An undated handout photograph shows Nippon Yusen KK's dry-bulk ship. Expectations for higher shipping costs suggest the 78 percent plunge in capesizes since June 2 doesn't point to a new global economic slump. [Nippon Yusen KK / Bloomberg News]
Improving Chinese demand likely to ease transport industry glut
LONDON - The smallest profits in the commodity shipping market in 18 months may be ending as a rebound in steel and iron-ore prices signal improving Chinese demand that will ease the transport glut.
Chinese steel prices rose 4.7 percent last week, the most in 11 months. Derivatives for fourth-quarter iron-ore prices jumped 23 percent between July 9 and 21, Deutsche Bank AG said. Costs for leasing capesize ships used to carry iron ore will average $30,375 a day in the fourth quarter, from $12,755 now, according to the median in a Bloomberg survey of 18 analysts.
Expectations for higher shipping costs suggest the 78 percent plunge in capesizes since June 2 doesn't point to a new global economic slump. While last month's Chinese steel output was the smallest since February, the nation still accounted for 45 percent of global supply. Three consecutive months of lower iron-ore imports may mean mills are running down inventories.
"This is hand-to-mouth stuff," said Stuart Rae, London-based co-managing director of M2M Management Ltd, a $450 million hedge fund group that operates ships and trades freight derivatives.
"By the fourth quarter, stockpiles will have been depleted to a point that, strategically, they will want to try and build them up," said Rae, who correctly predicted a decline in shipping rates at the end of 2008.
Capesizes, three times the length of a football field, were last this cheap in the first quarter of 2009, when the US contracted 6.4 percent and Chinese growth fell to 6.2 percent, the slowest since 1999. Now, China will expand 8.95 percent in the fourth quarter and the US will gain 2.8 percent, according to as many as 54 economists surveyed by Bloomberg. The world is "very far from any kind of double dip", International Monetary Fund Managing Director Dominique Strauss-Kahn said on July 13.
Forward freight agreements traded by brokers and used to bet on or hedge against dry-bulk rates are already anticipating a rebound, pricing in a fourth-quarter average of $26,625, according to data from the Baltic Exchange.
That's $3,750 less than the median in the Bloomberg survey. Capesize rates more than quadrupled last year as the US economy accelerated from a first-quarter contraction to 5.6 percent growth in the final three months of the year, the fastest pace since 2003.
Chinese prices for rebar, steel used to reinforce concrete in roads and buildings, advanced for five consecutive days through July 23, reaching 3,995 yuan ($589) a metric ton, data from Beijing Antaike Information Development Co show. Prices had fallen 17 percent since April.
The cost of 62 percent iron-content ore delivered to Tianjin port in China gained 8 percent to $127 a ton since July 14, rebounding from a 37 percent drop that began in April, according to data provider The Steel Index. Fourth-quarter iron-ore swaps, traded off exchanges, rose to $123 a ton on July 21 from $100 on July 9, according to Deutsche Bank.
China accounts for 64 percent of the seaborne iron-ore market, the single biggest source of demand for dry-bulk shipping, according to Clarkson Plc, the biggest shipbroker. Iron ore represents about 75 percent of capesize cargoes, according to Georgi Slavov, head of freight and basic resources research at ICAP Shipping International Ltd in London.
"Chinese iron-ore demand is very, very important for the capesize market, it's the most important thing driving rates higher or lower," said Rahul Sharan, an analyst at Drewry Maritime Services in Gurgaon, near New Delhi.
Global shipments of iron ore will advance 6 percent to a record 961 million tons this year, Clarkson estimates. The brokerage also predicts a 9 percent gain in coal cargoes to an all-time high of 874 million tons. The commodity is the second- biggest source of demand for capesizes.
Higher costs
Higher shipping costs may bolster returns for Mitsui OSK Lines Ltd, Nippon Yusen KK and China Cosco Holdings Co, the biggest dry-bulk ship operators. Shipping lines typically lease vessels on long-term contracts on fixed rates as well as single-cargo voyages.
"We expect Chinese iron imports to recover when the price of iron ore drops further," said Masafumi Yasuoka, a senior managing executive officer at Mitsui.
Even if rates rebound to the $30,375 anticipated in the Bloomberg survey, analysts are more bearish than they were five months ago, when a Bloomberg survey of 11 analysts predicted $39,000 in the fourth quarter. Costs rose as high as $59,324 by June before slumping. The anticipated levels are also a long way off the record $233,988 reached in June 2008.
Part of that less-optimistic outlook can be explained by China's efforts to slow growth, which eased to 10.3 percent in the second quarter from 11.9 percent in the first. The nation raised bank reserve ratios three times this year and introduced lending controls to contain property prices. Citigroup Inc cut its outlook for China's 2010 economic expansion last week by a percentage point to 9.5 percent.
Baoshan Iron & Steel Co, the biggest publicly traded Chinese steelmaker, said July 13 it would cut prices for a second month amid weakening demand. Mills have curbed output, with Chinese production falling to 53.8 million tons in June, 4.2 percent less than in May, according to the World Steel Association in Brussels.
There is also no sign yet of a drop in iron-ore stockpiles at Chinese ports. Inventory expanded for four consecutive weeks to almost 74 million tons by July 16, according to data from information provider Shanghai Steelhome. That came even as monthly iron-ore imports fell to 47.17 million tons in June, the lowest since January, customs data show.
The port inventory data isn't reflecting what is happening at mills, where there has been a "reasonable destocking", said Colin Hamilton, an analyst at Macquarie Group Ltd in London.
The plunge in iron-ore prices since April came amid concern that the global recovery will slow and also reflected a switch from annual to quarterly contracts for iron ore. Steelmakers built up inventory in the second quarter, anticipating higher prices in the third, Barclays Capital said in a report July 16. Imports are also being curbed by more supply of iron ore from domestic mines, which is typically of a lower grade and therefore less competitive as prices decline, the bank said.
Capesize rates are so low now that some owners are likely to anchor to wait for better prices, shrinking vessel supply, said Guy Campbell, head of dry bulk at London-based Clarkson. Daily operating expenses, excluding financing costs, are about $7,000, he said. There are 1,044 capesizes in service, according to Clarkson.
As much as 25 percent of the capesize fleet anchored in December 2008, after rates slumped 99 percent to $2,316 in six months, Fearnley Fonds ASA said at the time.
"Day rates are unsustainably low," said Scott Burk, a shipping analyst at Oppenheimer & Co in New York who was named by the Wall Street Journal as the top stock picker for industrial transportation in 2007. "We've already heard indications that owners are staying away from the charter market, rejecting cargoes."
