As freight rates tank, Goldman Sachs predicts further fall in Baltic Index.
Weighed down by a steep fall in freight rates, shipping companies are in troubled waters. The future looks even more uncertain as the economic slowdown has depressed the demand for raw materials.
The Baltic Dry Index, the benchmark for bulk carriers that transport iron ore, coal, etc, has crashed over 40 per cent in a little over three months. The index closed at 6,809 on Friday from its all-time high of 11,793 on May 19.
The rates for Very Large Crude Carriers (VLCC) have also crashed by 90 per cent from its peak three months back.
Most shipping companies fear the worst isn’t over, as a report released by Goldman Sachs, an international brokerage, on August 15 predicted that the index will average 40 per cent less next year and sink another 47 per cent in 2010. Goldman also advised investors to sell bulk carrier stocks ahead of any major correction.
“Lots of orders for new ships were booked before the US economic crisis happened. There is a fear that the crisis may spread to other countries,” said Vikram Suryavanshi, analyst with Karvy Stock Broking, a Mumbai-based brokerage.
The outstanding order book for new ships is unusually high at 50 per cent of the existing fleet against the earlier figure of 15-20 per cent – a reason why analysts feel the freight rates will sink further when new ships are delivered in the second half of 2009 and 2010.
Besides, China, the world's biggest consumer of coal, iron ore and industrial metals, expanded at the slowest pace since 2005 in the quarter ended June 30. Further in July, it closed steel mills and other factories to cut pollution during the Beijing Olympics that ended on August 24. Since China will hold the Paralympics on September 6-17, those polluting plants will remain shut.
“If the global economy slows down, every industry including shipping will get impacted,” said Nitin Kolhatkar, vice-president (finance and accounts) at Mumbai-based shipping company Mercator Lines.
However, the company, which has the largest tonnage in the dry bulk segment among private sector shipping companies, expects the freight rates to remain firm for the next two years. Mercator has hedged itself from the rate volatility through long-term contracts. Still, its scrip has slumped 32 per cent in the last three months on the Bombay Stock Exchange. The Sensex was down 11.28 per cent in the same period.
The stock of India’s largest shipping company, Shipping Corporation of India, has also dipped by 26 per cent to Rs 207. The stocks of other shippers such as G E Shipping and Essar Shipping Ports & Logistics have gone down by 24 per cent and 38 per cent, respectively, in the same period.
Varun Shipping, which exited the dry bulk segment two years back, however, said that the decline in the tanker and offshore segment was just seasonal. “There is a long term optimism for the tanker market as the single-haul tankers have to be phased out,” said Yudhishthir Khatau, its managing director.
