Shipping Rates Poised to Plunge 31% on Glut Off Australia: Freight Markets

By Alaric Nightingale – // Jan 12, 2011 10:02 AM ET from Bloomberg

A 20-mile-long line of commodity carriers off Queensland, suffering its worst floods in a half- century, means less income for owners already reeling from the biggest slump in freight rates in more than two years.

There are 132 vessels floating off the Australian state, which accounts for about 50 percent of the global seaborne supply of coal used in steelmaking, data collected by AISLive and compiled by Bloomberg show. Ships will wait at least 22 days to load, the longest delays since April, according to Truro, England-based Global Ports, which tracks the industry.

While congestion would normally boost freight rates by tying up vessels, mine closures could spur shippers to order carriers to leave and compete for new orders, said Amrita Sen, an analyst at Barclays Capital in London. Should the flooding persist, the Baltic Dry Index of shipping costs may drop as much as 31 percent to 1,000 points in the coming months, she said. It slid 1.8 percent to 1,453 points today.

“Any shipper that has a cargo is going to be inundated with offers and will try to exploit that situation,” said Nigel Prentis, director of research and consultancy at HSBC Shipping Services Ltd. in London. Carriers would most likely seek new cargoes in South America or South Africa, he said.

Rates for capesizes, the biggest components in the Baltic Dry Index, plunged 36 percent to $12,897 a day last week, the most since October 2008, according to data from the Baltic Exchange. Tariffs fell another 20 percent to $10,285 this week. The bourse in London’s financial district publishes daily assessments for more than 50 maritime routes.

Football Field

The vessels, each three times the length of a football field, would be competing for business in a market where the supply of new carriers will expand the fleet by 18 percent this year, compared with 7 percent growth in demand for transport, according to the median in a Bloomberg survey of eight fund managers and analysts.

The rain in Queensland means fewer cargoes. BHP Billiton Ltd., the world’s largest mining company, and London-based Rio Tinto Group, the second-biggest iron-ore exporter, already declared force majeure in Queensland, a legal clause allowing them to stop contracted sales.

The flooding, covering an area the size of France and Germany, cut coal output by about 4.5 million metric tons since the start of December, according to Macquarie Group Ltd. About 3 million tons of that is coking coal, used by steelmakers, and the remainder thermal coal, burned to generate power, said Colin Hamilton, a London-based analyst at Macquarie.

Flooded Pits

“You shouldn’t expect too much normality until well into February,” said Michael Roche, chief executive officer of the Queensland Resources Council, a trade group representing most of the region’s mining companies. “You’ve got to expect that clearing water from flooded pits will go into next month.”

Steelmakers and power companies are already paying more. Australian coking coal prices jumped 6.9 percent to $265 a ton last week, according to Petersfield, England-based researcher IHS McCloskey. Thermal coal prices from Newcastle, on Australia’s southeast coast, rose 4.5 percent to $131.80 a ton, gaining for a sixth consecutive week, McCloskey estimates.

While the Queensland flooding may increase the supply of empty vessels now, consumers will eventually seek more cargoes to compensate for the lost supply, said Jonathan Chappell, a shipping analyst at JPMorgan Chase & Co. in New York.

“At some point, there’s going to have to be a return to inventory restocking,” Chappell said. “We don’t know if that happens next month or next quarter or second half, but I think there’s going to be a snap-back trade.”

Satellite Tracking

Some vessels off northeastern Australia are still loading, with three bulk carriers moored at the ports of Hay Point and Dalrymple and two at Gladstone, the satellite-tracking data from AISLive show. Global Ports estimates the congestion outside the three ports almost doubled since November.

“The cargoes that are going out now are what’s in the stockpiles or what was already on the railways,” said Sverre Bjorn Svenning, a senior analyst at Fearnley Consultants A/S, a unit of Oslo-based investment bank and shipbroker Astrup Fearnley. “Once those are depleted, we will have to wait until mines are dry again.”

The cost of the ships waiting off Queensland is in some cases being met by the companies who hired them, a charge known as demurrage. The charterers can ask owners to release the vessels and seek alternative cargoes, covering any shortfall in income, under a maritime law called the principle of mitigation.

Diverting Vessels

“We are starting to hear about ships in the queue having discussions with charterers who are saying ‘we are releasing you: fix something else and mitigate’,” said Guy Campbell, managing director of dry cargo at Clarkson Plc, the world’s biggest shipbroker. Owners are also diverting vessels away from Queensland, he said.

Some vessels subject to force majeure on coal cargoes may be earning nothing, said Steve Rodley, London-based joint managing director at M2M Management Ltd., a shipping hedge fund group that operates about 65 carriers and trades derivatives tied to the future cost of freight.

That’s an additional setback for vessel owners already missing out on the boom in commodities. Shipments of iron ore will jump 7.5 percent to a record 1.04 billion tons this year and coal cargoes 6.7 percent to an all-time high of 978 million tons, London-based Clarkson’s research unit forecasts.

The owners aren’t reaping the benefit because they ordered too many ships in 2007 and 2008, when daily income for a capesize averaged about $111,000. The existing fleet of about 1,100 capesizes will expand by about 200 this year, according to the Bloomberg survey of fund managers and analysts.

“It’s been a very slow-motion tidal wave,” Neville Smith, a consultant at Freight Investor Services Ltd., a broker of shipping derivatives, told Maryam Nemazee on Bloomberg Television’s “Countdown.” “We’ve seen this big wave of ships coming towards us for a couple of years now and it’s finally breaking and we’re really going to feel the impact.”

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3 Responses to Shipping Rates Poised to Plunge 31% on Glut Off Australia: Freight Markets

  1. Monex says:

    The orders are dispelling concern that the global credit crisis will force owners to slash ship purchases and may lead to a 35-percent profit gain for the 12 months ending December 31 to 30 833 won US 31.27 a share according to a Bloomberg News survey of 27 analysts. Shipping lines are paying about 47 percent more for vessels than a year earlier as economic growth in China has increased demand.

  2. GREAT BLOG! You are one of the best writers I’ve seen in a long long time. I hope you keep writing because people like you inspire me!

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