Commodity shipping rates, which rose in early February giving some respite to shipping companies, are expected to fall in the near term, industry observers say, following a drop in demand for Indian iron ore from China, which is negotiating its long-term contracts with Australia and Brazil.
"We will see a temporary lull in the dry bulk freight market till China finalises its long-term contracts," said an un-named executive from a leading Indian ship chartering company. The contracts are expected to be finalised in the next ten days.
While China, the top iron ore importer in the world, sources most of its committed iron ore from Australia and Brazil, its short-term spot requirements are met by imports from India. About 80% of India's iron ore exports are to China.
According to a shipping agent, no China-bound iron ore cargo has moved out of India in the past four days. The situation has worsened so much that exporters who have committed ships and have already brought the cargo in the port are faced with a situation where buyers have withdrawn.
Another shipping agent said that until early last week the trend was of exporters taking advantage of softer freight rates and booking as much cargo as they could before the year end. This had even seen the Baltic Dry Index, the index of commodity shipping rates, to rise from its December 2008 lows.
However, the situation has changed in a week where now the end user/buyer is not confirmed and hence no fresh contracts are being signed. "We are hoping this to be a short-term event," the agent said.
The Baltic Dry Index, an index for commodity shipping rates on 26 global routes, posted three consecutive drops early last week on falling rates to haul coal and iron ore for making steel.
This, coupled with lack of credit, as the banks are not honouring their letters of credit, is making things more difficult for shipping companies.
AR Ramakrishnan, director, Essar Shipping, said China's contract negotiations will lead to a temporary weakening of the freight market. However, what is more important to look out for is the outcome of these negotiations, he said.
"Indian iron ore exporters are looking forward for an increment in the iron ore rates as compared to last year, rate of as much as $90 per tonne," he said.
An executive from a leading shipping company, which has almost 50% of its vessels on the dry bulk market, said that the freight rates for Panamax size vessels will still be better. "The short-term softening of rates will be mainly for the Capesizes as we see demand mainly coming from Panamax." Besides the Indian imports are still strong, he said.
With the commodity demand collapse leading to lack of enough cargo to fill up a Capesize, many of these vessels have been idled. This, however, worked well for the Panamax vessel rates, which rose due to demand for smaller vessel types.
China's renewed long-term contracts will get some strength back in the commodity market.
"This will be able to sail us through March with reasonable demand and better freight rates," said the ship chartering executive.
India has also seen other critical exports come down. In the past few months, exports of agri-commodity such as soyabean meal have come down along with the textile market, which has almost collapsed.
It would at least take another two quarters to judge which direction the market is moving, Ramakrishnan said.
Delivery of the number of new-built Capesizes in 2009 is also expected to put pressure on the already weak market. "If this is coupled by a drop in demand of iron ore from China, it will take the Baltic Dry Index further down," Ramakrishnan said.
Source: Daily News & Analysis, Mumbai
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