Shipping cos run into Chinese iceberg

Despite the signs of a recovery in global trade, the shipping market is crashing as China has reduced raw-material imports and a record number of new vessels are setting sail.

The Baltic Dry Index, a gauge of the cost of carrying dry bulk commodities such as iron ore, coal and grain, has dropped 44% from the year’s high of 4291 on June 3 to 2421 on August 28.

The drop in China’s dry bulk carrier tonnage — from 392.2 million dead weight tonnage (DWT) in May to 227.62 million DWT in August, according to Bloomberg estimates — has been the main contributor to the drop in shipping rates. China’s State Council last week called for curbs on steel and cement production.

GE Shipping spokesperson Anjali Kumar said rates for leasing capesize ships have fallen below $40,000 per day from $50,000 a fortnight back. “China has been a big support for us. Due to their reduction in raw material imports, prices have started to fall for over the last two weeks.”

“We had seen a revival in freight rates in the last 3-4 months, especially in the May-June period, when the imports from China were substantial. But now, China is gradually pulling back and this will impact freight rates,” Kumar added.

The rate for leasing capesize ships could drop another 50% to as low as $18,000 before the end of the year, according to a Bloomberg survey. Moreover, a record 146 capesizes are likely to be added this year, equal to 28% of the existing fleet, according to Norway-based Fearnley Consultants A/S.

An official from Shipping Corporation of India, the country’s largest shipping firm, expects a revival in imports to China only in 2010. “China’s imports could see a further decline of 8% in the next six months owing to the newly introduced curbs. Positive trend might set in only by 2010, when we expect imports to grow by 5%,” the official said.

Kumar of GE Shipping noted that though there has been a revival in freight rates, a similar uptick was not witnessed in the asset market. “There is oversupply as large part of the order book is pending and finance availability is still weak,” Kumar added.

China constitutes 55% of world iron ore import and is the highest consumer of commodities. According to Kapil Yadav, analyst with Dolat Capital, China has an iron ore inventory of 74 million tonne, which would mean lower imports.

“For the last few days, China has reduced its commodity imports. Besides, there is additional capacity building up. These factors will further pressurise freight rates,” Yadav said.