August vault in shipping rates seen more a blip than trend

Shipping rates surged in August on a revival in global economic activity. But experts do not see the buoyancy holding for long.

The Baltic Dry Index (BDI), the barometer of shipping freight rates, had slumped in July to around 1700. The fall was mainly due to a decline in Chinese steel production, which curbed demand for iron ore.

However, the index has since made a steady recovery, ending August at 2713 and rising further to 2741 on the opening day of September.

“The main reason for this bounce was an improvement in economic activities. The demand for iron ore is picking up. Steel production activity is likely to be good for the second half of the financial year,” said an analyst from a leading brokerage firm, requesting not to be quoted.

But not many share the excitement.

“There has been some amount of rebound in the index, but it is difficult to say how long it will be able to sustain itself,” said Vinay Kshirsagar, CFO, Shreyas Shipping and Logistics Ltd, which currently has one dry bulk vessel in its fleet.

“We expect the index to stabilise at around 2200. Thus, some amount of volatility is expected. It will be primarily determined by China’s iron ore import activities. In the long term, we do see the BDI under pressure,” said an analyst from a leading brokerage.
BDI is dominated by capesize vessels, which are cargo vessels used to pass either the Cape of Good Hope or Cape Horn, and typically above 150,000 deadweight tonne (DWT).

Since these vessels are primarily related to China’s steel production activity, analysts expect the index to remain volatile in the near future.

In fact, the fall in July was mainly due to a drop in capesize vessel rates.

“The BDI fall in July was mainly due to a fall in the capesize index. Though, it has been on the upward trend in August, we do not expect it to continue. We expect the index to move in a volatile pattern,” said a spokesperson of GE Shipping.

S Hajara, CMD, Shipping Corporation of India said, “We expect the index to remain under pressure until 2011.”

The situation is seen getting worse as deliveries of as much as 55% of the current capesize capacity is pending and there are reports of an economic slowdown in China.

“Thus, no significant rebound is seen in capesize rates and BDI is expected to remain under pressure up to 2013,” said Kshirsagar.

A possible sweetener the bulk shipping industry is hoping for at this point is a change in India’s sugar export policy.

The impact of such a change will be visible on the West Asian and Southeast Asian corridors. Thus, rates for Supramax, Handysize and to some extent Panamax vessels, typically used to navigate the West Asian and Southeast Asian corridor with bulk sugar, are expected to trend up.

But even this is expected to be a short-term booster.
“Changes in the sugar export policy will surely have a short-term impact on the bulk freight rates, but this will not be sustainable,” said Kshirsagar.

An analyst with another domestic brokerage said that sugar’s contribution to the total trade volume was very negligible. “Hence, any policy decision would not have a significant impact. Even if there is an upside, it will be relatively short-term,” he said.