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Shipping: Waning party? - Views on News from Equitymaster
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  • Nov 20, 2000

    Shipping: Waning party?

    This year has been a memorable one for shipping companies. The Baltic Index recovered from 850 points in November 1999 to touch as high as 1,900 points during September 2000. Average earnings per day for tankers touched US$ 50,000 in September 2000 compared to US$ 8,000 in the corresponding period of the previous year. But, things have started to settle down and freight rates have fallen in the last two months.

    The Baltic freight index (BFI) has fallen from 1,620 points in October 2000 to 1,515 points in November 2000. Similar trends are witnessed in BFI futures also. For instance, BFI futures for April 2001 is trading at 1,335 compared to 1,635 during October 2000. But on the contrary, wet cargo rates (comprising product and crude carriers) have gained significantly. For instance, tanker index has gone up from 3,187 points in October 2000 to 3,655 points currently, a growth of 15%.

    Settling down…
    Indices BFI* BFI-Dec** BFI-Jan BFI-April BFI-July Gas Index Product
    Oct-00 1,620 1,650 1,650 1,650 1,635 1,449 1,668 3,187
    Nov-00 1,515 1,525 1,515 1,515 1,335 1,445 1,965 3,655
    change(%) -6.5% -7.6% -8.2% -8.2% -18.3% -0.3% 17.8% 14.7%

    Wet cargo rates have been on the uptrend primarily due to low oil reserves in US (US is one of the largest consumers of crude in the world) and inadequate tonnage supply to cater growing demand. Rising industrial activity and improving world trade, on the other hand, backed dry cargo rates in the last six months.

    We believe that tanker rates would continue to remain firm atleast for next two months. This is based on the fact that US is still running on low winter heating oil reserves, which will lead to higher demand for tonnage during December. Further, shipping companies have been forced to scarp their existing old tonnage due to strict environmental regulations.

    However, higher crude prices have slowed down industrial activity in many developing economies. These include South East Asian countries and Asia, which accounts for more than 60% of sea-borne trade. Besides, world order book for bulk carriers as well as tankers (especially Aframax tankers) has shown a sharp rise, which may result in excessive tonnage supply in the markets. Added to these, the slowing down US economy may also reduce sea-borne trade in Pacific region in coming months, which may subdue demand for tonnage and in turn freight rates in coming months.



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