Old bulk carriers gain currency

Busy shipyards mean delivery time for new vessels is around 2 years

In an unusual development, shipping companies are paying more to buy old dry bulk carriers as delivery of new vessels could take as long as two years owing to rising freight rates and order overflow at shipyards.

In August 2003, the price of a new Handymax carrier was around $20.5 million, while that of an old ship was around $16 million.

In March 2004, the price of a newbuilt Handymax rose to around $27.9 million, while that of a five-year-old ship crossed the $29 million tag.

The same is the case with Capesize ships. In August 2003, the cost of a new ship was around $39.5 million, while that of a five-year-old one was around $32 million. In March 2004, the price of a new building shot up to $50 million, while that of five-year-old jumped to $59 million.

"Bulk carrier freight rates are at record levels and it makes sense to cash in on that by deploying a ship, even an old one, immediately. On the other hand, by the time a new ship comes into the market, freight rates could have fallen down," says K Ramachandran, head of advisory desk at BNP Paribas.

To get an idea of the prevailing freight rates globally for dry bulk carriers one only has to take a look at the Baltic Handymax Index.

This index also is especially significant for the Indian shipping industry as much of the exposure of domestic shipping companies is to this segment. Industry observers say that the index was hovering around the 11,900 mark in August 2003. In March 2004, it had crossed the 31,000 mark, they added.

The surge in the dry bulk carrier rates initially began with stockpiling in anticipation of the Iraq war. It gained momentum and reached record levels primarily due to the import from China. Bulk carrier cargo chiefly comprises iron ore, coal, fertilizers and food grains.

China's huge imports led to a demand-supply mismatch for dry bulk carriers and this in turn led to surging freight rates in this sector.

The rising freight rates are causing companies to relook their ship acquisition strategies. Industry source say that Varun Shipping Company has decided to focus on the energy sector for the time being and look at buying dry bulk carriers only after the freight rates and the prices of these ships stabilise.

The Shipping Corporation of India (SCI) is in the market for six ships "" four dry bulk carriers and two tankers. "Our plans are not dependent on the ups and downs of the industry," says P K Srivastava, chairman and managing director of SCI and also the head of the Indian National Shipowners Association, the apex industry body.

SCI could not buy ships for over a year due to the government's plans regarding its divestment. It is only recently that the government gave it permission to embark on an acquisition programme.

Some within the company, however, are unhappy that the permission took so long in coming as they will have to pay more for acquiring dry bulk ships.

Some analysts, however, believe that freight rates will stabilise now. "We expect freight rates to stabilise in 2004-05 due to the softening of the Chinese economy," says Anish Desai, an analyst with HDFC Securities.