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Scrapping Record Fails to End ‘Nightmare’ for Shipowners: Freight Markets

Shipowners are scrapping capesize vessels at a record pace after rates plunged about 50 percent in a year. It’s still not enough to end losses.

Forty-eight capesizes, usually used for hauling iron ore or coal, have been demolished this year through June 24, compared with 18 in the whole of last year, according to shipbroker Clarkson Plc. Rates will remain below about $11,000 a day for the rest of the year, compared with a breakeven point of about $23,000, according to Johnson Leung, head of regional transport at Jefferies Group Inc. in Hong Kong.

The surge in scrapping has failed to revive capesize rates because 117 new vessels have been launched this year as yards work through orders placed in anticipation of a surge in iron ore and coal shipments to China. Instead, China is paring commodity imports to help cool growth, while Vale SA (VALE), the world’s largest iron-ore miner, is adding vessels larger than capesizes to cut its reliance on the charter market.

“The capesize sector is just a nightmare for shipowners,” said Shin Ji Yoon, an analyst at KTB Investment & Securities Co. in Seoul. “Lines went on a buying frenzy and business just hasn’t panned out as they hoped.”

The capesize fleet may rise to about 1,300 by year-end from 1,218 as of May, according to Osuke Itazaki, an analyst at SMBC Nikko Securities Inc. in Tokyo. That follows a net increase of 195 vessels in 2010 and 103 a year earlier, he said. Capesizes carry about 170,000 tons of cargo on average.

Plunging Rates

The growing supply of ships has pushed capesize rates to about $6,405 a day on the spot market compared with an average of $30,587 for the whole of last year, according to London-based Clarkson, the world’s biggest shipbroker. Its Baltic Capesize 4TC Index was at 12,898 yesterday compared with 24,237 a year earlier.

Forward-freight agreements, traded by brokers and used to bet on or hedge future transportation costs, anticipate rates no higher than $18,230 a day through 2016, Baltic Exchange data show.

“The bulk market will probably be bearish for as long as five years because of the overcapacity issue,” said Um Kyung A, an analyst at Shinyoung Securities Co. in Seoul. “Shipping lines have been quite reckless in ordering new vessels in the last three years.”

Jefferies Group’s Leung said he expects about 80 capesizes to be scrapped this year. Shipbroker Lorentzen & Stemoco AS predicted as many as 100 earlier this month. That compares with a record 25 in 1998, according to Clarkson data.

Mitsui, Grand China

As of June 1, 570 new capesizes were on order, according to the shipbroker. The vessels accounted for 45 percent of the 249.3 million tons of bulk ships on order. Mitsui O.S.K. Lines Ltd. had the biggest backlog with 30, followed by 22 for Grand China Logistics, according to Clarkson.

Mitsui expects daily rates for capesizes to average $15,000 in the six months ended September and $25,000 in the following six months, according to a statement last month. The Tokyo-based shipping line had 109 capesizes as of March.

The company has no intentions of changing its fleet plans, said Kazumi Nakamura, a spokeswoman. Calls to Grand China, which is backed by the investment arm of China’s Hainan province, went unanswered yesterday.

Orders for dry-bulk vessels jumped from 2007 through the first half of 2009 alongside a surge in freight rates. The Baltic Dry Index, a benchmark for commodity-shipping costs, hit a record 11,793 in May 2008, after rising fourfold in two years.

The index has since tumbled 88 percent, partly because of a 22 percent increase in the size of the global bulk fleet in the past three years.

China Commodities

Demand has also slowed as China, the biggest customer for bulk-shipping lines, curtails commodity purchases from Brazil and Australia because of rising prices and concerns about its economy overheating. Imports of coal and iron ore rose 2.8 percent this year, compared with a 21 percent increase last year and a 30 percent jump in 2009.

“Overseas iron-ore prices are still very expensive,” Leung said. “That’s why domestic iron-ore production in China is picking up.”

Rio de Janeiro-based Vale has also hurt charter rates as it begins to take delivery of 19 Chinamax ships, which are almost as big as the Bank of America Tower in New York and can haul twice as much cargo as a capesize. The miner is adding the vessels as it seeks greater control over shipping costs, particularly on routes to China, its biggest customer.

“Vale wanting to do its own thing has certainly contributed to the plunge in the spot market for capesize ships,” Shinyoung’s Um said.

Metals Prices

Alongside the decline in rates, rising metals prices are boosting the appeal of scrapping because shipowners can get higher prices. Some capsize owners were able to get as much as $10 million selling ships for scrap this year, an amount it would take three years to earn in the current charter market, according to Braemar Shipping Services Plc.

Shipowners have scrapped capesizes as new as 15 years old because of the rates plunge, compared with traditional ages of about 25 years or more, said Nitinbhai Kanakia, joint secretary of the Ship Recycling Industries Association, which represents shipbreakers in Alang, the western India city that’s home to the world’s largest scrapping industry. Seven capsizes are currently being taken apart on the city’s beaches, he said.

“Capesizes are sure to be a big proportion of business moving ahead,” said Kanakia. “Shipowners just don’t have sufficient cargoes.”

To contact the reporter on this story: Kyunghee Park in Singapore at kpark3@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net.

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