Freefalling rates spark fears dry bulk crash has arrived…

Baltic Dry Index hits lowest level for 13 months

THERE are fears the long-anticipated crash in the dry bulk market has arrived, as the Baltic Dry Index freefall continued for the 30th consecutive day to its lowest level in 13 months, as shipowners prepared to take delivery of record numbers of new panamax and capesize bulk carriers in the second half of 2010.

“I think it could get fairly ugly,” said a prominent Europe-based operator of dry bulk tonnage, who declined to be named.

“Percentage wise, [rates] can probably come off another 50%, to a bit above operating cost levels,” he added, with stronger demand for dry bulk commodities only to return with cheaper transportation costs.

Declining shipments of iron ore and coal to China (which employ nearly half the world’s bulk carrier fleet) have seen panamax and capesize earnings collapse in the past six weeks, losing around 65% in value.

Capesize rates alone on the major Brazil-China route today fell to under $30,000 per day, compared with nearly $84,000 per day in late May.

Darkening an already bleak picture is what some analysts are calling a tsunami of newbuilding tonnage against a deteriorating outlook for commodities shipments forecast to rise 8% to 3.2bn tonnes this year.

Some 23 capesize vessels are set for delivery each month until the end of the year, according to fresh forecasts, which allow for 20% to be delayed. That compares with average monthly deliveries of 16 in the first five months of 2010, which saw the fleet grow by more than 23%, to over 1,000 vessels.

“I think dry is going to have its work cut out for it for the rest of the year,” said a representative from a major freight trader. “In 2009 the market overperformed, and I think we have seen the best of the market for this year.

“There are too many ships, poor steel margins, poor orderbooks for steelmakers, building inventories in Chinese steel, and more and more restrictive measures in financing and real estate.”

Weakening steel mill margins at a time when iron ore and coal prices have nearly doubled — along with friction between the Chinese and iron ore majors over a new quarterly pricing system — was negative for the freight market, he said.

Since the global financial crash decimated shipping markets in September 2008 and ended a five-year supercycle that saw as much as $200,000 per day paid for bulk carriers, there have been fears that the bloated orderbook would further depress rates.

But iron imports to China grew 40% to 628m tonnes in 2009, along with unexpectedly strong coal imports, which combined with port congestion and delivery delays offset fears that supply would outstrip demand.

The managing director of one major shipbroker with an extensive network of offices in Asia and Europe was more positive about prospects, despite falling European and US market confidence.

“Our colleagues in Asia are a lot more bullish and optimistic, based on discussions with their clients, than we are in Europe,” he told Lloyd’s List. “People in Europe are very unsure of what is going on right now and have a sense that it is almost reminiscent of 2008 all over again, but we do not share that view.

“This year was meant to be the dustbin year of shipping, and everything was meant to go down the pan, but it has proved to be the opposite on the bulk side. Even the container side has gone up, and if the containers can do it, I don’t see why we should be so worried about the bulk side.”

He said rates to charter a large, modern, economic panamax for a two-year period hit a 2010 low of $19,750 per day this week, $4,750 lower than the 2010 high of $24,500 earlier this year, which was much less dramatic than the wild swings in spot rates.

“More long-term projects are coming to the surface, including for ships with forward delivery, and they are all obtaining good interest from charterers. This gives us hope that there is at least a foundation in the market now and people believe it is worthwhile to go long in ships and get the benefits thereafter.”

Slowing growth in Chinese steel production could see average monthly iron ore imports at 44m tonnes for the rest of the year, according to RS Platou’s Shipping Quarterly, released this month.

“This means that drybulk owners will have to hope for extraordinary high coal demand, higher slippage, higher port congestion, a jump in tonne-miles and the rest of the world to come to the rescue this time to balance the market,” the report concluded.

RS Platou also forecast rates close to operating costs during periods of volatility.

“Fleet growth remains at levels that will outpace demand, which leaves the dry bulk market with a risk of seeing a tonnage build-up towards year-end,” the report concluded. “In 2011 we will see the risk of rates hitting close to operational cost levels during the seasonal slower periods which will trigger new scrapping and order cancellations.”

The Baltic Dry Index closed today at 1,940 points, falling each trading day since May 25, when it was at 4,187 points.

The average panamax time charter is at just over $16,000 per day and average capesize at $18,000 per day, compared with $36,000 and $48,250 on May 25.

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