How does one explain the more than doubling of the Baltic Dry Index, which measures dry bulk shipping rates on 40 global maritime routes, in the last five weeks? The development will appear to be intriguing since the world’s major economies are reeling from a severe recession and China and India are seeing low growth rates.
According to experts, the answer may be in the recent spurt in shipments of iron ore from Brazil, Australia and India. The destination of a majority of ore shipments is China. Confirming the improvement, R K Sharma, director general of Federation of Indian Mineral Industries, says ore prices for immediate delivery should be rising to $90 a tonne soon compared with the November low of $45 a tonne.
Unarguably, iron ore is the world’s most shipped commodity. Last year, nearly 890 million tonnes of ore were exported using sea routes, including over 100 million tonnes by India. The immediate booster for dry bulk rates is coming from China with steel makers there making some spirited purchases of ore.
Trade officials explain that China once again lending support to the ore market has got much to do with the 23 per cent fall to around 60 million tonnes in its ore stockpile since the September high of over 90 million tonnes. Revival in the demand for ore in China is leading Vale, BHP Billiton and Rio Tinto to hire more and more capesize vessels.
The progress of the Baltic Dry Index, the benchmark for freight costs for dry bulk commodities, from the 22-year-low of 663 in mid December to close to 2,000 now is also due to the signs of recovery in raw materials trade in general. As more and more coal is being shipped, the volume in global trade in steel is finally showing some promise of picking up. Any such improvement will, however, be slow in happening.
Capesizes happen to be the largest sized vessels suitable for transportation of bulk items such as iron ore, coal and steel. While many such vessels had to be anchored in the last quarter of 2008 as demand for shipping space fell at an unnerving speed, they have now started coming back in the market.
No doubt the daily rates for capesizes would well have soared past $26,500 per day had not over 60 vessels are still idling away at different ports. Yet another reason why the progress in capsizes and smaller Panamax ships could get checkmated at some point is because of the new dry bulk shipping capacity in the pipeline. Even while cash strapped shipping companies are still cancelling orders for new ships, there remains an overhang of surplus capacity.
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It is, however, of paramount importance that the capsize one and two-year charter rates continue to rise to an extent that ship values appreciate at least 50 per cent from the present level. That will bring back shipping companies having broken their loan covenants in the wake of the collapse of freight market in the final three months of 2008 in the good books of lenders.
Dry bulk carriers are in safe waters as long as they maintain their net asset value at 130 per cent of outstanding loans. NAV in this case is linked to the current market prices of ships. Brokers say vessel prices have seen depreciation of as much as 70 per cent. Selling used ships left with many years of sea going worthiness has become difficult. A few that have been sold of late are all of distress kind.
Brokers are not to hazard a guess as to when we will see the Baltic Dry Index approaching last year’s all-time high of 11,793 points. A Morgan Stanley analyst says that shipping rates had seen their worst and they are likely to improve further on the back of freeing up of credit markets and greater activity on the Chinese trade front.
At the same time a few week’s of progress in the index is not to be taken as the signal for a strong recovery. “We are off ground zero, but I don’t think we are going to fly to the stratosphere any time soon,” says an official at London based Global Maritime Investments.
The point of risk is that the improvement in shipping fortunes is singularly on hope that steel makers in China will be a major beneficiary of the 4 billion yuan ($585 billion) stimulus package for the economy announced in November by Beijing. Sharma says the fact that Indian ore exports picked up after languishing for eight months may be taken as the end of the decline in the fortunes of the Chinese steel industry.
Even while demand fall forced China to apply brake on production since September, the commissioning of new capacity lifted Chinese steel output to 502 million tonnes in 2008. That is 38 per cent of global steel production of 1.329 billion tonnes. But if for some reasons there is a setback in steel in China then that would hit dry bulk freight rates badly.