News Room - Business/Economics

Posted on 10 Feb 2009

Shipping rate rebound described as short-lived

Shipping rates have rebounded sharply this year thanks to China, but both analysts and the sector's representatives say the quick recovery will not last long and the outlook remains weak. The Baltic Dry Index (BDI), the major measure of shipping costs for commodities, almost doubled from 774 points at the end of last year to 1,498 on Thursday. The current level, however, is significantly lower than last year's average of 6,365 when the index reached an all-time high of 11,930 in May and plunged to a two-decade low of 663 in December.

 

Analysts said the sharp rebound was mainly driven by higher dry bulk demand from China, which endorsed a US$586 billion economic stimulus plan. However, supply and demand imbalances for ships as well as the global economic slowdown would continue to pressure short-term charter prospects.

 

''Our only hope is that the recently announced stimulus package to be spent on infrastructure and other developments during 2009 will lessen the impact from major Chinese steel mills cutting production,'' said Khalid Hashim, managing director of SET-listed Precious Shipping Plc (PSL).

 

Chinese mill operators have said they would cut production capacity by 20-30% this year to counter falling demand and prices for steel. In 2008, the mainland imported 425 million tonnes of iron ore or about half the volume traded globally.

 

''I think we are still quite far from a normal situation and I expect the BDI will bounce between 500 and 2,000 points over the next 18 to 24 months,'' noted Mr Hashim.

 

According to Syrus Securities, the global fleet is going to expand by 14% in 2009 amid slow demand for world cargoes. Last year, the world fleet in the handy-sized sector increased from 3,164 ships to 3,219 at the end of the year.

 

On the other hand, PSL said the number of ships sent to scrap shot up recently, totalling two million dead-weight tonnes (DWT) in November and 2.4 million DWT in December.

 

''January's number, as we understand it, is even higher,'' Mr Hashim said.

 

''If freight markets continue at their extremely low but volatile levels, we expect the world fleet in our sector to shrink 3-5% per annum the next few years,'' he said. ''This will help redress the imbalance between supply and demand and consequently allow spot market rates to rise in a couple of years.''

 

Mr Hashim said PSL is working with lenders to secure sufficient credit lines to replace 25 aging ships with younger, economical second-hand vessels.

 

The dry bulk carrier has a fleet of 44.