Shipping companies are pinning their hopes on the Chinese New Year on January 26 as the Baltic Dry Index, the benchmark for freight rates of dry bulk carriers, has dropped 35 per cent over the last 40 days.
With the world’s third largest economy having built sufficient capacity, the demand for vessels to ship iron ore and steel to and from China has declined over the last few weeks. Now, the next round of movement is expected only in mid-February as the country virtually shuts down for the 15-day festival, shipping industry executives said.
“Freight rates for bulk carriers is too much dependent on China since the consumption has failed to take off in the US and UK,” said K S Nair, director, bulk carrier and tanker segment, Shipping Corporation of India (SCI). The public sector player has the largest fleet of 19 dry bulk carriers in the country.
Over the last six months, this is the second such fall in index which has stayed volatile though economies across the globe are reporting better numbers. Following the credit crisis, the index dropped to a 22-year low of 663 in December 2008. Just seven months prior to that the index was at a record high of 11,793.
When China started piling up a metal inventory comprising copper and iron ore, the Baltic Dry Index shot up to 4,291 in June 2009. But, it fell to nearly 50 per cent to 2,163 on August 24 as China slowed down purchases having built up a stockpile. Consumption in Europe and the US, which were in the middle of a recession, remained low.
Three months later, China drove up the index as it resumed purchases to fill up warehouses. It also coincided with the global movement of foodgrain and the index reached its 14-month high of 4661 on 19 November. With demand slowing down, the index dropped by 35 per cent to 3,005 today.
The World Steel Economics Committee said in October that China’s demand for steel would rebound 19 per cent in 2009 and 5 per cent in 2010. Steel output of the country has been at record levels for three consecutive months on the back of the government’s Yuan four trillion ($586 billion) stimulus package.
The US and the UK are the two largest consumers, including for products like cars and sports utility vehicles. Freight rates earlier depended largely on the trade from these two countries.
Capesize vessels, the largest dry bulk carriers, with over 150,000 tonne deadweight tonne (dwt) capacity, are currently having a $60,000 per day rate for Atlantic delivery and $54,000 per day for Pacific delivery. The rates have not changed in the last 40 days since it comes with a lag.
Total tonnage for dry bulk carriers in the world is currently 460 million dwt. Globally the yard has 22 per cent of the current capacity due for delivery in 2010.
The break-even for such ships is a maximum of $30,000 per day, including their interest cost and depreciation. So, at the current freight rate these ships are making a profit of $30,000 on short-term contracts. But as they get into new contracts they will have to bring down their freight rates substantially.
“Even if a half of it is delivered in the year then it would put pressure on the freight rates,” said an executive at Great Eastern Shipping, which is India’s largest private sector shipping company. The company has a fleet of 37 vessels out of which six are dry bulk carriers. “Freight rates would now depend on China’s importability,” the executive said.
