Dry bulk rates: What to expect? - Views on News from Equitymaster

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Dry bulk rates: What to expect?

Sep 4, 2007

Freight rates for Capesize, the largest dry bulk carrier (used to transport coal, iron ore and other dry commodities) continue to scale new highs on firm demand to move cargo across the Pacific. The Baltic Capesize Index, a daily benchmark freight index for Capesize vessels across different routes, has almost doubled in the past one year. Similarly, the Baltic Panamax index and Baltic Supramax Index have advanced by 120% and 91% respectively. What were the freight drivers?
Similar to 2005, the dry-bulk market in 2006 and 2007 has pre-dominantly been driven by robust growth in commodity imports form Asia, particularly China (Chinese demand for iron ore grew by an impressive 19% YoY in 2006). This led to congestion in the loading ports, effectively increasing the utilisation rates. In February-March 2007, Australia's New Castle port, arguably the world's largest coal handling port had about 70 ships waiting for loading. With the congestion significantly delaying the turnaround time of ships and vessels getting held up at the ports, the freight rates in the dry bulk sector have shot up significantly. Reduction in foodgrain in Australia, which meant longer tonne miles from South America and Asia, supported the Handymax and Handysize trades.

How has it benefited Indian companies?
Indian shipping companies operate a fleet of 70 dry bulk carriers, the biggest players being Shipping Corporation of India, GE Shipping and Mercator Lines. GE Shipping, which operates 12 dry bulk carriers (1 Capesize, 2 Panamax, 6 Handymax and 3 Handysize), recorded an average TCY (time charter yield) of US$ 28,446 per day for its dry bulk carriers in 1QFY08, compared to an average TCY of US$ 15,487 per day in the previous year, an 84% YoY increase!

What to expect?
The demand for dry bulk commodities is expected to grow by 5.5% to 6% on the back of a 4% to 4.5% growth in the global economy (Source: Teekay Shipping). The strength in the dry bulk segment is likely to continue on the back of robust demand for iron ore and coal from Asia. Traditional coal exporters like China, Vietnam and Indonesia are gradually turning into net importers, which will have a positive impact on the tonnne-mile demand too. The US harvest for corn and soyabean, which starts in October, is also expected to keep the dry rates firm. On the supply side, a total of 27 mdwt (million dead weight tones) of capacity is due for delivery in 2007 resulting in a fleet growth of about 7% YoY, which due to strong demand is expected to be absorbed. Hence, overall earnings are expected to remain strong in the medium term.

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