2013 shipping outlook
March 12, 2013
by Michael King
International grain shippers and traders were not overly troubled by the cost of ocean transportation in 2012. Although rates should improve during 2013, it is by no means certain they will return back even to the higher points of 2011, itself hardly a boom year for vessel owners and operators.
By late November 2012, the Baltic Dry Index, the leading guide to the cost of ocean transport by bulk carrier, was averaging 926 points, some 623 points lower than a year earlier. The same trend was apparent across the bulk vessel sectors with the Baltic Panamax Index at 980 — close to its annual average of 972 but down from the 1,749 averaged in 2011. The supramax and handysize sectors proved slightly more resilient. The former’s average in late November was 917 compared to 1,377 in 2011, while the handysize index was down to 448 points, below both its average of 523 for 2012 and the 718 average recorded in 2011.
For grain shippers this translated into major year-on-year reductions in shipment costs on key routes for those able to play the spot markets. On the U.S. Gulf-E.U. lane, the cost per tonne of heavy grain fell from $26 in December 2011 to just $19 in early December 2012. Over the same period, rates on U.S. Gulf-Japan lane fell from $57 per tonne to $42 per tonne, and on Brazil-E.U., from $44 per tonne to $29 per tonne.
By early December 2012, the International Grains Council Grain Freight Index had fallen below 4,000 points, from above 5,250 points a year earlier.
However, poor weather conditions saw grain markets assume a more important role in bulk markets than usual, albeit only in a negative sense from a bulk vessel operator’s point of view.
Peter Sand, chief shipping analyst at Bimco, said the U.S. and Russian crop performances in 2012 were especially influential.
“U.S. wheat exports in 2012 were weak all year,” he told World Grain in December. “Export volumes during the ‘peak season’ months of August and September were particularly disappointing. The shortfall of an accumulated 23% of the total wheat exports as compared to same period last year highlights the fact that many owners experienced a fierce fight for too few cargoes.”
Russia’s Agriculture Ministry now expects its drought to cause a drop in harvesting this year as high as 25% compared to the 2011 harvest. Russia, a huge exporter of mainly wheat, said total grain exports were down by 17% compared to last season.
“The shortfall in seaborne grain exports from both the U.S. and Russia has further and negatively impacted the shipping markets,” said Sand.
The current 2012-13 global crop is predicted to be a poor one in terms of seaborne exports and this will continue to influence freight rates on core trading routes during 2013 for vessels under panamax size.
“Lots of weather-related factors have negatively affected wheat, coarse grains and soybean exports globally,” said Sand. “This has meant a lot of lost tonne-miles for panamax, supramax and handysize bulkers.”
However, he said the outlook could improve in terms of volumes as 2013 progresses as buyers seek to replenish stores.
“In a scenario where the weather affects the harvest in a positive way, exports could rebound and come back with a vengeance as the current poor trading year has also brought down global stock holdings,” he said.
“As we have seen, the crops of Argentina, Australia, the U.S., Ukraine and Russia were all negatively affected. So the chance of getting stronger seaborne exports of grains and soybeans in 2013 is certainly there. Russia’s accession into the World Trade Organization earlier this year should also bode well for solid Black Sea exports if the next harvest is good.”
However, even though the grain markets could be more of a factor in freight rates in 2013 than has been the case in recent years, demand for coal and iron ore from China, and for coal from India, will be the main deciders of freight rates from a demand perspective.
Activity in the final quarter of 2012 certainly boded well for demand growth in 2013. China’s imports of iron ore and coal both picked up toward the end of the year as government attempts to boost growth primarily by investment in infrastructure proved a boon to the steel industry. With a new administration expected to continue the program, and with domestic miners unable to meet the demands of steel makers for iron ore and met coal, or demand from power producers for steam coal, most analysts expect China to continue to drive bulk markets and boost overall demand for bulk carriers during 2013. The country’s rising steam coal imports will also be a major factor.
