economics

The World Shrinks for Goldman as Commodity Rout Snares Ships

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The collapse in global rates for shipping commodities from the world’s mines to mills and utilities will persist until at least 2020 on a glut of vessels and stalling cargo growth, according to Goldman Sachs Group Inc.

The extended slump is set to intensify competition in the iron ore and coal markets, benefiting the biggest, low-cost suppliers, analysts Christian Lelong and Amber Cai wrote in a report. Higher-cost producers may suffer, they said.

The Baltic Dry Index, a measure of shipping commodities including coal, iron and grains, sank to a record in February amid the fleet surplus and slowing demand for cargoes to China. The country’s transition from investment to consumption, together with a shift toward cleaner energy, caused a sharp slowdown in the dry-bulk trade, Goldman said. At the same time, shipyards churning out carriers find they are adding unwanted capacity into an oversupplied market, according to the bank.

“From the iron ore pits of Western Australia and Brazil’s Sudeste to the coal pits of Indonesia and South Africa, mining companies have experienced the end of the bull market in commodities,” Lelong and Cai wrote in the report dated May 6. “Now the shipping industry is feeling the impact.”

The daily charter rate for a Capesize vessel slumped below $10,000 from a peak of more than $100,000 in 2008, according to Goldman. Lower rates will combine with cheaper fuel to spur a period of cheap freight until enough older vessels are scrapped to balance the market, probably after 2020, the bank estimated.

‘Too Many Ships’

“People ordered too many ships on the basis that there was a lot of supply of iron ore coming on,” Ian Roper, a Singapore-based commodity strategist at CLSA Ltd., said in an interview on Thursday. “There’s still this structural overcapacity in dry-bulk shipping. That’s definitely not good news.”

The daily average rate for Capesize vessels rose 3% to $3,291 Thursday, according to Baltic Exchange data. The Baltic Dry Index fell 0.3 percent to 573 points, led by declines in the rate for Panamaxes, vessels that carry coal and grain and are smaller than Capesizes.

Goldman cited slumping rates for hauling iron ore from Western Australia to China, described as the busiest dry-bulk trade route in the world. The cost of shipping one ton sank from $44 at the peak in early 2008 to $4.40, it said.

“When transportation is cheaper and distance matters less, the world appears to be smaller and goods can travel further,” the analysts wrote. “The world has shrunk.”

Global demand for seaborne iron ore, thermal and coking coal may expand only 2 percent this year, down from an average of 7 percent between 2005 and 2014, Goldman said. After that, trade-volume growth will stall to 2018, it forecast.

Slowing Growth

China’s slowing growth contributed to declines in bulk-commodity prices. Iron ore sank to a decade-low at the start of April as Rio Tinto Group and BHP Billiton Ltd. boosted low-cost output into an oversupplied market. GlobalCoal’s Newcastle thermal price, a benchmark index for the Asia-Pacific, fell in April to the lowest level since 2007.

China’s economy grew in the first quarter at its slowest pace since 2009 amid a property slowdown. Last year, coal imports by the country contracted 11 percent, according to data from the General Administration of Customs.

The dry-bulk fleet’s utilization rate will drop from about 90 percent in 2008-2010 to 70 percent from this year to 2019, Goldman said in the report, which focused its analysis on iron ore and coal cargoes and the larger Capesize and Panamax vessels. Order books at shipyards will ensure that vessel capacity will continue to grow until 2017, it said.

“Faced with the risk of leaving vessels idle over long periods, we believe that shipowners will continue to charge low charter rates,” the analysts wrote. “We expect low freight rates to persist at least until the end of the decade.”

(Updates with Baltic Dry Index in seventh paragraph.)
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