Marred by slow growth in international trade freight rates have taken a big hit. From dry bulk to tanker to containerised cargo, the shipping industry is grappling with a falling freight rate situation across all cargo. In the last one year, the Baltic Dry Index has plunged by 36 per cent.
A combination of demand and supply side factors are pressurising freight rates. On the demand side, the debt crisis in the US and Europe is expected to further dent the international freight rates and create a dampening effect on the trade outlook. “US, Eurozone crisis is a cause of concern. There is an uncertainty of consumer sentiment,” said AR Ramakrishnan, managing director, Essar Shipping.
Shrinkage in cargo from not just the western economies but from countries like China has significantly contributed to the falling freight rates in the dry bulk segment. “Sentiments play a major role. US and Europe may cut down on imports from China, Taiwan and India due to shrinkage in their economies,” said TV Shanbagh, former head of Transchart, shipping ministry's chartering wing.
China’s iron ore inventory level is at an all-time high of 94 million tonne and steel production in China is expected to remain slow on account of restriction of electricity allocation to steel plants.
“China could be importing lower volumes of iron ore due to current high level of inventories. Dry bulk freight rates are expected to remain range bound with a negative bias in August on the back of Indian monsoon season which will most likely reduce iron ore exports from India,” said Bharat Chhoda, analyst, ICICI Securities.
Indonesia's dictat on the export of coal on market prices instead of negotiable rates have led to a decline in coal exports by Indian companies which have set up captive ports there.
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According to industry experts, bulk and liquid cargo rates have already hit rock bottom and expected to remain stable at the level. The container market is down by 50 per cent due to a fall in trade. Most of this is attributed to supply side anomalies. With new building coming in and shipping companies putting in orders for more vessels the freight rates have been negatively impacted.
“Growth of trade is not matching the growth in supply. While supply side is rising by 13 per cent year on year, demand is only increasing by 8 per cent,” said Captain Sunil Thapar, director-bulk carrier and tanker division, Shipping Corporation of India.
In the dry bulk segment, 45 per cent ships are still on order and in tanker about 28 per cent. Shipping companies are expecting that the new building effect will reduce by 2012 with the peak time of deliveries over in 2011. “On the positive side, the drop in crude oil prices should help the consumers. We are hopeful that demand for crude oil imorts in the west will increase in winters,” Ramakrishna added.
Although, it is a wait-and-watch policy for shipping companies as of now, industry experts are expecting some positive momentum for Very Large Crude Carriers (VLCCs). While the lifting of the Russian wheat export ban and the recovery of Australian coal mines could lend support to the dry bulk freight rates, industry experts say. "Suezmax day rates are expected to rise from its current appalling levels. LPG freight rates are expected to remain range-bound in August 2011 due to availability of excess tonnage,” Chhoda added.