The Hindu Business Line : Bulk carriers ride rising freight wave

The skyrocketing of dry bulk rates, largely fuelled by strong Asian demand and Australian port congestion, is the strong driver for the record new highs in bulker prices.

Santanu Sanyal

An Indian shipowner engaged in dry bulk transportation would like to acquire a Supramax bulk carrier but finds the price prohibitive.

The going rate for a five-year-old Supramax is around $65 million. The same owner had bought a three-year old Supramax two years ago at around $30 million. The resale price of a Panamax newbuilding is currently more than $80 million while the contract value of the same ship is $41 million. A 10-year old Panamax has a premium of $10 million compared to a new building. “The market now is virtually on fire,” say shipping industry sources, pointing out that “in the past one year, second-hand prices shot up by 80 to 90 per cent and the new building by 30 to 40 per cent.”

Interestingly, this is happening despite the record number of new deliveries in the first half of 2007 and a robust order book position.

According to one estimate, nearly 90 per cent of the total deliveries in 2006 have already taken place so far in the current year. The order book position shows a healthy 159 million dwt, representing 42 per cent of the total tonnage on order.

Big jump in prices

The virtual skyrocketing of dry bulk freight rates is the strong driver for the record new highs in the bulker prices, according to sources. The spot rates are up by more than 100 per cent from a year ago.

The Supramax freight rates now top $45,000 per day and Panamax rates about $60,000 per day. Between April and August this year, the dry bulk freight index jumped more than 1,200 points and between August 24 and September 6 by nearly 1,000 points.

Between April and now, the Supramax freight index rose by nearly 1,500 points, Capesize by around 2,500 and Panamax by nearly 3,000. Never before has the bulk shipping sector witnessed such a big jump in freight in so short a period.

Factors fuelling jump

The jump, according to analysts, has been fuelled by strong Asian demand and Australian port congestion. The strong Asian demand again is largely due to the growth of the steel sector pushing up the demand for iron ore and coal. Global steel production in the first half of 2007 increased by 8 per cent, global iron ore trade by 10 per cent and Chinese steel exports by 70 per cent from a year ago. The global coal demand is up six per cent since 2002 and the steam coal trade by 6 per cent.

The forecast is that there will be 6-7 per cent annual growth in coal demand through 2011 as China, India and the US will see rapid growth and the Japanese imports too will rise due to nuclear problems.

Grains could be in as much demand as coal and iron ore and the grain trade too was up by 3 per cent in 2006-7 crop year and grains prices soared to an eleven-year-high due to increasing demand for bio-fuels. Between 2007 and 2011, the grain trade is projected to grow 11 per cent, fuelled largely by China’s need to feed its growing population, expected to cross 1.3 billion by 2010.

Port congestion, particularly in Australia, currently blocks an estimated 6 per cent of the fleet, and experts say the problem will not fully disappear in the foreseeable future. From 2008, the extent of congestion will come down a little but remain fairly high till 2011.

Go for buys

In such a situation, according to experts, ship-owners should go for an acquisition, even if it is a high-cost one. In the present market, the five-year-old $65 million Supramax can be fixed at $50,000 per day, yielding $16 million annually. Even if the market dips after a few years, the ship, with a normal useful life of 20-25 years, will still have many years left to earn enough not only to cover the cost but also to generate surplus.

A 17-year-old Panamax was recently fixed at $53,000 per day. If the net earning is $48,000 per day, the ship will earn $17.2 million in one year. It is possible to get a three-year deployment for a five-year old Panamax at $30,000 per day, yielding a total of about $33 million over three years.

How long will the present up-cycle in dry bulk freight continue? Opinions vary but the general feeling is that the present situation should continue till 2010. The feeling is bolstered by the forecast that the annual global GDP growth till 2011 will remain more or less at the present level of around 4 per cent and steel production growth too at the present level of 8 per cent. In other words, the dry bulk sector is set to run harder. In the shorter term, the freight rates could even outstrip their current record levels, observe experts.

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