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Shipping: Will freight rates sustain?

May 17, 2001

One of the key beneficiaries of a 3.5% growth in world trade last year was the shipping industry. Though growth waned in the last quarter of FY01, both exports and imports registered good growth during this period. But given the fact that the US economy is slowing down, are we going to witness a slump in freight rates in the coming year? The recent statistics indicate the fact that the world economy is indeed slowing down. Against the GDP growth of 5.2% in FY00, the US economy has registered a 3.2% growth in FY01. In the first half of the current year the growth has slowed down even further. This holds true across the board. All the developed economies have been reducing interest rates to revive confidence in the economy and spur growth.

GDP growth – Where is it heading?
(% growth) FY99 FY00 FY01
USA 4.2% 5.2% 3.2%
Japan 1.0% 1.4% 1.8%
Germany 1.4% 2.9% 3.3%
UK 2.1% 3.1% 2.8%
China 7.2% 7.5% 7.3%
Malaysia 5.6% 6.0% 6.0%

The revival of these economies is critical to the shipping companies because if industrial growth were higher, raw material requirements would increase. This will boost world trade growth. The International Monetary Fund (IMF), recently, lowered world trade growth to around 2%-2.5% as against 3% expected earlier. However, there are a few structural and policy changes in the shipping industry, which could actually help maintain freight rates at the current levels despite the fall in world trade.

GDP growth wanes…
(% growth) 4QFY00 4QFY01
USA 5.2% 3.5%
Japan 0.0% NA
Germany 2.4% 2.6%
UK 2.8% NA

On the tanker front, the international shipping agencies unilaterally have decided to fade out single hull tankers by FY05, the tanker segment is set to witness large scale scrapping in the coming years. The International Energy Agency (IEA) expects the oil demand to increase by 1.8% in the current year, which should increase demand for crude tankers. Moreover, the West-African oil production is expected to rise by 35% to 251 m tonnes per annum (MTPA) by FY05 from 186 MTPA currently. This would translate into higher demand for tankers. Though more than 4% of existing tanker fleet is expected to be delivered by the end of the year, tanker rates are not expected to register any sharp downward movement.

Another structural change is the shift in trade patterns. Though production of domestic petroleum products has gone up, there are significant changes in the trade patterns for product tankers. Since some of the American oil refineries are not yet Euro-II complaint, they import products from India and other developing nations. As a result, the tonne-mile demand i.e. transit duration for these products has actually gone up, which means that product carrier transportation cycle is higher. However, the ships are not available for such long periods and therefore tonnage supply shrinks. As a result, shipping companies are of the view that freight rates of such carriers is expected to remain at the current levels in the current year also.

However, prospects for the dry-bulk segment is not promising as majority of shipping companies are aggressively increasing capacity. With almost 12% of the existing fleet to be newly commissioned and tonnage addition projections in the range of 30 m dwt in FY02, freight rates could witness a sharp decline. But this could change if industrial production recovers towards the later half of the year. However, the recovery is still under a cloud of uncertainty.

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