hyundai heavy industries

New Ship Orders, China Demand Threaten Dry Cargo Recovery

Reuters
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July 22, 2013

Hyundai Heavy Industries shipyard in Ulsan, about 410 km (255 miles) southeast of Seoul. REUTERS/Lee Jae-Won

reuters logoBy Keith Wallis

SINGAPORE, July 22 (Reuters) – A flood of orders for new vessels and slower Chinese growth in demand for commodities could derail a recovery in dry bulk shipping, industry leaders warn, keeping freight rates low and threatening a further shake-out among shipping firms.

As dry cargo shipping rates recover from 14-year lows touched in March, shipowners have splurged on a raft of new orders, taking advantage of cheaper prices, more fuel efficient designs and money from private equity funds looking for a new home.

The rise in capacity comes at a time of slowing economic growth in China, which has raised fears that its vast appetite for imported raw materials such as iron ore and coal may start to wane.

“The ordering wave is indeed worrying,” said Henning Oldendorff, chairman of Oldendorff Carriers, one of the world’s largest dry cargo operators with about 400 owned and chartered ships.

“If it coincides with a China slowdown and possible recession in the global steel industry, then freight rates could potentially stay low for many years to come,” Oldendorff told Reuters.

He estimated some 35 million dwt (deadweight tonnes) of new capacity was ordered during the first half of 2013, well above the 22 million dwt ordered during the whole 2012.

More than 50 per cent of recently ordered tonnage was contracted at just a handful of Chinese shipyards, figures from Norwegian shipbroker Fearnleys showed.

NASCENT RECOVERY

The moves come as average spot charter rates for large Capesize ships, capable of hauling more than 150,000 tonnes of iron ore or coal, have risen from the March lows to better than break-even at around $13,000 per day, according to Clarkson Research Services.

The operating cost of a Capesize vessel is around $7,000 a day, with the shipping company paying finance costs on top of that.

The current rate is double the average for the year and despite jitters over China’s growth outlook has been driven by China’s strong steel sector, where steel output climbed 8 percent in the five months to May, according to official data.

But consultants Drewry Maritime Services believes the dry bulk shipping recovery may be shortlived and could replicate the rollercoaster ride in freight rates after 2009.

Capesize charter rates rocketed to more than $80,000 per day in mid-2009, fuelled by stronger-than forecast demand from China, compared with $10,000 per day at the start of the year.

But an influx of new tonnage, which outpaced the actual growth in cargo volumes, saw average rates plummet over the following three years to fall below operating costs.

Rates hit just $1,700 per day in late March this year, the lowest in 14 years, according to Clarkson data, sparking a series of shipping company failures including STX Pan Ocean, South Korea’s fourth largest ship operator, which is undergoing a court-approved restructuring.

For the dry bulk sector now, “the risks outweigh the upside potential”, said Drewry group managing director Arjun Batra.

The over-ordering of bulk carriers and a commodities growth slowdown could delay a recovery in rates from next year to 2016, he said.

Oldendorff said a replay of the last four years could have more severe consequences because the current recovery would be shortlived, leaving less time for shipowners to rebuild cash reserves.

“There will be more failures in the next few years in the bulker field,” he warned.

But fears of a downturn in Chinese commodities growth may have been overdone, said Jeffrey Landsberg, president of Commodore Research & Consultancy, a New York-based commodities advisory group.

“Chinese demand for imported dry bulk commodities will remain strong over the long term,” Landsberg told Reuters.

The biggest threat – and the key factor to watch – will be vessel oversupply, Landsberg said, especially if new vessel ordering remains as strong as it was during the first six months of this year. (Reporting By Keith Wallis; Editing by Richard Pullin)

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