Freight rates become profitable; Baltic index gained 96% in May
Kowshik Kuchroo is sure that the bad days for the shipping industry are over, finally. The vice-president of Mercator Lines, India’s largest dry bulk carrier, said operations had become profitable once again and the company was, in fact, looking to buy new ships.
Kuchroo’s optimism is based on two factors. First, the Baltic Dry Index, the global benchmark for freight rates of dry bulk carriers, has gained 96 per cent to 3,494 in May, on the back of China’s import of cheap iron ore from Brazil.
And second, the spurt in the freight rate has coincided with a drop in the prices of newly-built ships, which are available now at $60 million to $70 million, down from $160 million a year ago.
On Friday, the freight rate for newly-built Cape-size vessels for Atlantic and Pacific route deliveries were $27,000 per day for a year contract, compared to $2,000 in December.
Kuchroo said the break-even rate for Cape-size vessels for newly-built ships was about $24,000 a day.
“We are definite, the bad days are gone,” Kuchroo said. The company has a fleet of 12 dry bulk carriers and nine tankers, 70 per cent of which are on long-term contracts.
Others agree. For example, K S Nair, director, bulk carrier and tanker, Shipping Corporation of India (SCI), the country’s largest sea carrier, said he expected demand for such ships to improve between India and China in the coming months.
The stock markets have had a whiff of the revival in the shipping industry’s fortunes. The new freight rates have pushed up the Mercator Lines’ scrip 85 per cent in May alone, to Rs 63.40 on the Bombay Stock Exchange. The Sensitive Index gained 28.2 per cent in the same month. The SCI stock gained 66.7 per cent to Rs 155 a share in May (see table).
The stock of Essar Shipping, which has eight large dry-bulk carriers in a fleet of 26, gained 74.6 per cent to Rs 72.90, and Great Eastern Shipping, which has 31 tankers and 7 dry bulk carriers, gained 38 per cent to Rs 205 in the same period.
The recovery in the Baltic Dry Index has also been spectacular. The index, which had touched an all-time high of 11,793 on May 20 last year, started sliding following the global economic slowdown. It touched a 22-year low of 663 in December, as steel producers cut production. Even the world’s largest steel maker, ArcelorMittal, breached contracts for shipping cargo in that period.
The index started reviving from February, as some Chinese steel producers started stocking iron ore before the end of the financial year. But the downturn resumed in April and the index again slid to 1,463 on April 7, before recovering to 1,773 at the end of April. Since then, it has gained 96 per cent, indicating a change in the mood for the better.
Reason: The price of Brazilian iron ore has come down from a high of about $120 per tonne in the middle of last year to about $90 per tonne now. The cheap raw material cost has prompted China to build its reserves and start low-cost manufacturing. Indian iron ore, which is low on metal concentration, is available at about $80 per tonne.
