Manning the ores

There’s a chart that keeps Tim Huxley awake at night. It shows the global order book for new bulk carriers (ships carrying dry cargo like iron ore or coal).

What it highlights is a scary spike this year and in 2010. With abnormally high orders for new ships in 2011 too, it suggests massive oversupply on the horizon.

In his Hong Kong office, the CEO of Wah Kwong Maritime Transport – a family-owned shipping firm that has been around since 1952 – also showed WiC a series of headlines from the past week’s shipping newspapers. One involved bankruptcy, another a delay by a Korean firm in taking delivery, and another talked of freight rates plunging to new lows. Huxley gave WiC his views on the current state of the shipping industry.

It all sounds like wrist-slitting stuff?

Well, if it wasn’t for China, all of us in the shipping industry would have every reason to be suicidal. In the first quarter of this year, China was the only game in town. But let me step back and give an overview of where things stand.

The Baltic Dry Index is the key indicator of the dry cargo market – and to avoid confusion, that has nothing to do with tankers or container ships.

Last June the Baltic Dry hit a high of 11,500. By December it dropped to 663. At the beginning of last month it rallied to just over 4,000. And now it is back to just under 3,000.

So it’s very volatile – but the trend in the first five months of this year has been a recovery from December’s low.

Why? China. Its stockpiling of commodities in the first and second quarter was the big story. It forced rates on the big bulk carriers on the Brazil and Australia iron ore run back over $90,000 a day. In January they’d been down at $6,000 a day – which is below operating costs.

When I attend conferences, I like to show people a graph showing the quarterly import of iron ore and coking coal by China, and by the other major steelmaking nations. Up until the end of last year, China was importing roughly the same as the rest of the steelmaking nations combined. Then in the first quarter of this year, its imports surged to about 135 million tonnes, and the rest of the world collapsed to almost 80 million tonnes.

What happened? Well, the rest of the world was in recession, but China’s stimulus package proved a great success in reviving the domestic economy. Perhaps in anticipation of this there was a huge stockpiling of iron ore in expectation of future demand. For example, China’s building of railways (see WiC23) will require huge amounts of steel. There has also been a revival in construction, which is also vital for steel demand. So over the first five months of this year we’ve had this revival in China’s raw material imports, and bulk carrier shipping companies have been major beneficiaries.

China is not going to save the world on its own, but you see from that chart just how critically important it is – at least from a shipping point of view.

That’s dry bulk. What about the container shipping market?

Container shipping is in a much worse state and there the rates remain dire.

At container ports the cranes are up and the number of idle ships is amazing.

You will not make money carrying containers at the moment.

Why? It doesn’t have the China factor. Containers are very much driven by exports out of China but until you get consumption returning in the US and Europe, this segment of shipping is in trouble.

You mentioned there’s a chart that keeps you awake at night…

Even if you believe demand will pick up in 2010 – and I have my reservations about whether or not the world is even starting to pull out of recession – we have another problem. There is a huge number of new ships being delivered from shipyards and the expanding supply puts downward pressure on freight rates.

The biggest problem that shipping has given itself in the past five years has been the massive expansion of shipbuilding capacity. Just look at the data: there’s 103 million (deadweight) tonnes of new bulk carriers scheduled for delivery in 2010. Just compare that with 2007, when the figure was 25 million tonnes!

Adding to the oversupply: there are something like 120 large bulkcarriers sitting off China waiting to unload – a lot of ships have basically been used as storage for iron ore. As those ships come back into the market, that also increases supply.

How much has the cost of a ship come down?

At the peak of the market last year, a newly built Cape Size Bulk Carrier of 170,000 tonnes (the work horse of the iron ore trades) – if promptly delivered – would have fetched $150 million. Now it sells for about $65 million.

So are we at the end of the so-called shipping ‘supercycle’?

We’ve been through a blip. What happened between 2005-08 was not normal. You don’t go out buying $80 million assets and expect to pay them off in 12 months. That was happening in 2007 and early 2008.

I am still long-term optimistic, because the BRIC story is very positive for shipping. This industry is also pretty good at self-correcting. For example, in the first quarter of this year we had more ships sold for scrap than we had in the previous five years. There’s a lot of older ships that have got to go and if we continue to have a healthy level of ship demolition, that will help correct the oversupply problem.

Then again, I’ve been in shipping for 26 years and I’ve never found it more difficult to make a call on the market. Back in December there was panic and the market clearly got oversold. I don’t think the Baltic Dry Index will go back to 663. My realistic estimate is the index will settle in a range of 2000-2500. And lest I sound too negative, plenty of shipowners will still be able to make decent money at this level.

How will China impact global shipping in the longer term?

That’s a key question. The Chinese shipping fleet is already (probably) the world’s largest and currently about 20% of Chinese goods are carried in Chinese ships. But that percentage will increase dramatically, and in a short space of time.

Take oil. Chinese tankers were responsible for importing about 10% of the country’s oil as recently as two years ago; by the end of next year the goal is to import 50% in Chinese tankers. This trend will have a major impact on the shipping world, which is, for the most part, still privately-held. China’s increasing use of its own ships could squeeze existing players.

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