Grain-Carrier Rates Rising as Crop Cargoes Near Record: Freight

Near-record agricultural exports are diminishing the capacity glut in grain carriers, boosting rates for Safe Bulkers (SB) Inc. and other owners to the highest in almost two years.

Global shipments of wheat, corn and soybeans will rise 11 percent to 365.4 million metric tons in the 2013-14 crop year, the U.S. Department of Agriculture predicts. Panamaxes, each hauling 75,000 tons of cargo, will earn an average of $9,500 in the first quarter, 32 percent more than now, according to the median of six analyst estimates compiled by Bloomberg. Investors may profit because the forecast is 14 percent higher than swaps traders use to bet on future freight costs.

The U.S. will account for 47 percent of the expansion in grain shipments as output recovers from the worst drought since the 1930s, with corn and soybean harvests starting next month. That will add cargoes for the next two quarters and curb the shipping glut that caused rates to drop 92 percent since 2007. Projected Panamax earnings would still be below what most owners need to break even.

“The increase in grain exports is a shot in the arm for Panamax owners,” said Frode Moerkedal, an Oslo-based analyst at RS Platou Markets AS whose recommendations on the shares of shipping companies returned 20 percent in the past year. “Panamax earnings have been scraping along the bottom, but now the market has turned.”

Shipping Costs

Daily earnings for the 750-foot-long vessels rose 30 percent this year to $7,207, according to the Baltic Exchange, the London-based publisher of shipping costs on more than 50 maritime routes. Rates averaged $7,599 since the start of the year, on course for the lowest annual level since at least 1999. They peaked at $94,977 in October 2007.

Shares of Athens-based Safe Bulkers, which operates 19 Panamax-class vessels, jumped 96 percent this year to $6.60 in New York trading by the close yesterday. They will exceed $7 in 12 months, according to two of the most bullish analysts covering the company and tracked by Bloomberg. Rates will top $10,000 in the fourth quarter, President Loukas Barmparis said on a conference call Aug. 22.

The average Panamax needs $10,500 to break even once financing costs are taken into account, Oslo-based Arctic Securities ASA estimates. Quarterly averages have been below that level since the end of 2011, according to data compiled by Bloomberg. Safe Bulkers, which has the highest proportion of Panamaxes in its fleet among the six biggest owners, can profit at less than $10,000, Chief Executive Officer Polys Hajioannou said by phone Aug. 22.

Seven Ships

The company, which is adding seven ships to its fleet, is betting on a recovery by trading carriers in the spot market rather than on long-term contracts, Hajioannou said. The fourth quarter is typically the strongest for Panamaxes as U.S. harvest starts, he said. Safe Bulkers’ most widely tracked measure of profit will narrow to $53.5 million next year before rising 46 percent to $78 million in 2015, according to the mean of 11 analyst estimates.

“Name another shipping company that hasn’t lost money,” said David Beard, an analyst at Iberia Capital Partners LLC in New Orleans. The ClarkSea Index, a measure of earnings for vessels across the merchant fleet, averaged $9,086 a day this year, the lowest annual figure since at least 1990, according to Clarkson Plc (CKN), the world’s largest shipbroker.

Rising agricultural shipments may be offset by declines in other cargoes. Goldman Sachs Group Inc. predicts a 5.6 percent drop this year in exports of thermal coal to China, the biggest buyer. The fuel burned in power plants accounted for 74 percent of single-voyage Panamax charters in the past year, according to Morgan Stanley.

Outstanding Orders

The glut in Panamaxes is bigger than for other vessel classes and capacity will expand 9 percent this year, faster than any other type of commodity carrier, according to Clarkson. Orders at shipyards equal 25 percent of the existing fleet, the most of any vessel type, Couldson, England-based research company IHS Maritime says.

The overcapacity extend across the shipping industry. The Baltic Dry Index of costs to transport grains and minerals plunged 92 percent from its peak in June 2008 and supertankers hauling 2 million-barrel oil cargoes to Japan from Saudi Arabia are losing money, according to the Baltic Exchange. The ClarkSea index peaked at $47,350 at the end of 2007, triggering record fleet growth just before the global recession.

Crop Shipments

Additional crop exports predicted by the USDA will add 1 percent to global dry-bulk trade and increase average Panamax rates by $2,000 a day from this year’s fourth quarter to the first half of 2014, according to RS Platou Economic Research, part of Norway’s largest shipbroker. Global crop shipments peaked at 367 million tons in 2011-12, the USDA says.

Traders favor Panamaxes for hauling cereals because ports in many importing countries can’t accommodate larger ships, said Jeffrey Landsberg, the New York-based managing director of Commodore Research & Consultancy, an adviser to ship owners.

China’s soybean harvest this year probably will be the smallest in more than two decades, according to Oil World, a Hamburg-based research company. The nation’s share of world demand for the oilseed rose to 29 percent last year from about 12 percent two decades ago, according to the USDA. China’s population expanded 13 percent to 1.35 billion over the period, U.S. Census Bureau estimates show.

Extract Oil

Soybeans are crushed to extract oil and the remaining meal is fed to animals. China has the largest pig herd, with a record 710.6 million animals expected to be born this year, more than three times the amount 30 years ago, the USDA says. The nation is also the largest wheat consumer. The London-based International Grains Council doubled its estimate for Chinese wheat purchases in 2013-14 to 7 million tons on Aug. 1.

“To start it will be seasonal, but into next year, when supply gets better, we will see an improvement of the market as a whole,” Safe Bulkers’ Hajioannou said.

China Cosco Holdings Co. (1919), the biggest Panamax owner, will report narrowing losses this year and next before returning to profit in 2015, the average of as many as 19 estimates shows. Profit at Nippon Yusen K.K., the second-largest owner, will jump 43 percent to $326.3 million in the fiscal year ending in March, according to 16 predictions. Both companies also operate container ships and oil tankers.

“Panamax owners’ confidence is now on a high because of the increasing supply of grain cargoes,” said Rahul Sharan, a Gurgaon, India-based analyst at Drewry Maritime Research, an industry consultant. “It’s a much-needed boost for owners.”

To contact the reporters on this story: Isaac Arnsdorf in London at iarnsdorf@bloomberg.net; Rob Sheridan in London at rsheridan6@bloomberg.net

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

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