Shipping Rates Seen Bottoming on Demolitions: Freight Markets

Freight rates are poised to rise after tumbling to a two-year low as owners of ships hauling coal and iron ore scrap the most vessels in at least 28 years.

A total of 38 capesizes, carriers three times the size of the Statue of Liberty, will be demolished this year, according to Clarkson Plc, the world’s biggest shipbroker. Charter costs should average $22,000 in 2011, almost four times today’s rate of $5,724, according to Philippe van den Abeele, the managing director of Castalia Fund Management (U.K.) Ltd., the London- based sub-adviser to a hedge fund trading shipping derivatives.

“From where we are now I don’t see much downside,” he said. “People are depressed, they think it’s the end of the world in dry cargo shipping, but they’re pushing it too far.” Van den Abeele’s forecast in July for a rebound was followed by rates that tripled within three months.

Owners of older vessels may sell them for scrap because earnings from single-voyage charters were slashed by a four- week, 71 percent slump in rates. The most demolitions since Clarkson’s records begin in 1983 may help reduce a glut as an estimated 200 new capesizes, spanning about 35 miles laid end- to-end, leave shipyards this year, a Bloomberg survey of eight fund managers and analysts last month showed.

Van den Abeele’s forecast for this year’s average rate is at least 22 percent higher than any of the quarterly forward freight agreements being traded for 2011, according to data from the Baltic Exchange in London. The accords, traded by brokers, allow investors to hedge or bet on the future cost of shipping.

Charter Costs:

Companies ordered too many ships in 2007 and 2008, when daily income averaged about $111,000. Rates reached a record $233,988 in June 2008 before plunging 99 percent over the next six months to $2,316, according to the Baltic Exchange, which publishes assessments for more than 50 maritime routes.

Korea Line Corp., South Korea’s second-largest operator of dry bulk ships, filed for receivership last month after reporting losses in six of the past seven quarters. The 12- member Bloomberg Dry Ships Index fell 4.5 percent this year, extending an 8 percent drop in 2010, with the biggest declines for Genco Shipping & Trading Ltd. and Eagle Bulk Shipping Inc.

Owners of capesizes valued at $60 million are paying about $25,000 a day in costs to cover expenses such as crew and financing, according to Nigel Prentis, director of research and consulting at HSBC Shipping Services Ltd. in London. Single- voyage rates have been below that level since Dec. 20.

Negative Rate:

The Baltic Exchange reported its first-ever negative rate for dry bulk freight on Jan. 13. Costs on the C11 route for shipments to Europe from Asia are now at minus $2,227 a day. While that means owners pay customers to hire their vessels, clients still pay most of the fuel costs. For a shipping line wanting to relocate a vessel to a region where there are more cargoes, that’s still cheaper than sailing the craft empty.

The glut is also hurting profits in the oil-tanker market, where owners’ daily returns on the benchmark route from Saudi Arabia to Japan dropped 89 percent to $7,973 in 12 months. For container ships transporting goods in boxes, rates more than doubled in the past year as trade rebounded with the global economy, a Hamburg Shipbrokers’ Association index shows.

Scrap values are at their highest since 2008, with a capesize worth about $10 million at current steel prices, said Jamie Dalzell, sales and purchasing manager in Shanghai for Global Marketing Systems Inc. The company, based in Cumberland, Maryland, is the world’s largest cash buyer of obsolete vessels. Cash buyers purchase vessels from owners and deliver them to recycling yards.

Global Marketing:

Bangladesh controls about 34 percent of the market for the demolition of bulk carriers, China 29 percent and India 27 percent, according to the United Nations. Scrapping businesses are typically privately owned, and there are enough of them to handle the anticipated increase in demand, said Anil Sharma, chief executive officer of Global Marketing Systems.

The estimate of 38 capesizes from London-based Clarkson is equal to a carrying capacity of 6.3 million deadweight tons.

At Van den Abeele’s estimate for an average rate of $22,000 this year and HSBC’s estimated daily costs, some capesize owners still wouldn’t make money. Charter costs would be the lowest annual average since 2002, data compiled by Bloomberg show.

Rates out of Asia plunged after the worst floods in a half century in Queensland, Australia, which supplies about half the world’s seaborne supply of coal used in steelmaking. BHP Billiton Ltd., the world’s largest mining company, and London- based Rio Tinto Group, the second-biggest iron-ore exporter, declared force majeure, a legal clause allowing them to stop contracted sales.

Secondhand Capesize:

Slumping rates also drive down asset prices. The cost of a 5-year-old secondhand capesize dropped to $49.4 million this week from as much as $61.4 million in June, Baltic Exchange data show. Analysts use ship prices to assess company valuations and they can also be part of conditions attached to loans.

Owners are also reacting to the slump by anchoring more ships and slowing down those carrying cargoes to conserve fuel. An average of 233 capesizes were anchored globally in the week to Jan. 30, compared with 142 at the end of October, based on data collected by AISLive and compiled by Bloomberg. The average speed of the bulk carrier fleet fell to 8.81 knots, from 9.56 knots, over the same period, the data show.

“One can see charterers being spoiled for choice, and they will prefer newer ships with anything over 20 years old marginalized and hard to employ,” said HSBC’s Prentis. “This should be a record year for capesize scrapping.”

Source: Bloomberg Business Week. By Alistair Holloway. Editors: Stuart Wallace, Dan Weeks. Wednesday, February 02, 2011

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