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Shipping Market Sinks Most in 9 Years on Steel Output |
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Saturday, 27 September 2008 |
 Commodity investors' expectations for a rebound in shipping rates are collapsing as Chinese steel mills reduce production and economic growth sputters. Shipping investors, analysts and brokers from New York to Oslo cut their forecasts for fourth-quarter rates by 17 percent in three days this week, according to data compiled by Bloomberg. The cost to hire a capesize
vessel, most commonly used to carry coal and iron ore, will average an
estimated $70,000 a day in the period, down from $84,000 forecast at
the start of the week.
The price to lease a capesize is falling the most in at least nine
years, according to the benchmark Baltic Exchange index. Leasing costs
may continue to decline because steelmakers are scaling back production
and two of the world's fastest- growing economies, Russia and China,
are slowing based on estimates from the International Monetary Fund and
economists surveyed by Bloomberg. ArcelorMittal, the world's biggest
steelmaker, said Sept. 17 it could cut output 15 percent in Europe and
the U.S. to support prices.
``It will just keep going down from here,'' said London- based Andreas
Vergottis, the research director at shipping hedge fund Tufton Oceanic
Ltd. who correctly predicted the plunge a month ago. Prices won't
``find resistance'' until they've fallen about another 50 percent, he
said Sept. 23.
Mitsui O.S.K. Lines Ltd., Japan's largest operator of iron- ore ships,
dropped 6.3 percent to its lowest in almost two years in Tokyo. China
Cosco Holdings Co., the world's largest operator of dry-bulk ships,
fell 11 percent in Hong Kong trading.
Rates Tumble
Capesize rental rates tumbled 80 percent since reaching a record on
June 5 of $233,988 a day on London's Baltic Exchange. The price fell 12
percent to $46,162 a day today, its biggest one-day decline since June
12. The broader Baltic Dry Index, a measure that also includes smaller
ship sizes, fell the most in at least 23 years today.
China's steelmakers, which account for one in every three tons of the
metal made globally, are at the center of the collapse. Mills that shut
to curb pollution during the Olympics in Beijing haven't reopened,
leaving the nation's stockpiles of iron ore, used to make steel and the
single biggest commodity carried by capesizes, close to a record.
China imported 23 percent more iron ore in the first eight months from a year ago, according to customs data.
Traders who bet on a rebound in iron-ore demand after the Olympics
underestimated the scale of the stockpiles by as much as a third,
shipping investor Nobu Su, chief executive officer of Taipei-based TMT
Co. Ltd., said in an interview Sept. 15.
Slower Growth
Forward freight agreements for the fourth quarter declined as much as 42 percent since he spoke.
A global economic slowdown is spreading from the U.S. to Europe and
Japan, International Monetary Fund First Deputy Managing Director John
Lipsky said Sept. 9. The IMF yesterday cut its forecast for Russian
growth to 7.1 percent from 7.8 percent. China's economy will expand 10
percent this year, down from 11.9 percent last year, according to a
survey of economists by Bloomberg.
Chinese steel production expanded 1.3 percent in August, the lowest
rate in at least four years, according to the Brussels- based
International Iron & Steel Institute.
Cia. Vale do Rio Doce, the world's largest iron-ore producer, has
slowed shipments to China after steelmakers rejected a price increase,
the China Iron and Steel Association said this month. Should that
stand-off end, demand for capesize vessels will rebound.
`No Interest'
Shipping Brazilian iron ore to China is the single biggest component of
global demand for capesizes, based on distance multiplied by the amount
of cargo, according to Simpson, Spence & Young Ltd., the world's
second-largest shipbroker.
Chinese steelmakers ``have shown no interest'' in reopening plants
because of ``languid'' demand from customers such as carmakers and
builders, Bank of America Corp. analysts Michael Pak and James Lee said
in a Sept. 22 report. Demand from China may also be hindered by
National Day holidays that run for a week from Sept. 29.
The price of hot-rolled coil steel in southern China dropped 17 percent
from a June peak, according to data from Metal Bulletin, a price and
news service.
``It's going to be pretty tough unless the steel price recovers,'' said
Omar Nokta, an analyst at Dahlman Rose & Co. in New York. Iron-ore
demand is in ``disarray,'' he said.
Steelmakers in China account for half of global iron-ore imports,
according to Simpson, Spence. Iron ore represents almost a third of all
so-called dry-bulk cargo shipped, data from Drewry Shipping Consultants
Ltd. show.
Sap Earnings
Lower rates will likely sap earnings for the 12 members of the
Bloomberg Dry Ships Index, led by Seoul-based STX Pan Ocean Co., South
Korea's largest bulk-shipping line. The index is down 53 percent from
this year's peak in May.
The $14,000-a-day cut in the forecasts from the survey translates into
about $400 million of earnings evaporating in the fourth quarter, based
on half the global capesize fleet operating in the spot market.
``The steel industry has ended the period of high growth in production
and demand,'' Baosteel Group Corp. Chairman Xu Lejiang said Sept. 18.
``Steel demand is not good, and we are facing falling orders from our
customers.''
Source: Alaric Nightingale, Bloomberg
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