Smallest Ships Profitable Again as Logs Feed China Boom: FreightRob Sheridan and Isaac Arnsdorf
China is building the most property in at least a decade, expanding shipments of logs and adding to record commodity cargoes that are making the merchant fleet’s smallest ships profitable for the first time since 2011.
Global trade in logs will expand 10 percent to 127 million cubic meters (4.5 billion cubic feet) in 2013, according to Wood Resources International LLC, a research company in Bothell, Washington. Daily rates for 550-foot-long Handysizes will climb 29 percent to $9,750 next year, according to the median of nine analyst estimates compiled by Bloomberg. Investors may profit by buying freight swaps that are trading at $8,019, or 18 percent less than the forecast.
China uses most of the wood in construction and the amount of floor space being developed is the highest for this time of year since at least 2002, government data show. Global trade in dry-bulk commodities is rising to a record as demand strengthens for everything from coal to iron ore. That’s helping absorb the biggest capacity glut in shipping since at least 1986 just as the Handysize fleet grows at the slowest pace in four years, boosting rates for Pacific Basin Shipping Ltd. and other owners.
“We’re seeing more cargoes for log carriers and other smaller dry-bulk segments and fewer new ships being delivered,” said Marius Magelie, an analyst at ABG Sundal Collier in Oslo whose recommendations on the shares of shipping companies returned 34 percent in the past two years. “Rising demand for dry-bulk cargoes will buoy all classes of shipping.”
Daily rates rose 18 percent to $7,805 this year, according to the Baltic Exchange, the London-based publisher of shipping costs on more than 50 maritime routes. Forward freight agreements, traded by brokers and used to bet on future shipping costs, rallied 4.8 percent in the past month. Handysizes, which also carry cement, steel, sugar and fertilizers, need $8,400 to break even, Oslo-based Arctic Securities ASA estimates.
Chinese log imports will jump 13 percent to 39.8 million cubic meters this year, accounting for 39 percent of the global increase, according to Wood Resources.
Most Chinese log imports are soft woods for sawing into lumber, of which as much as 80 percent is used in construction, Wood Resources estimates. Builders were developing almost 5.86 billion square meters (63 billion square feet) of floor space at the end of last month, from 5.12 billion square meters a year earlier, government data show.
The remaining 30 percent of log imports is hard woods such as oak and teak used in furniture and flooring, according to Bob Flynn, a director at RISI, a forestry research company in Bedford, Massachusetts. Softwood imports rose 17 percent in the first seven months and may exceed the record set in 2011, Flynn said. New Zealand supplies 34 percent of the shipments, Russia 31 percent and the U.S. 16 percent, RISI estimates.
While the amount of floor space being developed is still expanding, the rate of growth slowed to 14.4 percent in August, from 15.6 percent a year earlier, the government data show. Construction of new homes expanded 4 percent to 1.28 billion square meters between January and August compared with a year earlier. The increase in the January-to-July new-building program was 8.4 percent compared with a year earlier.
The world’s second-largest economy decelerated in nine of the past 10 quarters and will expand 7.5 percent this year, the slowest pace since 1990, according to the median of 53 economist estimates compiled by Bloomberg.
The International Monetary Fund cut its forecast for world trade growth twice this year, most recently to 3.1 percent. About 90 percent of world trade travels by sea, the Round Table of International Shipping Associations estimates.
Handysize rates slumped from a peak of $49,397 in 2008 as companies ordered too many new ships just before the start of the global recession. Ship yards still have contracts equal to 19 percent of existing capacity, from as much as 44 percent in 2009, according to IHS Maritime, a Coulsdon, England-based research company. The fleet will expand 0.2 percent in 2013, the least since a 0.5 percent contraction in 2009, Clarkson says.
Pacific Basin is the largest owner with a core fleet of 135 Handysizes, according to data on its website. All but 19 have the steel bars used to secure logs, equipment lacked by 50 percent of the global fleet, Chief Operating Officer Jan Rindbo said by e-mail Aug. 5. The Hong Kong-based company’s log shipments expanded 32 percent in the first half from a year earlier, he said.
Pacific Basin will report a profit of $24.7 million this year, from a loss of $158.5 million in 2012, according to the mean of 10 analyst estimates compiled by Bloomberg. The shares rose 14 percent to HK$5.23 since the start of January. They will reach HK$6.50 in 12 months, according to Jefferies Hong Kong Ltd., which gave the most recent forecast tracked by Bloomberg.
The next-biggest publicly listed owners are COSCO Group, China’s biggest shipper, and Tokyo-based Daiichi Chuo K.K., according to Clarkson Plc, the world’s largest shipbroker. Handysizes often have cranes on board, allowing them to go to ports that lack equipment to move cargoes, according to D/S Norden A/S, Europe’s largest commodity shipping company.
Global trade in dry-bulk commodities will expand 5 percent to 4.29 billion metric tons this year, Clarkson estimates. Capacity across the combined dry-bulk fleet, which also includes larger Panamaxes and Capesizes, is about 30 percent bigger than demand, the largest excess since at least 1986, the broker said in a report last month.
The ClarkSea Index, a measure of industrywide earnings, averaged $9,187 a day this year, the lowest since 1990, Clarkson estimates. The glut of supertankers hauling 2 million barrels of oil is the biggest since 1985, according to Fearnley Consultants AS, a maritime research company in Oslo.
China’s wood purchases from Russia, most of which are delivered by rail, fell 0.6 percent in the first half, according to the International Trade Centre, an agency of the United Nations and World Trade Organization. That means more exports from New Zealand, Australia and North America, all of which are carried by sea, Pacific Basin’s Rindbo said.
“The market is getting better balanced and we’ll see freight rates rising again,” he said. “Small changes in supply and demand can have a large impact on rates.”
Shares of China Cosco Holdings Co., which also owns oil tankers and container ships, advanced 3.9 percent this year. They will decline 18 percent to HK$3.25 in 12 months, according to the average of 20 analyst estimates compiled by Bloomberg.
The 12-member Bloomberg Dry Ships Index gained 28 percent this year, compared with a 13 percent increase in the MSCI All-World Index of equities. The Baltic Dry Index, a benchmark of commodity shipping rates, jumped 46 percent this month to the highest since December 2011, according to the exchange.
“Demand for the whole dry-bulk market looks very good,” said Jonas Kraft, an analyst at Pareto Securities AS in Oslo. “Handysizes can benefit most when there is an increase in trade across lots of commodities, which is what we are seeing now.”