Fall in Baltic Freight not seen hitting shippers

The fall in the baltic dry index (BDI) by more than 56% in the last one month is unlikely to have an impact on shipping companies, while the impact on global players would be significant, according industry experts.

According to a Crisil report, the drastic fall in dry bulk spot freight rates will have a limited impact on the profitability of shipping companies as they have low exposure to dry bulk fleet. Moreover, most of the dry bulk fleet is deployed under long-term contracts on time charter rates, which is another factor favouring companies.

What is also insulating the companies is their low dependence on dry bulk segment. According to Siddharth Khemka, analyst, Centrum Broking, the focus of our companies is more on the tanker segment. In the tanker segment, which accounts for almost 75% of the Indian fleet, freight rates have been relatively stable. The exposure of shipping companies to dry bulk segment is limited to only 16% vis-a-vis 47% for global carriers, said Crisil in its note. According to Bharat Chhoda and Jehangir Maste, analysts with ICICI Direct, the dirty tanker index declined 11% to touch 855 level while the clean tanker index gained 15% to touch 785 level in June.

Companies such as Mercator Lines, GE Shipping and Essar Shipping are fairly insulated from the fall in dry bulk spot rates, as their ships are largely on long-term contracts on a time-charter basis. Mercator Lines has 80% of its dry bulk fleet on long-term contracts of more than a year. Anjali Kumar, spokesperson, GE Shipping, said that their dependence on the dry bulk market is only up to 15% while the rest is dedicated to the tanker segment.

“Of the six vessels that we have two are on charter and the rest are on spot. It is only to that extent will we feel the impact,” she added without disclosing the time period of the vessel charter.
V Ashok, director, Essar shipping, ports and logistics said, “We follow long-term contract model, so the movement in the freight market does not affect us. We have locked our cash and assets and most of our contracts range between one to sever years, with no contract due for renewal in the next one year.” Essar has almost all its vessels on long-term charter.

However, Shipping Corporation of India, which has high exposure to the spot market, is likely to face the heat of the drop in the BDI.
S Hajara, chief managing director, SCI said that 33% of its tonnage is on the spot market and are facing an adverse impact.

“While we will be impacted on the spot market segment, 33% of our tonnage is still on long term charter and balance 33% is on contract affreightment,” he added.

Iron ore is the biggest source of demand for dry bulk shipping followed by coal. Trade levels of dry bulk commodities are highly dependent on Chinese imports of iron ore and coal, as China accounts for over 50% of the total trade in iron ore and coal. In the last 2 months, a decline in steel prices has compelled China to use its own captive iron ore rather than importing high cost iron ore. This has impacted demand for dry bulk carriers and has put pressure on freight rates. The impending overcapacity, because of the record number of new ships expected to be delivered, will also exert pressure on freight rates, said Crisil in its note.