Shipowners rejoice over rising demand for commodities

September 12, 2017 -A long slump for dry-bulk shipping companies, which transport the raw materials of global trade, may be coming to an end.

After two years of below breakeven freight rates that pushed the world’s biggest ship operators deep into losses and smaller ones out of business, strong growth in the global economy has shipowners rejoicing.

The Baltic Dry Index, one the world’s leading trade indicators which measures the cost of moving commodities like coal and iron ore, is hovering at 1,355 points, the highest in 34 months after falling to its lowest level ever at 292 in February 2016. At its peak, prior to the 2008 financial crisis, the index hit 11,000 points.

Shipping brokers say the rise will likely continue in the short term, with 1,700 points being the initial resistance level.

“Things are looking better all around,” said Robert Bugbee, president of Scorpio Bulkers Inc., one of the world’s biggest carriers. “There is strong growth in the world economy and this translates to more shipments of everything from cement and grains to aluminum, coal and iron ore.”

Scorpio, which now operates 48 ships, sold around 20 of its biggest vessels at a sharp discount in late 2015 to maintain financial viability after charter rates tanked to less than half of break-even levels.

The International Monetary Fund expects the world economy to grow by 3.5% this year and 3.6% in 2018, up from 3.2% in 2016.

The current market surge is mainly driven by China’s move to limit this year’s production of coal and iron ore in 10 provinces by around 25% and 20%, respectively, compared to last year, according to data by Athens-based Allied Shipbroking.

The move aims to cut pollution levels in major urban centers, but comes amid an increase in infrastructure investment from Beijing, which means greater reliance on seaborne imports.

“China’s economy is turning around with a resurgence in infrastructure spending, at a time when its steel inventories are low,” said Basil Karatzas, chief executive of New York-based Karatzas Marine Advisors & Co. “The dollar [in which commodities are priced] is also at an 18-month low which makes it a good time to buy.”

Brokers in Singapore and London said they have seen increased demand for commodities like grains, lumber, cement, coal, and copper. One broker, who arranges charters for big operators in Asia and Europe, said rates are improving across the board.

“Commodities are back in play at least for the next couple of months,” he said. “Daily spot rates for the biggest cargo ships are hitting $21,000 compared to $11,000 at the year, with Chinese imports being sourced from Australia and Brazil to the U.S. and Canada.

Dry-bulk shippers were hurt over the past few years after China, the world’s biggest commodities importer, began shifting away from heavy industry as the main growth driver. Like Scorpio, other big players shrank their fleets in the face of losses while some smaller operators went bankrupt. At the same time, banks turned off access to ship-financing in the face of rising nonperforming loans.

But analysts warn that bursts of optimism in the past have prompted owners to order new vessels worsening an overcapacity of tonnage in the water that they see as the main culprit behind the industry’s woes.

“The owners are often their own worst enemies,” Mr. Karatzas said. “Hopefully, the current rally won’t be derailed by operators who forget the fundamentals, stop scraping and start buying.”

Source: The Wall Street Journal