Freight Shipping Oversupply Squeezes Rates

Making forecasts about dry bulk ocean freight rates have always been a tricky business. This is because forecasters have to consider diverse factors.

Among other things, how the economies in different parts of the world would behave, and the expected growth in seaborne trade of coal and iron ore, constituting nearly 60 per cent of dry bulk cargoes. Also, global movement in food articles.

Nobody will claim precise knowledge of any of these. Therefore, most such forecasts are loosely structured and they come with a number of caveats.

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Even then, when Moody's Investors Services talks on the subject, ship owners and shippers take note. There is no question of contesting the credit rating agency's underlying point that the oversupply of dry bulk tonnage would keep rates under pressure over the next couple of years.

In fact, the behaviour of the Baltic Exchange Dry Index (BDI, which tracks rates to ship dry commodities), in the past several months is a pointer to the world economy being unable to absorb the commissioning of a growing number of vessels. One prediction is that the bulk fleet will grow between 11 and 13 per cent this year, to top an unprecedented 600 million deadweight ton (DWT), leaving the demand for shipping space far behind.

TURBULENCE
Moody's report also says as a large number of new vessels take to the water in the midst of slowing of the growth rate of dry bulk shipping: "We expect freight rates to fall substantially in 2011. The agency sees the spate in supply of shipping space constraining the BDI between 1,000 and 2,000 points."

It goes without saying that the less efficient shipping groups will find the going extremely difficult with the BDI moving in that range. The report says the operators whose charter policies are based predominantly on long-term contracts would, however, come under less pressure.

The shipping world is in a situation where there will be occasional upticks in rates, only to be followed by falls. The BDI hit a two-year low in mid-February. There has been recovery since. But the Index and also daily earnings of cape-size vessels have remained volatile. Freight rates are, perforce, sensitive to unforeseen developments like the near-Biblical December floods in Australia and the ruinous combination of quake and tsunami that hit Japan last month. Gujarat NRE Coke managing director Arun Jagatramka says coking coal exports from flood-ravaged Queensland in the January-March quarter took a hit of up to 15 million tonnes.

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The rare act of Queensland-based coal producers invoking the force majeure clause for their inability to honour supply commitments did hurt capesize activity and was responsible for freight market disruptions in January-February. Then came the Japanese disaster, bringing in its wake bad tidings for the shipping industry, already reeling under over-capacity.

But Japan may not prove as bad as was initially feared. The country has enough unaffected port capacity and the transport ministry there has given assurances that radiation at the larger ports is at a safe level.

The shipping fraternity is hopeful that, sooner than later, shipments of coal, both thermal and metallurgical, and also iron ore to Japan, will pick up with restoration of power supply and the steel industry resuming production at full throttle.

AFTER EXCESS
In times of excess shipping capacity, scrapping of old tonnage and postponement or cancellation of orders for new ships are time-tested safety valves. But Moody's report says such traditional action might not be enough to mitigate all the excess capacity.

This year is very likely to see record scrapping, as about a fifth of ships are over 20 years old, having lived their useful life. More, ships sent to the scrap yard are fetching attractive prices. Are not all steel intermediate raw materials like iron ore, coking coal and steel scrap fetching good prices, too?

Scrap yard owners in the Indian sub-continent say the ageing vessels should come to them at a rapid pace for the rest of 2011 as new vessels for which orders were placed ahead of the 2008 economic downturn get delivered in growing numbers. It will not be a surprise if up to 20 million tonnes are scrapped this year, to make it a record.

In the near term, BDI will stay on turbulent waters and at levels not bringing a cheer to ship owners. The long-term prospects for dry bulk shipping, however, appears more favourable to Moody's, in the context of emerging markets using more and more commodities. At the same time, there is concern that given the industry's high degree of fragmentation and the innate speculative nature of its players, the industry will be found wanting in exercising restraint in creating excess capacity.