With demand for iron ore in China sliding and more vessel capacity coming online through the end of the year, dry bulk freight rates have sunk to four-month lows on the Baltic Dry Index this week and look to continue down, according to several experts.
The Baltic Dry Index, which measures dry bulk ocean freight rates in a collection of lanes, has dropped steadily from a recent peak in June above 4,000 to its close yesterday of 2,175. Reuters reports that average Capesize earnings, for example, have fallen to $23,762 this week, down 74% since their June peak this year.
"Panamaxes are beginning to feel the pressure as well on increased competition from Capes as well as lighter volumes than last week," Dahlman Rose & Company said in a note.
One of the biggest drivers of drybulk freight demand is iron ore shipping to China for steelmaking. With stimulus-fed production slipping, China's iron-ore imports declined 14% in August from July and coal imports slid 15%, a second consecutive monthly decline, according to a Bloomberg analysis of customs data. And the outlook for iron ore demand from most analysts points to a short-term slump.
"Lower Chinese imports will slow iron-ore trade in late 2009," said Piet-Hein Ingen Housz, managing director of metals commodities at Fortis, in a Bloomberg report. "Iron-ore trade growth will be slow in the first half of 2010, with activity increasing" later that year, he said.
But at the same time, there is a continuing overcapacity issue in drybulk freight markets. The rally in drybulk rates earlier this year may have been enough to convince some shipbuilders to avoid retiring older ships or scrapping plans for new ones, creating overcapacity on the water, especially in the all-important lanes between Asia and North and South America. And port congestion that once plagued the market is much less of an issue with the lower volumes.
Morgan Stanley analyst Ole Slorer says, "While the impressive recovery in dry bulk markedly lifted rates and values in 2009, it also resulted in a near-halt in scrapping and less incentive to cancel newbuildings from a total orderbook that currently stands at 65% of the fleet."
Another Fortis analyst tells Bloomberg there are still more than 100 Capesizes are due for delivery by year-end and one such ship will be delivered every day next year, as shipowners placed orders in the last few years as rates rose.
Source: Purchasing.com
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