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Thursday, June 25, 2009

Is volatility the name of the game for the dry bulk market?

Wednesday, 24 June 2009

Although latest reports from Hellenic shipbrokers indicate that the Baltic Dry Index should only be seen as a reference point for the industry and nothing more, the index's latest behavior could be regarded as erratic to say the least. Volatility is a major concern among ship owners who find themselves amid an environment where tomorrow could prove totally different from today and even more from yesterday. Yesterday, the BDI was down 3.84 percent from Monday's session, ending at 3,874 from 4,029 the day before. It lost 155 points with the capesize sector proving to be the more vulnerable, as was the opposite case (the main gainer) during the previous rises. The relative capesize index (BCI) lost 468 points yesterday to end at 7,411, which is still enough to see rates of $83,257 on average, despite losing $5,680 on a day-to-day basis. While supramaxes and handysizes remained relatively unchanged, panamaxes followed the fall of the capesizes albeit at a much slower pace, ending down by just 47 points at 3,012 points or $382 on average.
As shipbrokers have pointed out this market, although largely fluctuating and far from being stabilized keeps offering opportunities to reap enough profits to keep companies afloat. What's more important is that owners who have secured financing to invest in expanding their fleet of bulk carriers, will be among the beneficiaries, despite the fact that ship values have been on the rise lately. They are still much lower (more than 50% in most cases) from the highs of 2007-2008, which means that they can provide ground for profits at today's market. It's also important to state that many owners are actively seeking ways to hedge their risks, by adding more of these lower-valued vessels at their fleets, in order to improve their overall profit margins. This tactic can lower capital costs and boost their chances of weathering the crisis, instead of being stuck with a highly expensive fleet, which wouldn't be able to offer a sensible return on investment.
According to brokers Barry Rogliano Salles' latest weekly report on the dry bulk market, the BCI gained nearly 20% last week, while the panamax market was also pulled along by the Capes. “Once again, Chinese ore imports provided the fuel for the fire. With the delivered price of imported ore currently around $70-75 per ton, the argument for imported ore over domestic supplies remains extremely strong. Underlining this trend, UNCTAD this week predicted “a great Chinese shakeout” with a significant shift towards more imports by the country. The agency now estimates 40% of Chinese mines (or 130m – 150m tons of ore capacity) will close between now and 2012, eliminating a large part of the local market. Around half of Chinese ore mines are now operating at a loss due to the effect of lower freight rates and higher production costs, added UNCTAD” the broker said.
If this year's contract price remains in line with, or even below current spot rates, the incentive for importing ore will continue. BRS also noted that “there was little news on the contract front, although the first European deal (ArcelorMittal) was signed at prices in line with Korean and Japanese terms. There are now reports the Chinese could abandon the contract system altogether for 2009/2010, and leap straight to negotiating contract prices for next year”.