Shipping industry set to emerge from five-year downturn

Dry cargo ships likely to see strongest recovery after a slump caused by years of overcapacity

PUBLISHED : Saturday, 08 February, 2014, 5:12am
UPDATED : Saturday, 08 February, 2014, 5:12am

The shipping industry is poised to emerge from its longest downturn in three decades, buoyed by an end to years of overcapacity that have depressed freight rates since the end of a shipping boom in 2008.

Dry cargo ships are likely to see the strongest recovery, say owners and analysts, as growth in bulk commodity cargoes such as iron ore and coal outpaces supply of new tonnage for the first time in seven years.

But tanker rates will also rise as fleet growth is slowing, while strategic oil reserve projects in China and India should boost already solid Asian demand.

The recovery will bring some respite to shipping firms that have endured years of losses as freight rates failed to cover costs. Global shipper TMT filed for bankruptcy protection in June, shortly after South Korea's STX Pan Ocean filed for court receivership, while Indonesian shipper Berlian Laju Tanker narrowly avoided bankruptcy.

"While there will be potholes, here and there, as always, the worst is over based on the market fundamentals," said Ong Choo Kiat, president of U-Ming Marine Transport, one of Taiwan's largest listed shipping companies.

Prices of new and secondhand ships started to rise last year on expectations of a recovery, though experts warn some shippers will still only break even this year and any recovery may fade after 2016 when overcapacity could again dampen freight rates.

Key drivers of the pick-up will be China's continued urbanisation and falling iron ore prices, experts say, which should support import growth even though the commodities super-cycle that drove a 2003-2008 boom in shipping markets is over.

The global dry bulk seaborne trade is forecast to grow 5.8 per cent this year to 4.37 billion tonnes, according to Barclays Research, outpacing a 5.3 per cent rise in the global merchant fleet to 753 million deadweight tonnes (dwt).

It promised to be the first time growth in demand for shipping of iron ore, coal, grain and minor bulks such as fertiliser, logs and soya beans exceeded dry bulk fleet growth since 2007, Barclays said, as the industry finally shook off a surge in new ship orders in the wake of the boom.

However, ship owners who paid high prices for new tonnage at the peak of the market would still only break even this year, said Jayendu Krishna, senior manager at shipping consultancy Drewry Maritime Research.

Buyers who paid up to US$100 million for a 180,000 dwt Capesize ore carrier at the top of the market would need a daily charter rate of US$44,000 to US$45,000 to break even, still well above current rates.

The price of a similar Capesize ship has since eased to about US$56 million, according to Clarkson Research.

The Baltic dry index, compiled from a basket of dry bulk freight rates and which traditionally falls in the run up to the Lunar New Year holiday, has halved in the past month and stood at 1,086 points on Wednesday.