year, helped by the South American grains export season and some demand for iron ore and coal, freight rates are unlikely to gain ground.
"The fact that you can see a bit of a rise in the freight index followed by a drop is also a good indicator that nothing is going to come back right away," said Joel Crane, commodities analyst with Deutsche Bank in New York.
Too many vessels
Norwegian ship broker Lorentzen & Stemoco has forecast seaborne trade contracting 7.4 percent in 2009 on a year-on-year basis versus 3.1 percent growth in 2008.
Its analyst Erik Nikolai Stavseth said he expected the Baltic index to hover around the 1,600 to 1,900 range in the third and fourth quarters.
"There is probably going to be a small peak in the second quarter," he said.
"I don’t think we will see a major rebound (in 2009)," he said. "We are seeing a contraction in real demand."
Most expect that an oversupply of dry bulk vessels to be delivered in the coming years will dog rates. Demand for new ships reached a peak in the middle of 2008 before credit crisis affected the sector.
The order book for ships has been estimated at anywhere between 70 to over 100 percent of the world’s current dry bulk fleet of about 6,980 ships over 10,000 deadweight tonnes.
"If all the ships that are in the order book come on-stream (between 2009 to 2011) you will have a major problem because you will have serious oversupply," said Lorentzen & Stemoco’s Stavseth. "No growth in demand can make up for that."
Rebound in 2010?
Georgi Slavov, head of dry freight research and structured products at ICAP Shipping in London, said 837 vessels were estimated for delivery in 2009 and 1,256 in 2010.
"Most of the ships scheduled for delivery in 2009 will be delivered: the plates have already been cut, they are under construction," he said.
"It is very, very difficult at such a stage to cancel a vessel."
Such a large overhang of ships is expected to prolong prospects for any freight market rebound well into 2010.
"The exact bottom will depend very much on how quickly the global economy will recover, how strongly it will recover and how many of those ships for delivery 2010 onwards would be cancelled," said Slavov.
"If we assume that 50 percent of this order book is gone, (cancelled) and at the same time the global economy recovers quickly, then we may also assume a market bottom in late 2010/early 2011."
Yet some argue freight rate weakness may linger even longer.
"We don’t see a recovery in the rates until 2012," said Susan Oatway with London ship consultancy Drewry.
"Fleet growth is still so much higher than trade growth."
Drewry estimated that average one-year worldwide time charter rates for Capesize vessels could fall to $21,445 per day this year from $116,000 a day in 2008.
The rates for Capesizes — the largest class of ships that ferry iron and coal — could drop to $16,965 on average in 2010.
While there have been hopes that a government stimulus package in China, the world’s third largest economy, could bolster demand, the sheer glut of vessels is expected to temper any potential boost from demand this year.
"I am afraid that the excessive amount of tonnage coming on the market and the global economy, which is still far away from recovery, will again push the market down," said ICAP’s Slavov.
Source: Reuters
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