London: A triple assault of weak consumer demand, vessel oversupply and global recession is set to keep shipping rates under pressure this year and batter any prospects of a major rebound.
Around 80% of the world’s traded goods by volume are transported by sea, with many pinning hopes of a world economic recovery via a resurgence in freight activity.
The Baltic Dry Index (BDI)—that gauges the cost of shipping resources including iron ore, cement, grain, coal and fertilizer—collapsed to a record low in December and has remained volatile since then.
“Underlying supply/demand fundamentals for the dry bulk shipping industry appear to have worsened over the last two months,” JPMorgan Chase and Co. said in a report.
The London-based index, which is heavily exposed to Asian economies, has been hit by worries of weaker prospects in China. Container shipping, another industry sector, which transports finished goods, from electronics to toys, has also been affected on key routes from Asia to consumers in the West.
“Demand is dismal and the outlook for container demand remains clouded by global macro-economic concerns,” Goldman Sachs Group Inc. said in a note.
Strong appetite for iron ore and coal in India and China helped push the Baltic index to a record high in May 2008 of 11,793. But global turmoil and recession drove it back down to as low as 663 in December.
While the index has posted a high of 2,298 this year, helped by the South American grains export season and some demand for iron ore and coal, freight rates are unlikely to gain ground.
“The fact that you can see a bit of a rise in the freight index followed by a drop is also a good indicator that nothing is going to come back right away,” said Joel Crane, commodities analyst with Deutsche Bank in New York.
Norwegian ship broker Lorentzen and Stemoco has forecast seaborne trade contracting 7.4% in 2009 on a year-on-year basis versus 3.1% growth in 2008.
Its analyst Erik Nikolai Stavseth said he expected BDI to hover around the 1,600 to 1,900 range in the third and fourth quarters.
“There is probably going to be a small peak in the second quarter,” he said.
“I don’t think we will see a major rebound (in 2009),” he said. “We are seeing a contraction in real demand.”
Most expect that an oversupply of dry bulk vessels to be delivered in the coming years will dog rates. Demand for new ships reached a peak in the middle of 2008 before credit crisis affected the sector.
The order book for ships has been estimated at anywhere between 70% and over 100% of the world’s current dry bulk fleet of about 6,980 ships over 10,000 deadweight tonnes.
“If all the ships that are in the order book come onstream (between 2009 and 2011) you will have a major problem because you will have serious oversupply,” said Stavseth. “No growth in demand can make up for that.”