Shipping rates increase in last half of 2013
March 11, 2014
by Michael King
Finally, ocean-going bulk shipping freight rates showed some semblance of serious improvement in the second half of 2013. At the start of November, the Baltic Panamax Index was 10% higher than a month earlier, 59.7% higher than three months previous, and a whopping 126.5% up compared to November 2012. Major gains were also apparent in capesize, supramax and handysize rates (see BDI chart, page 60).
According to Aristides Pittas, Chairman and CEO of vessel owner/operator Euroseas, the dry bulk rate hikes seen in September and early October were primarily driven by the strength of the capesize market, especially demand for iron ore shipping from Brazil to Asia which, because of the long distance involved, adds significantly to global tonne-mile demand. But the hikes were also felt by grain shippers.
The International Grains Council’s Grain Freight Index (GFI) was hovering near 4800 in mid-November, up from around 4,000 points a year earlier, a rise reflected in prices on key routes. In November 2012, for example, the average cost of shipping one tonne of heavy grain from the U.S. Gulf to the E.U. was $18 per tonne. A year later the price had risen to $24 per tonne. For the U.S. Gulf to Japan, the cost in November 2013 was $51 per tonne, representing a year-on-year increase of $4 per tonne.
The GFI and Baltic year-on-year gains do not fully explain how the market has progressed over the last 12 months, however. This was no steady progression in returns for vessel owners and operators. Rather, most of the upward acceleration of rates came in the summer and early autumn and the picture was then muddied during November. The key question is whether the BDI’s gains of the late summer months or the subsequent losses offer the best guide to grain shipping rate movements in 2014.
On the demand side, grain will do its part. Rising exports and more demand from China, which has suffered its own drought, are expected to see global seaborne grain trade rise 7% this year compared to 2012, when a 9% decline was registered. Next year, seaborne trade is expected to grow 2% with seasonal pushes offering timely boosts to handy, supramax and panamax fleets.
But, as ever, it will be coal and iron ore that will make the market. According to Macquarie Equities Research, iron ore, thermal coal and coking coal volumes will rise year-on-year by 4.5%, 4% and 7%, respectively, in 2013. Driven by imports to China, iron ore seaborne demand is then forecast to expand by just under 9% in 2014, while coking coal and thermal coal seaborne trade are expected to increase by 3% and 4%, respectively. Indeed, Macquarie expects total global dry bulk demand to rise by 5.5% in 2014 after growing 5% this year.
All is well on demand side
So, in short, all is well on the demand side of the equation. It is worth noting, however, that except in 2009 when volumes contracted by 0.4%, global demand for bulk carriers has expanded every year for the last decade despite the global economic downturn from 2008. The low rate environment suffered by owners over the last five years has been entirely a matter of excess capacity, with orders driven by overconfidence and the assumption of ever rising ship values and charter rates, despite the historical evidence which shows that every boom in bulk freight rates has been followed by a lengthier bust.
On that basis it should be safe to assume that after such sustained period in the doldrums, owners have kept their powder dry and stayed away from shipyards. Well, think again. Or simply google news “carrier,” “bulk” and “order.” The results list is lengthy, to say the least.
In just one week in November, some 78 vessel orders worth over $3 billion were placed globally with shipyards. Of these, 38 were for bulk carriers, according to shipbroker Golden Destiny. By contrast, a year earlier just 14 newbuilding orders were recorded globally of which only five were for bulk carriers. In week 32 of this year the Piraeus-based broker also noted 42 bulker orders, 21 of which were booked in Japan for delivery next year or in 2015.
Indeed, ship owners spent over $13 billion on new bulk carriers in the first three quarters of this year, compared to $9.6 billion in all of 2012. But ship owners are not acting irrationally, although some may be overstretching. Prices for capesize vessels are one-fifth higher now compared to the beginning of the year and secondhand prices have also been rising, so those that placed their bets early have already returned a profit, irrespective of freight rates. Some analysts expect an appreciating Japanese Yen and new Chinese policies — designed to tighten credit for industries like shipbuiding which are suffering from excess capacity — to fuel further newbuilding price increases.
Others are looking for operational savings. Among the most popular new vessels being built at yards are ultramax bulkers which, compared to small panamaxes and supramaxes, are being marketed as offering 8% more cargo space and up to 17% reduction in fuel consumption, a major draw given the persistently high fuel prices of recent years. And even with all the new orders, owners and investors are being encouraged by a supply-demand balance outlook which looks set to improve in the coming years.