Declining exports of Indian iron ore exports have also offered the bulk shipping operators some respite, with iron ore price declines enabling the substitution of Indian iron ore with strong Brazilian exports, which generates extra tonne-mile demand due to the extra distance to market.
U.S. coal exports are also going from strength, with some 98 million tonnes exported in the first nine months of 2012 expected to see year-end volumes set an all-time record.
“Will this venture stay strong?” asked Sand. “It’s unlikely. If you ask the U.S. Energy Information Agency, it predicts U.S. coal exports will decline in 2013 but remain above 100 million tonnes for the third straight year. The case is this: as long as U.S. coal exports go to Europe as a substitute for Australian exports, the lower tonne-mile represents a bad bargain for shipping. But if U.S. exports are heading for the Asian markets, it may become a positive story for the dry bulk market. “Arguing in the other direction may be that gas prices stay low in the U.S. and relatively high in Europe, leaving demand for thermal coal low in U.S. domestic markets but higher in Europe, as coal is the preferred fossil fuel for electricity generation in Europe. Finally, a supply disruption in a major export country may increase U.S. exports.”
As 2012 drew to a close, the signals pointed toward a higher rates environment in 2013. The BDI (see charts on page 84 and 85) was up 17% in early December compared to Oct. 10, with the BCI at 2,000 (+13%) over the same time scale, the BPI at 949 (+21%) and the BHSI at 446 (+1%). Only the BSI was struggling at 768 (-2%).
A spokesman for Drewry Maritime Research, the publishers Dry Bulk Forecaster, said dry bulk shipping in the next few years would be highly dependent on growth in commodity trades since the bulk carrier fleet would continue to expand, albeit at a declining rate of growth.
“Many steel furnaces closed in the European continent, steel production and iron ore imports will decline in the coming months,” he told World Grain. “Similarly, grain trades suffered a major blow in 2012 given dry conditions in many of the top exporting countries. The coal trade provided some support to the market, as very low commodity prices boosted trade. U.S. coal exports improved and low prices are expected to continue supporting coal trade.”
Petter Haugen, a dry bulk analyst at DNB Markets, said the key for rates of smaller vessel sizes in 2013 will remain the strength of the of coal and iron ore demand.
“Although these cargoes are mostly shipped on Capes, the substitution between vessel sizes will support the smaller sizes as well,” he said. “Grains will have a limited but positive effect on panamaxes and below. Most noticeable will be South American grains in the first and second quarters. But as a share of total trade, we think grain will lose importance.”
On the supply side of the shipping equation, based on the first three quarters, total ordering for 2012 was forecast by Drewry to amount to only about 24 million tonnes dwt, half the 48 million ordered in 2011 and one-third of the 74 million tonnes ordered in 2010.
“Even though yards are using fuel-efficient and economical ship designs as marketing tools to attract shipowners, the newbuilding market still reflects the scenario prevalent in the global economy,” said the spokesman. “Limited and expensive finance has hampered the trading conditions in the shipping market and will continue to do so for some time. Some players are also looking toward private investors who can provide finance. However, this will not be easy.”
BULK CARRIER ORDERBOOK DECLINES
At the beginning of 2012, the total bulk carrier orderbook stood at 32.8% of the fleet. But by the end of the third quarter, it had receded to 23.1% due to huge numbers of new vessel deliveries.
This trend should see the excess of supply that has characterized the bulk shipping market for a number of years ease somewhat over the next two years.
“The orderbook does not have a lot beyond 2013, and that will limit supply growth from 2014, supporting the recovery of freight markets,” said the Drewry spokesman.
BIMCO is bullish on behalf of owners, predicting that 2013 will be the turning point for the global economy as well as for dry bulk shipping.
“We see rates coming out of the doldrums of 2012,” said Sand. “But don’t expect thunder to strike. Overcapacity in the market is likely to put a lid on how high freight rates may go even with strong demand.
“Slow steaming is now being widely applied, so given the underutilization of existing tonnage, this will limit rate gains in 2013 if vessels are again speeded up. But we should see higher rates next year.”
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 Micheal@borderline.eu.com.