 "Shipping firms look for operational equilibrium as Baltic Index recovers")
The spike in Baltic Dry Index (BDI), the benchmark for dry bulk shipping freight, in the past month is expected to continue on the back of scrapping of vessels which has pulled down the supply to some extent and rise in front-haul due to the ongoing harvest season in South America.
BDI has jumped 67 per cent in the last one month to above 670 levels and is seen touching 900 levels by end of May, industry officials said. The index was below 300 points barely two months ago.
"Old and more fuel consuming vessels whose performance is poor are getting scrapped. This is helping correction in the supply side of vessels and balance their supply-demand equations to some extent," said a top official with Equator Maritime. "Apart from that, freight rates for front-haul that is South America to China or Japan have improved due to the harvest season in the US which has allowed grains to sail across and reducing availability on other routes. All this is helping BDI rise."
He added that with some vessels also getting laid off in Singapore and Europe, the freight rate for dry bulk is also going up.
Industry officials are of the view that though a further rise in BDI is likely, the upside could be limited due to lower rates on backhaul from China to South America. On this route, there isn't much trade taking place as China is on a slowdown and not much exports are taking place from the dragon nation, said officials.
In industry jargon, backhaul refers to trips that generally lose money. Here the ship owner needs to take a discount in order to reposition itself for a better paying cargo. Front haul refers to the legs of a journey where ship owners can make better returns but usually end up in a less favourable area.
Meanwhile, industry officials said that the continued rise in BDI is expected to help shipping companies break even at the operating expenditure level. Typically, the operating expense for a dry bulk shipping vessel is about $5,000 per day.
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"Currently, though our three vessels are employed, we are in losses," said a top official with M Pallonji Shipping. "Our vessels carry minerals in the Indian Ocean and though the Baltic has moved up, it is yet to show its positive impact for Indian shipping companies. If the rising momentum continues in BDI for a month, which is mostly likely then we will be able to break even at the operating expense," he added.
Shipping Corporation of India, Great Eastern Shipping and Essar Shipping are leaders in the domestic market.
However, analysts were of the view that covering of operating expense is not a challenge for most domestic shipping companies that for their contracted ships as at they fix contract price accordingly. Only vessels in spot market will have to face the heat of meeting operating expense.
Brokerages suggest investors not to exit at current level despite of the fact that prices have recovered in sync with Baltic index. "The current situation in the shipping industry and the non-consistent performance of shipping companies, we do not recommend buy in any of the stocks at present," said an analyst with local brokerage.
Meanwhile, since January 1, 2016, domestic shipping stock index has outperformed SENSEX and infact has moved in tandem with with BDI.
Brokerages were of the view that BDI close to 1500 levels would allow domestic shipping companies to break even at ease but given the outlook for global economic growth, the index touching that level seems skeptical.
As per the International Monetary Fund, global growth is projected at 3.4 percent in 2016 and 3.6 percent in 2017 from 3.1 percent in 2015. Overall, forecasts for global growth have been revised downward by 0.2 percentage point for both 2016 and 2017, it said.
Growth in China, the world's largest producer and consumer of most commodities, is expected to slow to 6.3 percent in 2016 and 6.0 percent in 2017, primarily reflecting weaker investment growth as the economy continues to rebalance.