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China shipbuilding frenzy to cut freight costs by 40%

China shipbuilding frenzy to cut freight costs by 40%
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First Published: Tue, May 01 2007. 12 54 AM IST
Updated: Tue, May 01 2007. 12 54 AM IST
London: The cost of shipping coal and iron ore is about to decline as the supply of cargo vessels overwhelms demand.
Japan, China and South Korea will produce so many vessels that shipping costs, now at an all-time high, will fall 40% by 2010, according to futures contracts traded privately among banks, transportation companies and hedge funds. The decline would hurt Antwerp-based Compagnie Maritime Belge SA, the world’s largest commodities-shipping line, and Golden Ocean Group Ltd, run by Norwegian billionaire John Fredriksen.
“We’re going to see the largest deliveries to the fleet that’s ever been recorded,” said Philip Rogers, 58, head of research at Galbraith’s Ltd, the London-based shipbroker, who’s been assessing freight markets for 30 years.
Chinese shipyards are building enough carriers to haul 48 million tonnes in the next five years, equal to 15% of the nation’s annual iron ore imports, according to Galbraith’s.
Lower costs may benefit China’s Baoshan Iron & Steel Co., Arcelor Mittal of Luxembourg, the world’s biggest steel producer, and other companies that hire ships to carry grains, coal, ore and similar goods.
Commodity-shipping rates have soared 41% this year and ended last week at a record 6,230 on the Baltic Exchange, a 263-year-old institution that traces its roots to a London coffee house.
Clarkson Plc., the world’s largest shipbroker, and hedge funds M2M Management Ltd, headed by a former chartering executive at BHP Billiton Ltd, and Castalia Fund Management UK are already anticipating a drop in costs.
“It has to fall,” said Steve Rodley, joint managing director at M2M Management in London. “It’s hard to see rates sustaining where they are today beyond summer.”
Rates may begin to decline next month, when cargo vessels become available as port officials in Newcastle, Australia, clear one of the worst-ever traffic jams. A revival in iron ore trade between India and China that has reduced the length of voyages will free more freighters.
The cost of renting the biggest ships, known as capesize carriers, climbed 73% in six months to a record $106,289 (Rs4,357,849) a day on 27 April, enabling owners to pay for a $78 million ship in a little more than two years.
Diana Shipping Inc., which paid a record $110 million for a capesize carrier in March, agreed to daily rental rates for the ship of $52,000 every day for more than four years from BHP Billiton, the world’s biggest mining company. Diana will earn sales of at least $75 million. BHP Billiton has an option to extend the contract for 13 more months.
Futures contracts, called forward freight agreements, are traded privately and cleared by Imarex NOS ASA in Oslo and LCH Clearnet in London. They signal rates will decline to $42,200 by 2009, the biggest drop since 2001.
A record 74 vessels are stuck off Newcastle, the world’s largest coal port, waiting for congestion at the terminal to clear and a chance to load. The delays began last year after the terminal scrapped a quota system that restricted when shippers could take on cargoes. The quota was reinstated this month, and delays will start to ease around mid-May, said Vivek Srivastava, an analyst at Maritime Strategies International Ltd in London.
India may add to the supply of vessels. The country is considering revising a plan to impose a tax on iron ore imports. The original proposal prompted Chinese steel makers to boycott iron ore from India last month in favour of countries as far away as Brazil, tying up vessels on longer trips. Iron ore makes up about 25% of global bulk freight.
“When fleet utilization reaches 92-93%, you see rates going up exponentially,” said Torstein Bomann-Larsen, a freight-derivatives broker at Imarex NOS ASA in Oslo. “And fleet utilization is 97-98%, so it’s extreme. If congestion eases by 20%, rates could come down fast.”
Chinese shipbuilders had more customers for commodity carriers than those in Japan in the first quarter, according to Clarkson. Shipyards in China attracted orders for 98 vessels with a combined carrying capacity of 8.7 million tonnes.
“The Chinese have added the equivalent steel-making capacity of Japan and Korea in five years, and that can’t continue,” said Martin Stopford, 59, head of research at Clarkson. “It leaves you with a problem if and when steelslows down.”
Steel demand is being buoyed by China’s economy and may not slacken anytime soon, said Andreas Vergottis, who helps manage $750 million at London-based Tufton Oceanic Ltd, the world’s biggest shipping hedge fund. Tufton may spend $200 million to buy vessels for the first time.
“We are going to have three very good years,” Vergottis said. “This year will be better than 2006, 2008 will be better than 2007, and 2009 will be even better.”
Tufton is bullish because China is both the largest shipbuilder and consumer of commodities. The economy grew 11.1% in the first quarter, driving demand for iron ore. China also became a net coal buyer for the first time this year, while rising incomes and a shortage of farmland may spur increased imports of grain to feed livestock.
China launched vessels capable of carrying 14.5 million deadweight tonnes last year, about a fifth of the world’s total orders and 20% more than in 2005, the state-run Xinhua News Agency reported 31 January. The Jiangnan Changxing shipyard, located on an island near Shanghai, has orders for 49 bulk carriers, tankers and container ships, accordingto Clarkson.
Katherine Espina in Singapore contributed to thisarticle.
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First Published: Tue, May 01 2007. 12 54 AM IST
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