01 February 2012

Freight, shipping rates to face ‘long’ U-shaped recovery

KUCHING: The recent slump in the Dry Baltic Index (BDI) to its 3-year low has not been due to a drop in demand of dry bulk commodities but primarily due to overcapacity of ships.

Incorporating the seasonal effect in shipping demand and slowing of production activities in year-end, BDI was expected to hit a rebound point this month, MIDF Amanah Investment Bank Bhd (MIDF Research) stated in its research report yesterday.

Records showed that the leading economic indicator had fallen in seven consecutive weeks to 726 points as at January 27, 2012, a sharp decline from 1,930 points recorded on December 12, 2011.

MIDF Research believed that the BDI was close to, if it was not already at, the bottom.

The all-time low for the BDI was 688 and this occurred at the extreme period of anxiety post-Lehman Brothers.

“The soaring BDI to a historical high of 11,793 points before the 2008/09 financial crisis had prompted ship-owners to aggressively order new vessels.

“The current glut of ships, which are depressing freight rate, is the consequences of new vessel orders prior to the financial crisis,” it added.

Based on the data compiled as at January 20, 2012, the ‘Supramax’ experienced the highest growth among all bulk vessel class with a plus 26.7 per cent year-on-year (y-o-y) growth. 

However, this had been moderated by the growth in vessel being broken up, which grew by plus 25 per cent y-o-y.

The growth in the number of ‘Capesize’ and ‘Panamax’ class vessels in service were moderate with plus 13.8 per cent y-o-y and plus 10.5 per cent y-o-y respectively.

The number of ‘Handymax’ vessels in service actually declined by minus 1.5 per cent y-o-y, possibly due to the aggressive demolition of older vessels as evident by the plus 88.6 per cent y-o-y growth in broken-up ships.

The highest number of demotion was in the ‘Capesize’ class where ships broken up grew by plus 103.4 per cent y-o-y.

Overall, there was modest growth in the number of ships in service, which grew by plus 9.3 per cent y-o-y while the pace of demolition of ships had accelerated, growing by 35.9 per cent y-o-y.

While the pace of broken-up vessels had accelerated and new ship orders had declined, the research firm remained cautious as the ships under construction continued apace, increasing by plus 42.2 per cent y-o-y.

This suggested that the ship delivery would accelerate in the near term as shipowners would not be able to further delay the delivery of the ordered new vessels. Hence, MIDF Research believed the oversupply of ships would not be resolved soon and the freight rate might only rebound in 2012.

Adding woe to the shippers, the bunker costs had suprisingly remained high, reaching US$700 per metric tonne (pmt) level since the begining of the year.

“We believe that margin for bulk carrier operators will remain squeezed with the high bunker cost and low freight rates,” stated MIDF Research.

As an illustration, the Singapore bunker fuel spot price as at January 27, 2012, surged up by 33.3 per cent y-o-y to US$734pmt and this was comparable with record high US$764pmt in mid-2008 year.

“Nevertheless, we believe that the decline of BDI will be moderated by the demand in commodities.

“The spot price of iron ore remained steadily at US$139.80pmt as at January 26, 2012 and the mining companies anticipate demand to pickup after the Chinese New Year holiday,” said the research firm. A consensus in mid-December showed China’s iron ore imports would jump to a record high 720 million tonnes in 2012, with its steel output rising to 728 million tonnes.

The country was currently the largest steel producer which accounted for 44.3 per cent of world steel production in 2010.

Given the scenario of oversupply of vessels, higher bunker costs and modest demand of dry commodities, MIDF Research remained cautious on the shipping industry.

Source: The Borne Post. 1 February 2012

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