Low rates on the high seas

Old salts interpret low-flying seabirds as a sure sign that a storm approaches. For some observers the Baltic Dry Index (BDI), which tracks the cost of shipping iron ore, coal, grain and other materials, is delivering much the same message about the global economy as a wave-skimming albatross. Last month it hit a 30-year low (see chart 1). Yet its decline says more about the predicament of those who own the vessels that carry such cargoes than it does about economic growth or the prospects for world trade. For container ships, which move finished goods, and oil tankers the outlook is less gloomy.

True, fresh signs emerged this week that China’s economy is slowing. Growth this year may be 7% or less, compared with 7.7% in 2013 and 7.4% in 2014. China absorbs three-fifths of the world’s ship-borne iron ore—the most commonly carried dry-bulk cargo—and a quarter of its coal. Yet this alone does not seem to justify a two-thirds fall in the BDI over the past year. Clarksons, a shipbroker, still expects Chinese imports of iron ore to grow by 7.5% this year.

Cargo rates have foundered along with the share prices of shipping firms mainly because the growth of capacity has run ahead of the growth in demand. Some firms have sunk completely. Copenship, a Danish ship operator, went bust in February. Last year the bankruptcy of Genco Shipping was one of the largest in America.

The industry is suffering a flashback to what happened around the time of the global financial crisis. In the run-up to the crisis China’s appetite for raw materials seemed insatiable and shipping rates soared: the BDI peaked in May 2008 at 11,793, more than 20 times its current value. That prompted a frenzy of orders for new ships. But by the time these vessels started arriving, a couple of years later, they were launching into a global slump, so rates plummeted. In 2013, just as the scrapping of old ships and a scarcity of new launches were restoring a semblance of order, Chinese coal imports surged, and the BDI began to recover.

Shipowners took this as a cue to start ordering ships again. But no sooner had they done so than, in 2014, China’s coal imports fell back sharply once more. This was not because of the state of its economy but because a policy to wean the country off coal had begun to take effect, as power began flowing from big, new hydroelectric projects. Ships ordered in 2013 are starting to roll down the slipways, nonetheless, and even record Chinese imports of iron ore are not enough to soak up excess capacity.

All the steel that China is making with that ore has also been hurting the shipowners, explains Crystal Chan of IHS, a research firm. Usually, low shipping rates encourage the owners of old vessels to scrap them. But a flood of low-cost steel from Chinese mills has brought down the value of scrap metal, making it less attractive to send ships to the breaker’s yards.

There are now signs that shipping’s self-righting mechanism is finally beginning to work. Demolition rates have started to pick up, from a low base, and orders for new vessels have all but dried up, says Marine Capital, a shipping investment fund. But it may take a year or two before bulk-carrier rates, and thus the BDI, pick up.

For other types of ship, things look a bit brighter. Tankers, which shift crude oil and refined products such as petrol, had a period of oversupply and a collapse in rates after a similar ordering binge ahead of the financial crisis. But tanker rates are showing tentative signs of a pickup .

America’s shale-oil boom means it has fewer tankers heading in its direction—but much of the oil produced in the Atlantic basin is now making a longer journey to Asia, keeping tankers busy. Saudi Arabia and fellow OPEC members are still merrily pumping their oil aboard ships. The recent weakness in the crude price has put the oil market into “contango”, meaning that the spot price is lower than the forward price. This has encouraged some traders to charter tankers just to store oil and sell it at a higher price later.

As a result, for some oil tankers rates are at their highest since 2008. That said, some shipowners are said to be negotiating with builders to convert orders for their now unwanted bulkers into ones for tankers, which will bring more supply into the market for those vessels.

The picture with container ships, which shift manufactured goods, is more complex. There were no reliable indices before the financial crisis, but Trevor Crowe of Clarksons says container rates were hit far harder by the crisis than those for other types of vessel. Since then rates have been choppy (see chart 3). However, the biggest operators of container carriers have become more efficient at managing their fleets, and have swapped old vessels for bigger, more fuel-efficient ones, helping them cope with periods of weakness. Maersk of Denmark, the biggest, reported a record profit of $2.3 billion for 2014.

In all, the sorry state of the bulk-shipping industry says more about shipowners’ incurable optimism than it does about the world economy. Owners are habitually more worried about missing out on an upturn than they are about getting caught by a downturn. This cheery disposition can do serious damage to their wealth. But it means that, over time, shipping rates tend to be lower than they would be if owners were more pessimistic. Far from fretting about the BDI, customers should be grateful for low prices.
Source: The Economist 

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