Shipping Bears Are Ascendant as Fleet Growth Swamps Cargo
Shipping analysts are getting more bearish on the outlook for rates to haul iron ore and coal as China, the biggest consumer of both commodities, grows at the slowest pace in three years at a time of record fleet expansion.
Capesizes, each holding about 180,000 metric tons of cargo, will earn an average of $11,709 a day in 2012, the lowest in at least 14 years, the median of 10 analyst estimates compiled by Bloomberg shows. They predicted $15,000 in a December survey. The fleet will expand 13 percent this year, compared with a 4 percent advance in cargo volumes, according to London-based Clarkson Plc (CKN), the world’s biggest shipbroker.
Rates tumbled 85 percent since the start of January, more than for any other type of commodity carrier, as everyone from the World Bank to the Federal Reserve cut growth estimates. China, which imports more iron ore than all other nations combined, is expanding at the slowest pace since 2009 and the 17-nation euro region returned to recession this quarter, the median of 16 economist forecasts shows.
“China’s growth hasn’t been as good as some people had hoped,” said Rahul Kapoor, a Singapore-based analyst at RS Platou Markets AS, who cut his 2012 forecast to $10,000 from $13,000 in December. “That’s being compounded by rather negative demand for iron ore in Europe. Fleet growth has also been huge and above most people’s expectations.”
Capesizes slid to $3,591 a day this year, reaching a 3 1/2- year low of $3,377 on June 18, according to the London-based Baltic Exchange, which publishes costs along more than 50 marine routes. That compares with a 40 percent drop since the start of 2012 by the Baltic Dry Index, tracking four commodity vessel classes, and a 7.5 percent decline in returns for very large crude carriers, each hauling about 2 million barrels of oil.
Investors may still profit from the Capesize forecast for $11,709 because forward freight agreements, traded by brokers and used to bet on future transport costs, anticipate about $8,300. Rates averaged about $6,624 since the start of January, and FFAs are pricing in a third-quarter average of $7,650 and $12,075 in the three months after, Baltic Exchange data show.
Cie. Maritime Belge SA (CMB), whose Capesizes account for 75 percent of its fleet capacity, according to Clarkson, will report a 15 percent drop in net income to 82.2 million euros ($102.6 million) for 2012, the mean of three analyst estimates compiled by Bloomberg showed. Shares of the Antwerp, Belgium- based company, little changed this year, will advance 8.5 percent to 18.50 euros in 12 months, according to the average of four estimates.
Ten of the 14 members of the Bloomberg Pure Play Dry Bulk Shipping Index will report losses or lower profits this year, according to analysts’ predictions.
Global economic growth may accelerate as policy makers from China to Europe to the U.S. battle the retreat. The Chinese government cut banks’ reserve requirements three times in six months and the central bank reduced interest rates this month for the first time since 2008. European leaders are seeking to contain the debt crisis and the Federal Reserve extended a $400 billion program to lower borrowing costs last week.
The bulk of the fleet expansion may have passed because growth was as high as 25 percent in the 12 months to February 2011, the strongest since 1982, Clarkson data show. Outstanding orders at ship yards equated at the time to 43 percent of existing capacity and are now at 21 percent, according to data from IHS Inc. (IHS), a research group based in Englewood, Colorado.
Owners are responding by slowing vessels, idling them or selling ships for scrap. Capesizes moved at an average speed of 9.2 knots since the start of January, down from 9.6 knots a year earlier, according to data compiled by Bloomberg. Mitsui O.S.K. Lines Ltd. (9104), the Tokyo-based owner of the world’s biggest merchant fleet, said June 13 it would scrap or idle as many as 20 of its 110 Capesizes.
Companies need daily rates in the “high 20s” to break even once financing is taken into account, said Ole Stenhagen, an analyst at SEB Enskilda in Oslo. Still, the $11,709 predicted in the Bloomberg survey would exceed the $8,000 to $9,000 that owners need to cover operating costs, he said.
China’s imports of iron ore, the second-biggest commodity cargo after oil, will grow 8 percent this year, slowing from 10 percent in 2011, according to Clarkson. Europe will import 2 percent less, after a 4 percent contraction in 2011, and the global expansion in seaborne trade of the steelmaking raw material will drop to less than 6 percent, the weakest rate since at least 2003.
There are few signs of a rebound in the steel market, with Metal Bulletin Plc’s global reference price for benchmark hot- rolled coil dropping to $609 a ton on June 11, 17 percent lower than a year earlier. European buyers are limiting orders as prices drop, potentially spurring mills to produce less metal, MEPS (International) Ltd., a Sheffield, England-based industry consultant, said in a report June 19.
Global steel demand won’t recover any time soon to levels seen before the financial crisis, ArcelorMittal (MT) Chairman and Chief Executive Officer Lakshmi Mittal said in an interview in New York June 19. European mill closings are inevitable, said the head of the world’s biggest steelmaker.
Iron-ore prices at the Chinese port of Tianjin fell 8.2 percent to $137.10 a so-called dry ton since mid-April, according to a measure compiled by The Steel Index Ltd. The country imported 63.8 million tons of ore in May, the first increase in three months, customs data show. China’s mills produced 61.2 million tons of steel that month, the second- biggest month on record, according to the World Steel Association.
“Maybe the demand-side expectations were unreasonable,” said Jeffrey Landsberg, the president of Commodore Research, a New York-based consultant to ship owners. “The sheer level of vessel oversupply is just too big.”
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