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Shipping News Interviews G. Gregoriadis, head of Finance & Research of shipbroker G. Moundreas

Monday, 08 October 2007 | 13:59

Shipping will continue to enjoy record freight rate levels for a long period of time, given the vast resources needs of countries and regions like China, India, Russia and Latin America states George Gregoriadis, Director of Finance & Research of local

shipbroker George Moundreas & Co. S.A. In his interview at Hellenic Shipping News, Mr. Gregoriadis analyzes the current market fundamentals and the reasons behind today's optimism at least in the dry bulk segment of the market.

Let's begin with the current conditions in the dry bulk market. Do we continue to see the records previously set in the market?

Yes, during the last month we've witnessed an acceleration of the market's rise, of course with some few corrections and halts, like the ones we saw the last couple of days (end of last week). This minor correction was attributed to the holidays we had in many Asian countries and of course China's celebration of the Republic's declaration of independence. Nevertheless, the trend is upward and the freight market will remain at today's high level, because surprises constantly arise from China, in terms of economic indices and levels. So, despite the bad news coming from developed economies and markets, like the U.S., with the recent subprime loan crisis, which is making its way into Europe as well and even in Japan in a lesser grade, shipping rates aren't affected at all. This reflects the over-offsetting capabilities of the booming economies of developing countries and regions like China, India, Russia and South America, against the gloomy picture painted for developed economies also as we approach 2008 and moving forward.

How different is that evolvement against 10-15 years ago, when the U.S. and the European economy used to be the benchmarks for the shipping industry?

Exactly as you said, these economies used to be benchmarks for shippers worldwide. If we didn't have this growth in the developing world (i.e. China, India etc), we would be witnessing a shipping crisis, given the extent of the problems faced by the major economies of the world today. But, instead of a crisis we are amid a shipping boom.

Just to remember of the dark days of shipping in the past, what would a shipping crisis involve?
Could we see a halt of ships, because they would be losing money just by operating?

Yes, ships could be docked instead of operating with the best case scenario being the break-even situation, things we have seen in the past occurring. The worst case scenario would have ships not being able to cover not even their operating costs, while a milder version would see vessels not being able to finance their investment cost. These effects are more intense among the Hellenic shipping industry, in contrast with other countries' shipping sector, like for instance Japan, Germany or Great Britain, because our shipping isn't dealing with shipments from Hellas. Instead it is operating with the surpluses of the regular cargo quantities of international trade. So, in every case of increase or decrease in commodities demand, the ships affected, are exactly the ones operating with these ups and downs of demand, which are the Greek ones. What I mean is that cross-traders like Hellenic shipowners are likely to become more affected from a potential global shipping crisis.
On the other hand, our shipping industry is benefiting the most, when the surpluses of the regular cargo quantities are that large, like we see today. This is because the premium that shippers have to pay to transport these cargoes is quite high. To sum it up, Hellenic shipping is benefiting the most in periods of booming global trade, while it is most affected, when the opposite scenario occurs.

Why is it that the Hellenic shipping industry is involved in cross-trade cargoes?

Hellas is a very small country and can't support ocean shipping. The cargoes coming in and out of the country are a mere 5% of the total cargoes transported annually by Hellenic shipping companies. So, such a relation is impossible. Instead, our industry is largely involved in transporting goods and cargoes i.e. between the U.S. and Asia or Europe, Brazil to China and backwards and so on. It doesn't deal with the country's industrial production or agricultural exports. Instead it is currently benefiting from the increased needs of the countries of the so-called "developing world", being able to imposeΒ - sort of speechΒ - very high freight rates.
In order for somebody to grasp the extravagant situation in today's environment, I can mention the following: up until last month China predicted that the country's steel production for 2008 would amount to about 460 million tons with the corresponding imports of iron ore. Last week, they revised their prediction upwards to between 510 and 550 million tons of steel. This is translated to at least 200 million tons of extra iron ore imports needed to support this increase in steel production. Anyone can understand that this will create the need for dozens of more dry bulk ships to carry this type of commodity to China. This is just one example of why the freight rate market is sustaining these record levels.

Not only that, but we see also large delays in key ports around the world, further reducing the number of ships available for hire.

Yes, that's true, because of the big growth in global trade and the huge quantities needed to be shipped from these ports. In some cases it is difficult to see a parallel growth and expansion of port facilities, railway links and general infrastructure, in order to serve this amount of transit trade. Moreover, in some parts of the world this type of expansion is physically impossible due to lack of available land. This why we see this type of congestion at major ports, thus limiting a large portion of tonnage.
But that's not the only reason. As China increases constantly its iron ore imports to produce steel, it also seeks these additional cargoes from countries more and more away from it. Closer sources for iron ore like Australia tend to diminish and gradually perish, resulting in increased imports from countries like Brazil, which translates to three times longer distance.
On the other hand, India, which is also developing rapidly, has adequate iron ore resources, will begin more and more to use them for its own needs. As a result, the iron ore cargoes imported by China from India, will have to be replaced gradually from other countries which are further away. We have witnessed Chinese looking for iron ore even in Canada!

Just to support your view, let's not forget about the tax levy that India imposed some months ago to local iron ore exporters.

That's exactly why this tax was imposed, to discourage iron ore exports, due to the increased domestic need. The other major issue which contributed to the record levels of the market is that India doesn't have enough coal resources to fuel its economy, a commodity already adequate in China. So, India needs coal not only for energy producing purposes, but also for its steel production, since steel is made in blast furnaces by burning iron ore, using coal as fuel!Β  Analysts estimate that the annual increase of India's coal needs will reach 400 million tons. As you can imagine, nobody can even imagine where we shall find the ships to cover these huge needs. So, we have to suddenly deal with the huge growth of countries of such size, something unprecedented in the global economy's history, not to mention Russia and Latin America. Countries there have seized to be the underdeveloped and "poor relative" of the U.S. with new governments that have set their economies to a development path.

Nikos Roussanoglou, Hellenic Shipping News Worldwide

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