The median in a Bloomberg survey of fund managers and analysts suggests that the leasing rates of capesize ships will fall by over 50 per cent to $18,000 a day from their current level before the year ends. In fact, in the past three weeks, the daily leasing rates for the largest capesize vessels got shaved by as much as a quarter.
What is befuddling is that daily leasing rates for ships and the Baltic Dry Index, which tracks transportation costs of dry bulk cargoes on international routes, are on a slippery slope when for the first time since the world economy got wrapped in a stinging recession we have reports of some major economies rebounding. The BDI is worked out on the basis of rates for four sizes of ships, including capesize.
Not only has the freight market turned flaccid, but advance bookings for ships are becoming fewer as buyers are becoming increasingly edgy about the prospects of trade in dry bulk cargoes in this year’s final quarter. From over 4,000 in early June, the BDI, which is a daily average of price to ship industrial raw materials and foodgrains, is on a retreat. The BDI is down by about 40 per cent since.
The World Bank has forecast a “historic decline” of 6.1 per cent in global trade in goods and services in 2009 when for the first since the Second World War there will be growth contraction of 1.7 per cent. The general consensus is that economic recovery will be slow next year. In an environment like this, the collapse in shipping rates is not unexpected.
But shipping has its own dynamics which in recent years is affected greatly by the pace of Chinese import of minerals (principally iron ore, which in any case constitutes by far the single largest item of all dry bulk cargoes), metals (we have seen how actively China was engaged in restocking till recently) and food items like soybeans. On the supply side, a distorting factor could be port congestion. China, the world’s largest steel producer, is heavily dependent on iron ore imports, its own mineral being of inferior quality, requiring a high degree of beneficiation.
Iron ore trade, particularly the portion linked to China is the single largest influencer of the BDI. Confirming this Financial Times says that “In 2002, when the index began a six-year surge from about 1,000, China imported about 110 million tonnes of ore; last year when the BDI topped 11,600 before collapsing 92 per cent, it imported 440 million tonnes. As imports have soared this year to 355 million tonnes by July, the BDI has rallied six-fold.” The fall in the BDI since has also got to do with sudden fall in Chinese ore imports.
R K Sharma, director general of Federation of Indian Mineral Industries (FIMI), says that China by all accounts is in an overbought situation, having imported every month 13 million tonnes of iron ore in excess of local furnace feed. What does one expect China to do in this situation? According to Sharma, apply brake on ore imports.
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No surprise, therefore, the number of iron ore loaded capesize vessels waiting at designated Chinese ports has come down sharply from 88 in mid-June to about 30 now. As China doggedly refused to sign long-term ore deals with the world’s three largest mineral groups – the one done with Fortescue is of marginal import – the spot price rose to $110 a tonne not long ago.
Now, however, ready delivery iron ore is available at about $80 a tonne, in line with fall in Chinese steel prices for four straight weeks. China Iron and Steel Association (CISA) is seeking to impart discipline in ore imports by drastically reducing the number of importers, a euphemism for eliminating the speculators from the trade.
But the inordinately long time CISA is taking to wrap up long-term ore contracts is eroding its authority in the industry it represents. Chinese steel makers do not like its filibustering forcing them to buy spot ore at one stage at a big premium over contract prices negotiated by Japan and South Korea for this season. In any case, China has stockpiled considerable amount of ore over the last many months which is now being worked down.
Dry bulk market remains in choppy waters. What is to further add to the turbulence is the record commissioning of 146 capesizes this year, equal to 14 per cent of the existing fleet. Most of the new building deliveries will come from now on. The creation of excess shipping capacity is happening when the Chinese support to commodities appears to be waning.