What's next for dry bulk?

Monday, 09 February 2009

In what could easily be deemed as the best week for the dry bulk industry in terms of freight rates in months, the Baltic Dry Index (BDI) rallied back at high levels, compared to the lows of early December of last year, now extending its upwards sessions at 14 straight ones.

The BDI, which tracks prices to ship key commodities, ended the week at 1,642 points, rising by a further 9.61% from Thursday.

It is now a whopping 147% up from the low of 663 points it stood at December the 5th of 2008 and 122% up from the beginning of the year, in a start that is regarded the best since 1986.

The same frantic pace and even more was observed in the capesize index (BCI) which is often regarded as a benchmark for the market. It is now at 2999 points, up by 261% from the 830 points it reached back in December. Similarly, the panamax index (BPI) has risen by 191% at 1251 points from the lows of 442 points in December 11th.

What was particularly positive for ship owners during last week was the healthy increases of freight rates in all ship types, even smaller ones, which weren’t able to do that in previous sessions, despite the capesize market’s increases. Shipping brokers said the recovery was more a correction from the extreme fall between October and December of last year, helped by a pick up in Chinese demand for iron ore, than a sign that the world has emerged from the financial and economic crisis.

In the short term, shipbrokers see signs of stronger freight demand, particularly for the largest vessels, or Capesizes. Indeed, one reason for the rebound in iron freight was the return of Chinese steel makers to the market after running down their ore inventories, which hit record levels in October. However, final consumer demand for steel remains weak.

Apart from iron ore demand, China, the world's top consumer of wheat, has been buying grain from the United States and Australia as well as other sources in recent months. The country has declared an emergency over a drought that could threaten its wheat crop. Of course, the recent rally of dry bulk freight rates should by no means be considered as sufficient to restore faith and confidence among ship owners. Indeed, analysts indicate that it will take at least another 10 sessions like the previous ones, to bring the market at levels where one can be talking about a true rebound.

“Freight rates are still considerably low. They need to double from today’s levels, in order to provide a boost in ship values and therefore provide ship owners with a solution in the problem of breaching loan covenants” said Mr. George Grigoriadis, Head of Finance & Research at shipbroker G.Moundreas & Co. Choosing to speak the voice of reason, the Baltic Exchange’s CEO Mr. Jeremy Penn commented on the latest rally as being the result of “meaningful demand in the short term and that’s by comparison with the collapse of last year”.

He went on to state the obvious, that the market may weaken as new ships are delivered over the next 12 to 24 months. On a similar pattern, Australia’s Macquarie Bank warned in a report that “the recovery could prove to be a short lived one, as there is no evidence of an increase in demand for steel in China. A major downturn in iron ore imports continues in Japan and Europe as hefty steel production cuts are implemented.”

The report said that “There is also a risk that Chinese iron ore stocks will start rising, which could reduce short term demand for ships and this may soon cap the mini rally in freight.”

Nikos Roussanoglou, Hellenic Shipping News

Hg