After rebounding upward in 2009, analysts anticipate a softer freight rate environment this year
A year ago, the extent of the turmoil evident in the bulk shipping markets, as in the global economy, was impossible to understate. With the financial sector bringing its own brand of chaos to world trade, bulk carrier owners, operators and investors saw five years of feast turn to famine in a matter of weeks.
The Baltic Exchange Dry Index (BDI), which tracks freight rates across the entire bulk carrier sector, suffered an unprecedented plunge from a peak of 11,793 in May 2008 to just 733 in late November. To put the decline in perspective, operators of capesize vessels saw daily charter rates collapse from over $250,000 per day in June 2008 to around $5,000 a day in early 2009. Although capes were affected most severely, the smaller vessels, under 100,000 dwt, generally used for grain carriage also saw vessel period rates and valuations plunge.
As 2009 progressed, volatility in the market remained and a number of vessel owners and operators went bankrupt after over-extending at the peak of the market. But as World Grain predicted a year ago, once economic indicators started to reveal some "green shoots," the role of sentiment in pushing shipping freight rates far lower than seemed logical then helped drive rates back up. This occurred as it became clear the slowdown in world agricultural and industrial trades had left inventories and stores bereft of supplies, and charterers would be forced to re-enter the market. As confidence and demand returned, the BDI climbed from less than 1,000 points in January to over 4,000 in June before subsiding in the autumn and then surpassing 4,500 in November.
The major movements in the shipping freight indices were driven, as always, by the capesize market which benefited from a surge in demand for coal and iron ore imports from China. Indeed, China also started importing rising volumes of grains, soybeans and most other minor bulks from March onward as the economy benefited from a $586 billion government stimulus package which both boosted domestic demand and provided protection for a number of processing and export-based sectors, including many in the agricultural business as well as ship owners and ship yards.
Simpson Spence & Young (SSY) shipbrokers forecast in late November that seaborne bulk shipments in 2009 would total 2.27 billion tonnes, up 25 million tonnes from the prior year, an increase almost entirely the result of rising demand from China.
Ken Eriksen, senior vice-president for Transportation Services at Informa Economics, said the rise of Chinese demand and the fluctuations in transport and shipping costs over the last 18 months had "quite profound" impacts on grain flows.
"For the U.S., we compare the spread between the Gulf and PNW (Pacific North West) as a barometer to guide on the direction that grain will flow," Eriksen told World Grain. "Ten years ago if the spread exceeded $10 per tonne, then shippers would have an advantage to load out of the PNW for shipments destined for Asia. However, in the current environment, when the full accounting of transportation is considered, including the inland transport costs to the PNW, the ocean freight spread that gives the PNW an advantage is closer to $25 per tonne as the cost of moving corn and soybeans by rail has increased considerably over the past decade."
However, speaking in mid-December he said that such was the urgency of demand for soybean imports into China that the spread had almost ceased to matter. "We are seeing soybeans being exported out of every available port range in the U.S. with most of the volume being shipped to China," he explained.
"For corn, the ocean freight spread does matter, but because of the late corn harvest in the U.S., corn exports have been slow to develop. In fact, we have seen competitors such as Brazil filling the gap while the U.S. farmer is still harvesting corn this late in the year."
This spike in Chinese demand for most bulk commodities was reflected in the smaller vessel sizes used for international grain shipments. The Baltic Exchange Panamax Index, which started 2009 at just 500 points, had reached nearly 4,500 in late November. The Supramax Index jumped from 400 to over 2,400, while the handysize index climbed from under 300 to 1,100 in the same period.
SSY said that international grain shipments would total some 321 million tonnes in 2009, identical to the 2008 total. As World Grain went to press, SSY director Peter Norfolk said U.S. exports into the Pacific remained strong, with demand from China leading the market.
The International Grains Council’s Grain Freight Index (GFI) had risen to over 6,000 points in early December 2009, compared to less than 3,000 a year earlier. Shipping heavy grains from the U.S. Gulf to the E.U. and Japan in early December 2009 cost $37 per tonne and $68 per tonne, respectively. A year earlier, the totals were $17 per tonne and $25 per tonne.
So, as 2009 drew to a close, the shipping sector looked in far better shape than it did a year earlier with freight rates at least at profitable levels for most operators, even if they were far below the peaks of 2007 and 2008.
DOUBTS ABOUT 2010
But doubts remain over the stability of the dry bulk shipping business moving into 2010, and this brings an added dimension of uncertainty to the planning of shipping and freight strategies.
Paul Slater, chairman and chief executive officer of First International Corp., said that shipping "bears" would be correct to suspect that further surprises could be in store, in part because even more vessels are due for delivery in the next three years.
He argued that the volatility that attracted speculative investors to shipping before the summer of 2008 from those willing to "gamble" that short-term freight rates and second-hand ship values would remain buoyant could still prove problematic when the outlook for the world’s economies recovery rate remained "slow" and "will probably take three to five more years to return to 2002 levels."
