Iron Ore Transport Rates Seen Surging as Ships Scrapped: Freight

The beaches of Bangladesh are filling with unwanted ships waiting to be scrapped, driving up prices for transporting iron ore and halting losses for STX Pan Ocean Co. (028670), South Korea’s biggest owner of the carriers.

The cost of shipping iron ore in Capesize vessels will increase almost sixfold to $14,900 a day in December from the 2012 low, according to prices of swaps used by traders to hedge freight costs that reveal the direction of the market accurately about 60 percent of the time. Prices are rising as the fleet shrank 0.6 percent last month, its first contraction since November 2008, according to data from IHS Inc. (IHS), an Englewood, Colorado-based research company.

Earnings for Capesizes tumbled 94 percent from the 2008 record after the supply of vessels rose three times faster than demand, leading owners to sell ships. Carriers with total capacity of 12.8 million deadweight tons -- enough iron to build 150 Empire State Buildings -- will be dismantled this year, estimates Clarkson Plc (CKN), the world’s largest shipbroker. So many ships are being broken up that Bangladesh, the world’s second- largest recycler, is low on space on its beaches.

“Yards are pretty close to capacity and Bangladesh is running out,” according to Anil Sharma, chief executive officer of Global Marketing Systems Inc. in Cumberland, Maryland, the largest buyer of obsolete carriers. “This is the biggest boom for scrapping of Capesizes we have seen in history.”

STX Shares

Rates for the vessels rallied more than fourfold since the end of August to $15,074 a day, according to the Baltic Exchange, the London-based publisher of shipping rates used as benchmarks for about 75 percent of commodity cargoes. The ships need $16,400 to break even, Pareto Securities AS estimates.

Shares of STX Pan Ocean, based in Seoul, dropped 44 percent to 3,410 won ($3.13) this year and will rebound 45 percent to 4,929 won within 12 months, the average estimate of 15 analysts compiled by Bloomberg showed. The company will report net income of $1.8 million for 2013 after losing $221.3 million this year, according to the average of three estimates.

The company’s fleet, which includes oil tankers and container ships, comprises the highest proportion of Capesizes among the world’s five largest owners, Clarkson data show. The three biggest are Nippon Yusen Kaisha K.K., Japan’s largest line, Kawasaki Kisen Kaisha Ltd. (9107) and Mitsui O.S.K. Lines Ltd.

Dismantled on Beaches

Capesize demolitions will rise 22 percent this year, Clarkson estimates. A 15-year-old vessel was worth $4.4 million more than its scrap value in October, the smallest premium since at least 2001, the shipbroker’s data show. The fleet shrank 0.6 percent to 272.9 million tons last month, according to IHS data compiled by Bloomberg.

Ships sold for scrap are driven onto beaches and dismantled. The hulls and machinery are turned into steel for local industries, supplying half of Bangladesh’s needs, the World Bank said in a December 2010 report. Rising demolition demand is resulting in more ships being scrapped in India, which still has spare capacity, Sharma said.

While the fleet has diminished, STX Pan Ocean’s earnings will rise more slowly because there are still too many vessels, the company said in an e-mailed response to questions. The market will likely improve next year, it said.

Resume Growth

Higher rates could also convince owners to hold onto vessels, said David Webb, a shipbroker at Arrow Capesize (U.K.) Ltd. Only one ship was demolished in December, when rates averaged $30,651 a day, according to Clarkson and Baltic Exchange data.

The fleet may resume growth because outstanding orders at shipyards equal 19 percent of existing capacity, IHS data show. That compares with 99 percent at the start of 2009. Owners may be waiting until January to accept new vessels so the ships will be classified as built in 2013, said Jeffrey Landsberg, president of Commodore Research & Consulting, a New York-based adviser to ship owners.

Capesize earnings plunged from the record $234,000 a day in 2008 as the fleet expanded 74 percent while demand grew 23 percent, data from the Baltic Exchange and Clarkson show. The Baltic Dry Index, a broader measure of raw-materials freight rates, slumped 44 percent this year. Earnings for the largest oil tankers dropped 78 percent, according to Clarkson figures.

China Needs

Demand may be slowing in China. Growth in the country that consumes 65 percent of the world’s iron ore has weakened for seven consecutive quarters. The commodity accounted for 69 percent of one-time, or spot, cargoes on Capesizes in the past 12 months, according to Morgan Stanley.

The International Monetary Fund expects the global economy to expand 3.3 percent this year and 3.6 percent in 2013. The Washington-based group has cut its forecast twice since July, most recently by 0.3 percentage point on Oct. 9. About 90 percent of world trade travels by sea, the Round Table of International Shipping Associations estimates.

Iron-ore shipments to China rose to a 20-month high of 65.01 million metric tons in September, the country’s customs bureau said Oct. 13. Shipping demand gained 41 percent in October to the most since August 2009, according to DNB Markets, a unit of the largest Norwegian bank.

Making a ton of steel takes about 1.5 tons of iron ore, estimates Kenneth Hoffman, a Bloomberg Industries analyst in Skillman, N.J. The Empire State Building was built with 57,000 tons of steel, according to its website.

Fleet Growth Slows

The global fleet of Capesizes will expand 14 percent this year and 4 percent in 2013, down from 19 percent in 2011, Clarkson estimates. Demand for dry-bulk cargoes will gain 4 percent to a record 4.1 billion tons and has expanded by at least that amount in eight of the past 10 years.

Slowing fleet growth would help occupy more of STX Pan Ocean’s 28 Capesizes, which amount to 55 percent of its fleet, according to Clarkson data. All but five of the 25 analysts tracked by Bloomberg recommend owning the company’s shares.

“This is good for STX Pan Ocean as well as other commodities shipping lines and will gradually help improve their earnings,” said Kim Hong-Gyun, an analyst at Dongbu Securities Co. in Seoul. “We could see the bulk-shipping market recovering as early as next year. It is very important that the shipping companies continue to show efforts to cap capacity.”

To contact the reporter on this story: Isaac Arnsdorf in London at iarnsdorf@bloomberg.net

To contact the editor responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net

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