• Sun
  • Jul 13, 2014
  • Updated: 4:46pm

Shipping gloom to lift, Pacific Basin says

PUBLISHED : Monday, 09 August, 2010, 12:00am
UPDATED : Monday, 09 August, 2010, 12:00am

Shipping firms have had a roller-coaster seven years as they saw charter and freight rates surge to record highs on the back of the mainland's rapid growth before plunging almost to zero as the worldwide financial crisis haemorrhaged global trade.

Now, two years after the start of the downturn, the global shipping industry is still facing concerns over freight rate levels and the impact on rates from the delivery of new ships ordered at the height of the boom.

But for one Hong Kong-headquartered shipping company, these concerns are less important than previously. That is because of the increasing cyclical nature of freight rates and the mainland's insatiable commodities demand will offset the negative impact of new ships joining the global fleet.

Explaining the current conditions, Klaus Nyborg, chief executive of Pacific Basin Shipping, said the gloomy dry bulk freight rates would rebound in the fourth quarter. That is because of changes in the mainland's pricing policy for iron ore imports, which is now done on a quarterly basis using the previous quarter's spot price for ore.

As a result, the surge in iron ore prices in the second quarter, which hit about US$140 per tonne, fixed a higher price for ore in the third quarter. But this also resulted in a slump in demand as iron ore prices dropped to around US$110 per tonne. This lower benchmark price is predicted to spur demand for iron ore in the fourth quarter, pushing up charter rates as a consequence.

These dynamics and other changes that followed the global financial crisis and caused a recovery in the dry bulk market last year 'led us to re-evaluate dry bulk demand', Nyborg said.

As a result the company was more optimistic about medium-term prospects as the mainland entered the third phase of its industrialisation with the rise in steel consumption alone suggesting that strong growth in the dry bulk segment would remain.

He pointed out that total dry cargo volumes increased by around 3 per cent per year between 1974 and around 2003. But since then the increase in cargo volumes had climbed by 8 per cent to 9 per cent per year.

This reflected the expansion of the mainland economy, with increased spending on infrastructure and the growth in exports, after it joined the World Trade Organisation in 2001. It also mirrored the post-war industrialisation of Japan and South Korea.

Nyborg said dry bulk cargo volumes climbed by an average of 7 per cent a year between 1950 and 1974 as first Europe was rebuilt, then Japan started to industrialise from 1950 and South Korea followed in the late 1960s.

With the Chinese and Indian economies continuing to grow and investing in infrastructure it would 'lead to relatively higher growth (in dry bulk shipping) going forward', Nyborg said.

He added that China's move into Africa, South America and Australia to secure commodities for the future would also lead to 'relatively high' volume growth in the dry bulk shipment of iron ore, coal and other commodities.

Figures this year show the mainland was set to import 566 million tonnes of iron ore, down from 628 million tonnes last year, but coal imports would soar to 145 million tonnes volumes compared with 127 million tonnes last year.

Overall, dry bulk imports of all commodities into the mainland was expected to climb 12 per cent to almost 1.1 billion tonnes this year, against 957 million tonnes last year. As a result, Chinese imports would account for 29 per cent of the total global dry bulk trade.

It was for these reasons that Pacific Basin's reassessment of the dry bulk market painted a more optimistic picture of future opportunities and growth.

Consequently, 'the market would more easily absorb the large order book', Nyborg said.

Latest figures from shipbroker SSY Consultancy show 655 large dry bulk carriers totalling 125 million deadweight tonnes are to be delivered between now and 2013. This compared with an existing fleet of 1,064 ships of 190.5 million deadweight tonnes.

'The order book is still a concern, but less of a concern than it used to be,' he said.

This is especially true because Pacific Basin specialises in operating smaller dry bulk vessels of between 28,000 and 55,000 deadweight tonnes, where the order book as a percentage of the existing fleet varies between 38 and 48 per cent.

The correlation between charter rates for different sizes of ship has also waned this year.

Previously charter rates for smaller vessels largely rose and fell in line with rates for larger capesize vessels. But this link has been partially disconnected as cargo demand for larger capesize vessels, which are restricted to the main iron ore and coal trades between Australia, Brazil and South Africa to Asia and Europe, has slackened.

By comparison, rates for the smaller handysize vessels operated by Pacific Basin Shipping have remained firm because the ships are more flexible in the type of cargoes carried and so were in higher demand.

'There will still be correlation but it will not be as strong as it used to be. So we have little interest in moving up' to larger ship sizes, Nyborg said.

Giant consumer

Chinese imports would account for 29 per cent of the global dry bulk trade

Dry bulk imports of all commodities into the mainland was expected to be almost 1.1 billion tonnes this year, an increase of: 12%


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