"We have built nearly half of the world fleet by capacity in the last five years and have on order another 30% scheduled to deliver between now and the end of 2012," he said.
"Shipping stocks have declined on average over 70% since the peaks of January 2008, with over $10 billion having been lost. Freight markets have returned to pre-2000 levels and some to levels not seen since the early 1990s."
In his view, it is highly unlikely that freight rates will return to the levels of 2006 and 2007 anytime soon. "Spot rates in the dry-cargo markets barely cover operating costs and make little or no contribution to debt service," Slater said.
"2010 will be a very challenging year for most shipping companies. If rates continue at their present levels, many owners will run out of cash, and as the banks are not there to provide finance without large injections of new equity, these companies will go bankrupt."
Slater is not alone in this view, but it would be fair to put him among the "bears." What is transparently clear for shippers is that despite the rise in freight rates during 2009, there remain a number of clouds on the horizon for owners which could put downward pressure on the cost of moving goods by bulk carrier in 2010.
On the demand side, evidence of a full-blown global economic resurgence was still patchy as 2010 approached and there was no guarantee that China’s stimulus spending would continue to provide the bulk shipping market with ballast. A tightening of credit or a change in the government’s industrial policy in the wake of December’s "Copenhagen" meetings could strike a demand blow to the iron ore and coal export industry. The Dubai financial scare also gave warning that more economic surprises could still be in store.
But many believe the most fundamental flaw in the bulk carrier market remains on the supply side. Scrapping and cancellation levels fell short of most predictions in 2009, in part because Chinese yards and owners were buoyed by state aid and because, as freight rates rose during the year, owners were happy to keep their ships at sea rather than pack them off to the breakers.
Figures from Drewry compiled in October revealed a bulk carrier fleet of just over 7,000 vessels amounting to 448 million dwt. Outstanding orders for 2009 counted by Drewry in October still stood at some 575 vessels totaling almost 40 million dwt. Not all of these ships were delivered, but most were, particularly among the largest classes which are generally placed with the more established yards. Included in vessel deliveries due in 2009 but not completed by October were some 86 vessels above 110,000 dwt in size and 196 supramax vessels amounting to around 11 million dwt. About 1,240 vessels totaling 108 million dwt are then due for delivery in 2010 and a further 938 ships totaling 85 million dwt are set to enter service in 2011, according to the Drewry figures.
With so many fleet additions due in 2009-11, it is understandable that most forecasters are predicting vessel values and rates will fall considerably during 2010 and remain bearish in 2011.
Speaking in early December, Christopher Harrison, managing director of Thailand shipbroker Fearnleys, predicted earnings for smaller vessels of supramax and below would fall by up to 40%, with second-hand values down by 10%-15% by the summer of 2010 as the pressure of new deliveries skewed the market in favor of shippers.
Harrison said that the scale of the orderbook was such that even if 50% of these ships were not delivered, bulk carriers totaling some 137 million dwt would still enter service by 2011, adding around 1 billion tonnes of annual transportation capacity, enough to carry almost half of total annual dry bulk cargo shipments in 2008 or 2009.
"This equals the total deliveries in the preceding seven years," he said. "The supramax fleet will double in the next two years. Ninety-one percent of the capesize fleet is on order."
Even if lay-ups took some vessels out of the equation, if more vessels were delayed or canceled, and if the global economy expanded much faster than predicted, the growth of the vessel supply probably would still outstrip demand for additional movements of cargo by quite some distance in the next two years.
"We still see lots of ships coming," said Harrison. "Even massive non-deliveries and substantially increased demolition cannot reduce net fleet growth to a level in line with demand growth. Congestion is the joker – it is hard to predict why it happens and when it will happen. But we know even with congestion there will be a glut in supply next year. We expect a very weak 2010 and 2011."
Eriksen agreed: "We anticipate 2010 will be a softer freight rate environment. It will be difficult for the market to absorb the anticipated capacity that will enter service over the next three years without substantial growth in demand. The key driver is China’s buying habits. When they enter the market for bulk commodities, we are off to the races until China stops buying. When they stop, freight rates fall." One interesting side note to the decline in freight rates and shipping values could be the opportunities it opens up for the grain majors. Noble, Louis Dreyfus, Archer Daniels Midland and Cargill have all invested in ships while Bunge and Itochu have joined with STX Pan Ocean to construct a new export grain elevator in the PNW at Longview, which is expected to be ready for business in time for the 2011 grain harvest. In 2010, the grain multinationals could take firmer control of their supply chains if ship, port and transport asset prices slide as expected.
Michael King, a freelance journalist and editor, has been writing about shipping, transport and commodities for more than a decade. Currently based in Indonesia, he can be reached at