Shipping Poised to Drop After Two-Week Rally: Freight Markets

The rebound that more than doubled commodity freight costs in two weeks is peaking as idled ships haul anchor and compete for cargoes of iron ore and coal.

There were 282 capesizes anchored worldwide March 14, down from 300 Feb. 26, data compiled by Bloomberg show. The glut will mean second-quarter costs of $10,000 a day, 27 percent less than prices in the forwards market, said Sverre Bjorn Svenning, the analyst at Fearnley Consultants A/S who correctly predicted the industry’s crash in 2008. Forward freight agreements, traded by brokers and used to hedge or bet on future shipping rates, were at $13,675 by 1:16 p.m. in London today.

The 142 percent advance in the nine days ended March 11 was less about economic growth and more about a temporary lack of ships after owners increased by 127 percent the number at anchor in three months, creating a pool of idled vessels that stretched 50 miles end-to-end. Last week’s earthquake in Japan also will likely drive costs lower because it’s disrupting demand, Svenning said. Capesize rates have risen or fallen 10 percent or more in all except two of the last 30 months.

“The moment the market comes up to a certain level, you have this huge natural lid,” said Philippe van den Abeele, the managing director of Castalia Fund Management (U.K.) Ltd., the London-based sub-adviser to a hedge fund trading shipping derivatives. “They’re sitting there at anchor with crew on board and when it gets to a certain level they’re going to come out again,” said Van den Abeele, who correctly predicted last month that rates were bottoming.

Freight Forwards

Second-quarter freight forwards rose as much as 18 percent this month, according to data from Clarkson Securities Ltd., a broker of the contracts. Rates in the spot, or single-voyage, market more than doubled to $11,038 by March 11, after reaching a two-year low of $4,567 on Feb. 28, according to the London-based Baltic Exchange, which publishes assessments for more than 50 maritime routes. Returns fell 4.2 percent to $10,386 today, their second straight decline.

About 90 percent of global trade moves by sea, according to the Round Table of International Shipping Associations.

Owners need $8,248 to cover the daily running costs on a capesize, excluding interest payments on loans taken to buy vessels, according to Drewry Shipping Consultants Ltd. Returns on the ships, each three times the length of a football field, had been below that level since Jan. 25, spurring increasing numbers of owners to idle vessels.

Demand may also decline after the 9-magnitude earthquake in Japan on March 11 shut down factories and power plants. The country is the second-biggest importer of iron ore used in steelmaking and its purchases may weaken in the “short term” because of port disruptions, said Erik Nikolai Stavseth, an analyst at Arctic Securities ASA in Oslo. Japan is also the biggest importer of thermal coal, burned in power plants.

Baltic Dry

The Baltic Dry Index (BDIY), a measure of commodity shipping costs, declined for almost three consecutive weeks after an earthquake in Kobe, Japan, in January 1995, before rallying 20 percent in the next three months, Baltic Exchange data show.

“After an initial drop-off (corresponding to low initial power demand following the tragedy) a larger-than-normal increase in thermal coal imports could be experienced,” Soozhana Choi, an analyst at Deutsche Bank AG in Singapore, wrote in a report. “We expect that steel production is likely to fall sharply near-term with a considerable recovery thereafter as Japan rebuilds.”

The 12-member Bloomberg Dry Ships Index, in which STX Pan Ocean Co. (028670) and Cie. Maritime Belge SA have the biggest weighting, fell 10.6 percent since the start of January. A measure of combined earnings per share across the index is forecast to drop 23 percent this year, compared with anticipated growth of more than 14 percent in the Standard & Poor’s 500 Index, according to data compiled by Bloomberg using analysts’ forecasts.

Baltic Exchange

The market got so bad that the Baltic Exchange reported its first-ever negative rate for dry bulk freight on Jan. 13 and costs on the C11 route for shipments to Europe from Asia have remained negative since then. While that means owners effectively pay customers to hire their vessels, clients still pay most of the fuel costs. For a shipping line wanting to relocate a vessel to a region where there are more cargoes, that’s still cheaper than sailing the craft empty.

Supertanker owners have seen daily returns on the benchmark Saudi Arabia-to-Japan route averaging $20,022 this year, according to Baltic Exchange data. Frontline Ltd., the world’s largest operator of the vessels, says it needs $30,100 to break even.

The rebound in capesize rates is also being threatened by more vessels leaving shipyards, mostly in China, Japan and South Korea, according to data from Redhill, England-based IHS Fairplay, which compiles data on ships and ports. There are 312 capesizes on order, equal to 43 percent of the existing fleet of 1,077 by capacity, the data show.

Leaving Shipyards

The vessels leaving shipyards now were ordered in 2007 and 2008 when daily income for capesizes averaged about $111,000. Rates reached $233,988 in June 2008 before plunging 99 percent over the next six months to $2,316, Baltic Exchange data show.

Owners also are trying to cope with the global glut of vessels by sailing ships more slowly. The average capesize moved at 9.91 knots last month, the lowest since Bloomberg started collecting the data in 2008. Speeds averaged as much as 10.92 knots in November.

The strategy has also helped boost rates for container ships, as well as cutting fuel costs for owners. An index for six types of container vessels gained 23 percent this year, according to the Hamburg Shipbrokers’ Association. The gauge is 133 percent higher than a year ago.

Australian Cargoes

Capesizes also rallied on expectations that more cargoes will emerge from Australia and South Africa. The state of Queensland, which accounts for about 50 percent of the global seaborne supply of coal used in steelmaking, had its worst floods in a half century while rain in South Africa derailed trains, also curbing coal exports.

Three out of four coal mines are still removing water from their operations, Michael Roche, chief executive officer of the Queensland Resources Council, said March 3. The situation hasn’t changed since then, Jim Devine, a spokesman for the council, said by phone yesterday.

This month’s rally in capesize rates isn’t being reflected in the value of ships. The cost of a five-year-old secondhand capesize dropped to $47.5 million this month, from as much as $61.4 million in June, Baltic Exchange data show. Analysts use ship prices to assess company valuations and they can also be part of conditions attached to loans.

Record Demand

That’s more pain for an industry already missing out on the surge in commodities, with Clarkson predicting record demand for iron ore and coal. Shipments of iron ore will jump 8 percent to 1.06 billion metric tons this year, while coal will advance 7 percent to 974 million tons, the London-based broker estimates. The capesize fleet expanded at an annualized pace of 19 percent in the first 10 weeks of the year, IHS Fairplay data show.

Those ships are joining a fleet where almost one in every four vessels is already anchored.

“It definitely keeps a lid on rates,” said Sverre Bjorn Svenning, the analyst at Fearnley Consultants in Oslo. “I can’t see any upside potential.”

To contact the reporter on this story: Alaric Nightingale in London at anightingal1@bloomberg.net

To contact the editor responsible for this story: Stuart Wallace at swallace6@bloomberg.net

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