Shipping Costs Test New Low as China Coal Imports Slide

coal shipping dry bulk
Cranes loading coal, file image (c) imantsu/shutterstock.com

By Naomi Christie and Kiyotaka Matsuda

(Bloomberg) — Tumbling demand for coal in China and weakening growth in the nation’s iron ore purchases have sent shipping costs to almost the lowest on record.

The Baltic Dry Index, a measure of global freight rates for commodities, fell on Thursday to within 1.8 percent of the all- time low in July and August of 1986. China’s seaborne coal imports slid 10 percent in 2014, reversing growth of 16 percent the year before, according to Clarkson Plc, the world’s largest shipbroker. The Chinese economy, which buys almost half the world’s coal and ore cargoes, will grow at the slowest pace in 25 years, economists’ forecasts compiled by Bloomberg show.

Falling freight rates that have curbed earnings at operators from Nippon Yusen Kaisha to Star Bulk Carriers Corp. are damping new ship orders, as vessels ordered in 2013 on bullish forecasts hit the market. Contracts to hedge second- quarter rates, an indication of where traders are betting prices will go, are trading at levels 34 percent lower than six months ago, according to data from the Baltic Exchange in London.

“It doesn’t seem like there’s any relief in the near- term,” Omar Nokta, an analyst at Clarkson Capital Markets LLC in New York, a unit of the world’s largest shipbroker, said by phone Thursday. There’s “very little spot activity, especially for the biggest ships.”

Surplus Ships

Owners increased orders for dry bulk carriers threefold in 2013 on the expectation of coal imports that didn’t materialize, according to Jeffrey Landsberg, managing director of Commodore Research, a New York-based adviser to ship owners. Those vessels are now competing for cargoes and they are swamping demand, he estimates. A total of 947 were ordered in 2013, compared with just 267 in 2012.

China’s coal imports fell by 39 million tons last year, Chinese customs data show, enough to fill 263 Capesize vessels, the largest dry bulk ships to carry the commodity. The country now allows the largest ore-carriers, known as Valemaxes, to call at its ports, Vale SA, the world’s biggest iron ore producer, said Jan. 29.

The shift from coal is in part because China is finding other ways of generating power. China brought online 22 gigawatts of hydroelectric capacity in 2014, enough to replace about 44 million tons of coal, data compiled by Bloomberg show. One gigawatt translates into about 2 million tons of coal a year, according to a formula from Bloomberg Intelligence.

Coal Slump

The slump in coal cargoes to China hasn’t helped dry bulk ship operators including Nippon Yusen Kaisha, the largest publicly listed operator of the vessels.

Rates for about 20 percent of Nippon Yusen’s dry-bulk fleet are being “severely affected” by the slump, Izuru Ehara, a manager of the Capesize fleet at Nippon Yusen, said by e-mail on Feb. 3. NYK’s net income increased 0.3 percent to 28.5 billion yen ($242 million) in the nine-month period ending Dec. 31 as revenue rose 8 percent.

The company has long-term bookings for 80 percent of its fleet, meaning they’re unaffected by the slump, Ehara said. Demand for iron ore cargoes may strengthen from about 2017 because that will mark an increase in shipments of the raw material from Brazil and Australia, he said.

Mitsui O.S.K. Lines Ltd., Japan’s second-biggest publicly traded ship owner, isn’t anticipating an immediate rebound in dry-bulk freight costs, spokesman Takafumi Shiina said by e-mail

Feb. 3. The company has other vessel types, including tankers, and rates for those remains high. Charters for moving Middle East oil to Asia are the highest for the time of year since 2010, according to Baltic Exchange data.

Not Ordering

The exchange’s dry index lost some of its value as an economic indicator in 2012 because the oversupply of ships meant charter rates no longer rose and fell in lock-step with the cargoes that are integral to industrial production, the Baltic and International Maritime Council, a trade group representing most of the world’s ship owners, said at the time.

Declining dry bulk rates have stemmed new orders, according to Athens-based Star Bulk. The company’s fleet of 62 vessels on the water is mainly contracted on the short-term spot market.

“We’re not ordering new ships at this point, and I think basically neither is pretty much anyone else, and I think that’s a very good thing for the market in the long term,” Hamish Norton, Star’s president, said by phone from New York Feb. 3.

Dry bulk fleet utilization has fallen to about 85 percent from around 95 percent in the first half of 2008, and is now “comparable to how it looked like, say, after the financial crisis,” Nicolai Hansteen chief economist at Pareto Shipping AS, an Oslo-based research company, said by phone Feb. 3.

Low Rates

Clarkson expects Chinese iron ore imports to grow 7.5 percent this year, the slowest since 2010. The steel-making raw material is the biggest commodity carried by dry bulk ships, and China is the biggest buyer.

Freight swaps for shipping a ton of iron ore by Capesize for the second quarter of 2015 are trading at $13.14 a ton, according to data from the Baltic Exchange. Actual rates haven’t averaged that low since the end of 2008. The Baltic Dry Index has fallen for 11 consecutive days, and is 10 points from its record low of 554 points.

“If you’ve seen commodity prices falling and looking set to continue to fall there’s a natural reluctance for people to slam loads of stockpiles on the ground which could simply be worth less tomorrow,” Steve Rodley, co-founder of Global Maritime Investments, which operates a fleet of 48 dry bulk ships, said by phone on Feb. 2. “The single biggest issue is the oversupply of ships.”

Copyright 2015 Bloomberg.