Dry bulk market growth to weaken

PUBLISHED : Friday, 15 April, 2011, 12:00am
UPDATED : Friday, 15 April, 2011, 12:00am


The mainland's tighter controls on bank lending will have a negative impact on the dry bulk shipping markets as spending on real estate and infrastructure slows, according to a leading Hong Kong shipowner.

Ship owners are already facing a slump in dry freight rates as a flood of new tonnage competes with slower growth in cargo demand. Average freight rates for an 180,000 deadweight tonne dry cargo capesize ship carrying iron ore from Brazil to China have fallen to an average US$21,000 per day this year compared with US$48,000 per day last year.

Kenneth Koo Chee-kong, chairman and chief executive of Hong Kong dry bulk and tanker operator Tai Chong Cheang Steamship, said the mainland's tightening monetary policies would lead to a slow down in infrastructure spending.

Pointing to the areas that would be affected, he thought the massive expansion of China's high-speed rail network over the past few years would now make way for a period of consolidation with relatively less spending. The huge investments in high value residential and commercial building would also give way to more spending on social housing.

Koo added there was also a trend away from continued urbanisation which would affect levels of investment.

Explaining the enormous overcapacity in the shipping sector, John Brunton, a senior executive with Cargill International, said dry cargo ships totalling 106 million deadweight tonnes were expected to be delivered this year, equivalent to a 17 per cent in fleet growth. But comparison volumes of iron ore, coal, grain and other dry cargoes were set to grow by just 7.5 per cent in 2011.

'Demand growth will fall again next year. Freight rates will remain under pressure,' Brunton said.

He added that after last year's 'solid recovery' in steel production, there was likely to be 'little room for further recovery' next year. This suggested that any growth in iron ore or coking coal shipment volumes would depend upon the mainland substituting domestic output with imports.

But offering some hope, Koo said the recent flooding in Australia had disrupted coal supplies to Asia which meant ships had to travel longer distances from the United States east coast. This had increased the length of voyages boosting voyage earnings for owners.

Crop failures caused by the climatic shifts had also led to changes in traditional grain trade routes and longer voyages.

Commenting on the likely impact on the bulk cargo dry shipping markets from the Japanese earthquake and tsunami, Koo said: 'The jury is still out.' But he said the shipping markets might benefit indirectly if the production of shipboard components, including engines, radar and mechanical or electrical equipment, was disrupted.

Koo said without the necessary equipment, ships under construction at shipyards in Japan and China could be delayed so that the forecast increase in the number of new vessels entering the global fleet would not be as great as predicted. 'This may benefit us a bit,' he said.

Klaus Nyborg, chief executive of Pacific Basin Shipping, said: 'We need a game changer to lower the cost of operation in dry bulk.'

With fuel prices now more than US$600 per tonne and poorly built vessels consuming six tonnes more fuel than better quality ships, Nyborg thought pressure would be on owners to scrap their less fuel- efficient ships.

Slumping sales

Volumes of iron ore, coal, grain and other dry cargoes are only set to grow by this much in 2011: 7.5%