Shippers Poised to Return to Profit as Cargoes Grow 10%: Freight

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Shipping containers sit stacked at the Tanjung Priok port, operated by state-owned PT Pelabuhan Indonesia II (Pelindo II), in Jakarta, Indonesia, on Aug. 21, 2013. Close

Shipping containers sit stacked at the Tanjung Priok port, operated by state-owned PT... Read More

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Photographer: Dimas Ardian/Bloomberg

Shipping containers sit stacked at the Tanjung Priok port, operated by state-owned PT Pelabuhan Indonesia II (Pelindo II), in Jakarta, Indonesia, on Aug. 21, 2013.

The shipping industry hauling commodities from coal to crops to iron ore is poised to return to profit for the first time since 2010 as the biggest capacity glut in its history diminishes.

Trade in the three largest dry-bulk cargoes will expand 10 percent to a record 2.91 billion metric tons in 2014, according to ACM Shipping Group Plc, the third-largest listed shipbroker. Rates will exceed owners’ break-even levels in 2014 for each of the four main vessel classes, according to 34 analyst estimates compiled by Bloomberg. Investors can profit by buying freight swaps, which are mostly trading below the analysts’ forecasts.

The industry is emerging from its largest-ever glut after record rates five years ago spurred owners to order an unprecedented number of vessels. Shipyards built about 4,300 carriers since then, which lined up end to end would stretch for about 570 miles, or about the length of the U.K. Deliveries are now slowing after earnings that fell as much as 84 percent since 2008 curbed orders.

“We’re starting on the path to recovery,” said Erik Folkeson, an analyst at Swedbank First Securities AS in Oslo, whose recommendations on the shares of shipping companies returned 37 percent in the past two years. “Fleet utilization will tighten, and that’s reflected in higher earnings.”

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A coal carrier is loaded at Newcastle Port, in Newcastle, north of Sydney. Close

A coal carrier is loaded at Newcastle Port, in Newcastle, north of Sydney.

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Photographer: Ian Waldie/Bloomberg

A coal carrier is loaded at Newcastle Port, in Newcastle, north of Sydney.

Breaking Even

The Baltic Dry Index (BDIY), a measure of freight costs, almost tripled to 1,947 this year, according to the Baltic Exchange, a London-based publisher of prices on more than 50 maritime routes. Rates for iron ore-carrying Capesizes led the surge, jumping more than sevenfold to $38,397 a day as China bought record amounts of the raw material used to make steel.

Shares of Nippon Yusen K.K. (9101), the largest owner of the vessels, rose 57 percent to 316 yen in Tokyo this year. They will advance another 4.3 percent in 12 months, according to the mean of 14 analyst estimates compiled by Bloomberg. The Bloomberg Dry Ships Index of 14 transportation companies added 32 percent in 2013.

Capesizes that earned an average of $9,762 a day this year will get $16,000 in 2014, according to the mean of nine analyst forecasts compiled by Bloomberg. The carriers, each able to haul more than 160,000 metric tons of cargo, need $15,400 to break even, according to estimates from RS Platou Markets AS, an Oslo-based investment bank. Freight swaps for next year are trading at $18,306, Baltic Exchange data show.

China Dependence

Rates for Panamaxes, the largest to navigate the Panama Canal, averaged $7,770 since the start of the year. Earnings are forecast to rise to $12,000 in 2014, compared with a break-even level of $11,300. Freight swaps are trading at $10,950.

Supramaxes, the largest dry-bulk vessels equipped with cranes to move cargo, will earn $12,000 in 2014. They need $10,500 to break even and swaps for next year are trading at $10,360. Rates for Handysizes, the smallest vessels in the fleet, will average $9,800. Forward freight agreements are at $8,081 and the carriers need $9,300 to be profitable.

The anticipated rally in rates depends on China because the country’s imports represent 38 percent of all iron-ore, coal and grain shipments, according to data from Clarkson Plc, the biggest shipbroker. Japan, the second-largest destination, accounts for 13 percent of cargo demand.

China’s $8.23 trillion economy will expand 7.4 percent next year, the weakest pace in 23 years, according to the average of 53 economist estimates compiled by Bloomberg. That’s still more than three times the global average. Japan’s growth will slow to 1.55 percent in 2014 from 1.9 percent this year, the average of 46 forecasts shows.

ClarkSea Slump

The International Monetary Fund cut its forecast for this year’s global economic growth twice since January, most recently to a 3.1 percent. Expansion will quicken to 3.8 percent in 2014, the Washington-based lender said in July.

Other parts of the shipping industry are also contending with capacity gluts. The ClarkSea Index, a measure of earnings for vessels across the merchant fleet, averaged $9,259 a day this year, the lowest annual figure since at least 1990, according to London-based Clarkson. The surplus of the largest crude tankers is the biggest since the mid-1980s, according to Fearnley Consultants AS, a research company in Oslo.

Overseas Shipholding Group Inc., the biggest U.S. tanker operator, sought bankruptcy protection in November, about a year after second-ranking General Maritime Corp. took the same step. Shares of Hamilton, Bermuda-based Frontline Ltd. (FRO), which operates 32 supertankers, declined 17 percent this year after five straight annual drops.

Larger Fleet

The surplus in dry-bulk shipping is the biggest since at least 1986, according to London-based Clarkson, which characterizes it as a record. The fleet expanded 71 percent since 2008 as trade grew 31 percent. Total capacity will increase 4.8 percent next year, the least since 2003, the shipbroker predicts.

Shipyards, mostly in China, South Korea and Japan, built enough extra capacity since 2008 to carry about three years’ worth of western European iron-ore imports, according to data from IHS Maritime, a Coulsdon, England-based research company that maintains a database for the United Nations’ maritime agency.

Nippon Yusen, which operates 126 Capesizes, will report a 76 percent jump in profit to 33.2 billion yen ($334 million) in its fiscal year ending March 31, according to the average of 16 estimates compiled by Bloomberg. The Tokyo-based company’s fleet also includes car carriers, tankers and container ships.

Of the 14 members of the Bloomberg Dry Ships Index, 10 will either curb losses or report a profit next year, analyst estimates compiled by Bloomberg show.

Grain Cargoes

Shipments of coal will increase 13 percent to 1.3 billion tons next year, according to ACM. Iron-ore cargoes will rise 9 percent to 1.19 billion tons and trade in grains, soy, rice and other crops will gain 3.8 percent to 419 million tons, the London-based brokerage predicts.

China, the biggest steelmaking nation, more than doubled its production of the alloy in the past decade, adding demand for about 575 million tons in the seaborne iron-ore market. The country is also the biggest coal user and its power generation almost tripled in a decade as gross domestic product expanded fivefold. World exports of soybeans will reach a record in 2013-14 and those of corn and wheat will be the second-highest ever, the U.S. Department of Agriculture estimates.

“Demand is growing and supply is coming under control,” said Nigel Prentis, the head of consultancy at Hartland Shipping Services Ltd., a London-based shipbroker. “It’s telling us that dry bulk will be the first to recover.”

To contact the reporter on this story: Rob Sheridan in London at rsheridan6@bloomberg.net

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

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