Shipping firms should be cautious in ordering of new ships: Pradeep Rajan

Says, shipping companies are turning around, with a general increase in capacity utilisation

Shipping companies are turning around, with a general increase in capacity utilisation and freight rates steadier. Pradeep Rajan, senior managing editor, Asia Pacific Shipping & Freight, S&P Global Platts, talks to Rajesh Bhayani on the outlook. Edited excerpts:

Which factors are driving recovery in shipping freight rates?

Euronav Shipping, Frontline and Navig8 have acquired huge capacities in the tanker segment while the shipping industry was passing through huge consolidation. Now, 45 per cent of the world's tanker capacity is controlled by five players. At the same time, demand for crude oil has increased, either for refining or commercial as well as strategic petroleum storage from China, South Korea and India. These developments helped tanker freight improve.

Another factor that kept prices stable and steady last year was the increase in tonne mile demand. The arbitrage movement seen in crude markets helped in keeping ships engaged for a longer time, translating into higher freight rates and better returns to ship owners. For example, India imports crude oil from the Middle East to its west coast ports, which takes 2.5-3 days. But, if crude is imported to India from West Africa, the ship remains engaged for 25 days, which means that much tonnage is taken out of the market. The narrowing of the front-month Brent/Dubai exchange of futures for swaps -- used to price arbitrage opportunities for Brent-related crude grades to the Far East -- since last year has seen crude produced in West Africa, as well as in the Atlantic, moving into the Asian markets. This arbitrage also helped shipowners to soak up the newly delivered vessels last year. In 2016, 47 VLCCs (very large crude oil carriers) were delivered; this year so far around 19 new vessels have entered the market. Because of this increase in tonnage supply, we have seen some correction in tanker freight, different from what is happening in the dry bulk carriers’ market.

Will the dry bulk freight market, which is doing well, also correct in line with the tanker segment?

China's demand for iron ore and on the reverse side, its investments overseas and steel exports, has led to a rise in dry bulk carriers' freight (rates). Last year, China imported a billion tonnes of iron ore. As a result, exporting countries saw good growth and they were importing steel from China. Thermal and metallurgical coal demand was also good. Hence, most of the routes and segments of dry bulk have been doing well.

China has shown 6.9 per cent growth during the first quarter of 2017 and, ahead of the Chinese communist party’s politburo elections this year, efforts would be to see China growing. The country plans to build a new city southwest of Beijing, three times the size of New York, expanding its metro railway network in tier-II and tier-III cities and has investment plans for Pakistan, Sri Lanka, etc. All this will keep iron ore and metals demand high. This is expected to keep demand for dry bulk carriers’ fairly healthy this year.

So, that segment will remain tight?

Not tight but stable and steady. It seems like the bad times in the dry bulk markets are behind us. Cargo supply is looking healthy. We are seeing iron ore mines in Australia reopening that were either closed or kept under care & maintenance due to low commodity prices. The increased production will have to be shipped. However, the danger is if shipping companies put more orders for increasing of tonnage capacities.

So, broadly, this is a good time for shipping companies in Asia, due to a stable freight market?

Yes. A year ago, we had seen some ship owning companies on the brink of bankruptcy. They are much more stable, while a few others have seen a remarkable turnaround. However, to keep enjoying the fruits of a stable freight market, shipping companies should be much more disciplined in ordering of new ships.

Are they ordering new ships as seen in VLCCs?

Ship building yards are not doing so well and are offering goodies to attract shipping companies to order new ships. The market looks steadier and bad times for shipping companies are behind, though no one can predict the market movement. A few companies have been looking to add capacities, as new building asset prices are still low. Interestingly, second-hand ship sales have gone up during the past few quarters.

So, new ship orders will decide the direction of the freight market?
 

True but one more indicator favouring shipping companies is that Greek companies have increased their fleet size The Greeks are known for being pretty strict shipowners, who generally offer a lot more resistance during freight negotiations. Hence, it can be said that it's a good time for shipping companies. The, dry bulk segment looks steadier, while in tankers we might see a seven per cent growth in fleet in 2017.

Indian shipping companies has seen good improvement in capacity utilisation?

Yes. Because refineries in India are increasing crude oil import, with capacities being added and many refiners looking at the Atlantic basin to source it. Essar, Reliance, IOC, HPC, etc are quite busy in bring crude from the Atlantic basin. When the global tanker market goes up, Indian shipping companies are benefited as well, since their ships are also deployed on other international routes.

How is the freight rate outlook, especially India-specific ones?
 

In the March quarter, tanker freight rates fell by around 45 per cent but we have again seen an increase in April. In the tanker market, more VLCCs are going to be delivered in 2017 and that needs to be kept in mind. But, in the dry bulk segment concerning India-focused routes, freight levels in the March quarter went up, with thermal coal movement from Indonesia to the west and east coast of India staying steady. Similarly, metallurgical coal imports from Australia and limestone supply from the Middle East have been good. So, the dry bulk route is busy from India's perspective but tanker segment will be dependent upon how the arbitrage or tonne mile demand keeps ships busy, as well as on the capacity additions.