At the start of November, the orderbook for the capesize sector represented 16.7% of the operational fleet of more than 290 million dwt. For panamax vessels, the orderbook was worth 19.1% of the 181 million dwt fleet. For supramaxes it was 21% of 153 million dwt and, for handymaxes, it was 15.5% of 85 million dwt. While these are not insignificant numbers, by comparison the orderbook overhang for post-panamax container vessels is currently running at close to 40% of the operational fleet.
Moreover, despite all the new orders, net fleet growth rates are set to slow. Net bulk carrier fleet growth was 8.1%, 12.6%, 18.5%, 19.3% and 16% in 2008, 2009, 2010, 2011 and 2012, respectively. This year it is forecast to increase around 11.4% before slowing to just 5.1% in 2014 and 3.5% in 2015.
Perhaps more important is the year-on-year change in the demand-supply balance. Macquarie forecasts that this will tighten by 2.2% in 2014, the first time this has happened since 2008. This compares to a -4.9% balance in 2009, -8.6% in 2010, -5.1% in 2011, -3.8% in 2012 and an estimated -2% in 2013. In 2015, Macquarie estimates a further tightening of supply-demand of around 2.8%.
Signs of sustained recovery
George Karageorgiou, President/Chief Executive Officer and interim Chief Financial Officer of bulk carrier operator Globus Maritime Limited, said that market fundamentals as 2014 approached were showing strong signs of a sustained recovery.
“While there continues to be excess vessel supply in the market, we continue to see signs of moderation in terms of dry bulk fleet growth, which we believe will continue into 2014,” he said.
Karageorgiou views the third-quarter performance of the BDI as an indicator that the declining pace of fleet growth has enabled freight rates to be more responsive to increases in cargo demand.
“Although we don’t anticipate this translating into a material increase in the charter rate environment in the near term, we believe 2014 and beyond will provide a significant opportunity for an already robust demand for dry bulk commodities to outpace overall supply growth,” he added.
For his part, Pittas is “guardedly optimistic” for 2014. “We expect to benefit from higher rates as our vessels roll over their existing charters,” he said.
Bonnie Chan, an analyst with Macquarie, takes a more sobering line. She warns that newbuilding orders, especially for Capesize and Panamax vessels, remain a huge threat to eventual market recovery and could skew net fleet growth forecasts through 2015. She expects “stabilization” in 2014 rather than the “strong recovery that consensus is predicting” because she believes the absorption of excess supply is likely to keep rates capped until at least 2015, not least because vessels currently slow steaming could accelerate, adding capacity to the market.
“The overall fleet has increased by over 75% since 2008, while demand only grew around 40%,” she said. “Although some of this excess capacity has been absorbed through permanent slow steaming, we believe there is at least 20% to 25% of excess capacity within the dry bulk market and it will take time to be absorbed.”
However, Chan said the Handysize sub-segment so popular with grain shippers could buck the market and start a full recovery in 2014. “With just 1% net fleet growth in 2012 and our forecast of zero fleet growth in 2013-2014, we see significantly less excess supply within this segment,” she said. “Scrapping will also help to keep supply in check as over 25% of the fleet is over 20 years old. Coupled with a strong U.S. harvest season, we see Handysize rates rising 23% next year to average $10,625 per day vs. $8,569 per day currently.”
Rising rates have benefits
Applauding rising costs may sound like sacrilege to some agricultural counter-parties, but the more rational will acknowledge that sustainable charter and per tonne rates are a small price to pay to cut the risk of an owner going into bankruptcy or a cargo being spoiled or delayed due to poor vessel maintenance — clear and mounting dangers when vessels are earning less than the operating cost for a sustainable period as has been the case. The latest mini-rebound should also be put into perspective.
The breakeven for most operators based on the Baltic Dry Index is thought to be around 1,500. This point was passed for only the first time since Jan. 4, 2012 on Sept. 10, 2013. The BDI may well have dropped below that level again by the time this article is published, given the losses suffered in November as World Grain was going to press.
Stability followed by gradual freight rate increases through 2014 and 2015 would be a positive development for the grain industry in the long term.
Michael King, a freelance journalist and editor, has been writing about shipping, transport and commodities for more than a decade. Currently based in Southeast Asia, he can be reached at: Michael@borderline.eu.com.