Dec 30, 2011 -- The weakest growth in demand in at least a decade for shipments of iron ore, the second-biggest commodity cargo after crude oil, means rates for the largest vessels will plunge to the lowest level since 2002.
Capesizes, each hauling about 160,000 metric tons of ore, will earn an average of $15,000 a day next year, about 4 percent less than in 2011, the median estimate in a Bloomberg survey of 10 analysts shows. While that implies losses for ship owners and investors in their companies, speculators can profit because forward freight agreements, handled by brokers and used to bet on transport costs, are anticipating an average of $16,367, according to data from the London-based Baltic Exchange.
Owners are contending with the biggest fleet in history as vessels ordered when rates reached $233,988 in 2008 continue to leave ship yards. The glut may widen because trade in iron ore will expand 2.5 percent next year as the number of capesizes rises 9.8 percent, according to Clarkson Plc, the world’s biggest shipbroker. Economic growth in China, whose steel mills consume 65 percent of all seaborne ore, will slow to the weakest since 2001, economist estimates compiled by Bloomberg show.
"The question for ship owners now is how are you going to hang on, how long are you going to hang on, and when is the light at the end of the tunnel?” said Andreas Vergottis, the Hong Kong-based research director at Tufton Oceanic Ltd., whose $1.45 billion shipping hedge fund is the world’s largest. “There is definitely no light in the 2012 tunnel.”
Rates (BCAVRT) for capesizes averaged $15,639 this year, down from $33,298 in 2010, according to the exchange, which publishes freight costs for more than 50 maritime routes. The 1,000-foot- long ships need about $20,000 a day to break even, Oslo-based Arctic Securities ASA estimates.
The combined earnings of the 14-company Bloomberg Pure Play Dry Bulk Shipping Index (BPG4DBS) will drop 82 percent this year, analyst predictions compiled by Bloomberg show. Eight of the companies will report even lower profit or losses for 2012. Kawasaki Kisen Kaisha Ltd. (9107), based in Tokyo and the top capesize operator, will lose money this fiscal year and next.
Chinese growth will drop to 8.5 percent next year, compared with 9.2 percent in 2011, the median of 14 economist estimates compiled by Bloomberg shows. Steel production in the country, which accounts for about 44 percent of the world total, fell in each of the six months through November, according to the Brussels-based World Steel Association. China will import 5.8 percent more iron ore next year, against 10 percent in 2011, Clarkson estimates.
A rally in capesize rates that began in August and lifted charter costs to $32,889 on Dec. 12 is already fading, declining 16 percent to $27,512 since then, according to the exchange. FFAs anticipate a further drop to $15,096 in the first quarter, bourse data show. The market for the contracts, which also covers oil tankers and container shipping, was valued at $24 billion in 2010, according to the exchange.
Rates may rebound should Chinese growth exceed economists’ expectations. Clarkson, based in London, raised its estimate for 2011 Chinese iron-ore imports three times this year, increasing the forecast by 4.8 percentage points overall. The nation’s economy expanded 10.4 percent in 2010, more than the 9.5 percent anticipated by economists surveyed by Bloomberg in January.
Slumping rates and values for secondhand (BESPCAPE) ships may also spur owners to scrap older vessels. The difference between the price of a 20-year-old capesize and its demolition value declined 47 percent to $3.1 million this year, Clarkson data show. Eleven percent of the fleet is at least 20 years old.
Owners may also seek to boost earnings by slowing ships down to burn less fuel, their biggest cost. Capesize speeds averaged 9.6 knots this year, compared with almost 10.7 knots in 2010, ship-tracking data compiled by Bloomberg show. Speed cuts mean vessels take longer to complete voyages and seek new business, effectively reducing the fleet’s capacity.
The number (VESLCPIS) of capesizes has risen 58 percent to 1,186 since the end of 2007 and outstanding orders at yards equate to 27 percent of existing capacity, according to data from Redhill, England-based IHS Fairplay.
There are also gluts beyond so-called dry-bulk commodity shipping. Returns from hauling Saudi Arabian crude to Japan, the industry’s benchmark route, fell 53 percent to $12,445 a day this year, according to the exchange. That’s less than the $30,200 that Hamilton, Bermuda-based Frontline Ltd. (FRO), the biggest operator of supertankers, says it needs to break even.
An index (CTEXIDEX) reflecting charges for six types of containers slid 43 percent since the start of April, according to the Hamburg Shipbrokers’ Association. Volumes of steel boxes carrying everything from televisions to furniture to the U.S. from Asia, the biggest inter-regional trading route, dropped for the first time in almost two years in the third quarter, according to Newark, New Jersey-based PIERS, which operates a database of U.S. waterborne trade activity.
It’s not just capesize owners suffering within dry-bulk shipping. Panamaxes (BPRATCR), which carry about half as much cargo, will earn $13,250 a day in 2012, compared with an average of $14,000 this year, the Bloomberg survey of analysts shows.
The Bloomberg Dry Bulk Pure Play Index, which also includes shipping companies that operate panamaxes, plunged 45 percent this year, compared with a 10 percent decline by the MSCI All- Country World Index of equities. Treasuries returned 9.7 percent, a Bank of America Corp. index shows.
Kawasaki Kisen, which has 82 capesizes, will report a net loss of 33.2 billion yen ($427 million) for the fiscal year ending in March, compared with net income (9107) of 30.6 billion yen in the prior period, the mean of 17 analysts’ estimates shows. The loss will shrink to 11.6 billion yen in the following year. Shares of the company, which also operates other vessel types, fell 61 percent this year in Tokyo trading.
"Dry bulk has a massive demand driver in China,” said Erik Nikolai Stavseth, an analyst at Arctic Securities in Oslo whose recommendations on shipping companies returned 12 percent in the past year. “But as vessels keep being built, you basically need another China to mop up all the ships.”