Record Ship Lines in Brazil Fail to Erase Capacity Glut: Freight

Record delays for vessels loading corn and soybeans in Brazil, the biggest exporter, are failing to diminish enough of the global capacity glut in shipping to return Excel Maritime Carriers (EXM) Ltd. and other owners to profit.

Vessels are waiting as long as 51 days at Paranagua and 41 days at Santos, twice as long as last year, according to SA Commodities. They are the two biggest ports for agricultural exports and Panamaxes haul most of the cargoes, the shipping agency estimates. While rates jumped 66 percent to $8,991 a day this year on the delays, that’s still less than the $17,400 that Excel Maritime says it needs to break even.

Panamaxes are the fastest-growing class in the commodity carrier fleet after owners ordered a record number when rates rose as high as $37,099 in 2010. Outstanding contracts at ship yards are equal to 24 percent of existing capacity, according to researcher IHS Fairplay. Shares of Athens-based Excel Maritime will retreat 67 percent in 12 months, the average of three analyst estimates compiled by Bloomberg shows.

“Congestion soaks up available tonnage and is effectively bullish for rates,” said Peter Norfolk, a London-based analyst at Freight Investor Services Ltd., a derivatives broker. “The problems with congestion will persist for some time, so while we’re still wrestling with oversupply, there’s potential for the market to tighten again.”

Rates will rise another 21 percent to $10,850 by May, said Philippe Van Den Abeele, the managing director of Castalia Fund Management (U.K.) Ltd., an adviser to a hedge fund trading freight derivatives. That’s still 38 percent less than Excel Maritime’s break-even level.

Freight Agreements

Panamax rates last reached $17,400 in December 2010, according to the Baltic Exchange, the London-based publisher of costs on more than 50 maritime routes. This year’s average of $7,304 is the worst start since 2002. Forward freight agreements traded by brokers and used to bet on future shipping costs anticipate an average of $9,163 in May, according to the bourse.

Excel Maritime operates 28 Panamaxes, accounting for 60 percent of its fleet capacity, its website shows. That’s the highest proportion among the five largest owners of the vessels, according to Clarkson Plc, the biggest shipbroker. The shares almost doubled to 82 cents this year in New York trading and will drop to 27 cents in 12 months, the analyst estimates show.

Grains make up about 40 percent of Panamax cargoes, according to ICAP Shipping International Ltd., a London-based unit of ICAP Plc. Vessel owners typically rely on South American harvests to bolster rates in the second quarter, with earnings rising in the period in eight of the past 10 years.

Corn Exporter

Brazil’s corn and soybean crop is the largest ever after expanding a combined 12 percent, the U.S. Department of Agriculture estimates. The country is poised to overtake the U.S. as the world’s biggest corn and soybean exporter this year. Infrastructure hasn’t kept pace, resulting in an 18-mile line of trucks delivering cargoes to Santos last month, according to SA Commodities.

The delays aren’t deterring agricultural traders from hiring ships because there are few alternatives until Northern Hemisphere harvests start later this year, Abeele said. Corn from the last U.S. harvest is trading at a 21 percent premium to future supply in December on the Chicago Board of Trade. U.S. grain shipments will drop 21 percent this year after the worst drought since the 1930s, the government predicts.

Single Voyage

Panamax owners are also contending with slower growth in coal exports, their largest source of single-voyage charters. Seaborne demand will rise 5 percent this year, from 11 percent in 2012, Clarkson data show. Mining companies may cut output as prices retreat, according to Erik Nikolai Stavseth, an analyst at Arctic Securities ASA in Oslo. Coal costs at South Africa’s Richards Bay, a global benchmark, fell 19 percent in the past year, McCloskey Group data show.

The Panamax fleet expanded 51 percent since 2009, according to Redhill, England-based IHS Fairplay. Capacity will gain another 12 percent this year, the most of any type of commodity carrier, Clarkson estimates.

The glut extends across the merchant-shipping industry. Capesizes, which carry twice as much cargo as Panamaxes, and the largest oil tankers are both earning less than they need to cover operating expenses, according to the Baltic Exchange, Clarkson and Moore Stephens LLP, a London-based consultant. The ClarkSea Index, a measure of industrywide earnings, averaged $8,284 in February, the lowest since at least 1994.

Oil Tankers

Excel Maritime will report a loss of $129.1 million this year, narrowing from $211.6 million in 2011, the median of four analyst estimates shows. Excel Maritime has contracts covering 56 percent of its Panamaxes in 2013, it said in a March 28 statement. Four e-mails and two phone calls to the company seeking comment weren’t answered.

China Cosco Holdings Co., the biggest owner of Panamaxes, will narrow its loss to $88.9 million this year, from $1.5 billion in 2012, according to the average of 11 analyst estimates. Nippon Yusen K.K. (9101), the second-largest, will report profit of $89.48 million for its fiscal year that ended March 31, and $291.4 million this year, as many as 13 estimates show. Both companies also operate other vessels including oil tankers and container ships.

The industry carries about 90 percent of world trade, according to the Round Table of International Shipping Associations. The International Monetary Fund cut its forecast for global growth in trade this year to 3.6 percent in January and April, from 4.5 percent.

Soybean Shipments

The U.S. may export 22 million metric tons of corn in the 2012-13 trade year, compared with shipments from Brazil at 25 million tons, according to the USDA’s Foreign Agricultural Service. U.S. soybean exports at 36.74 million tons will be less than Brazil’s at 36.75 million.

World trade in grains will expand 2 percent to 376 million tons this year, Clarkson estimates. Total demand for dry bulk commodities, which also includes iron ore, will rise 5 percent to 4.27 billion tons, the shipbroker predicts.

“The large amount of South America grain cargoes is not over yet,” said Jeffrey Landsberg, the New York-based managing director of Commodore Research & Consultancy, an adviser to ship owners. “I’m still thinking we’re going to continue to get large Panamax fleet growth. That’s why rates haven’t been increasing by that much.”

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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