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35 Miles Of Capesize Vessels Leaving Shipyards In 2011 Guarantee Low Baltic Dry For A Long Time

Tyler Durden's picture




 

Back in 2007 and 2008 every single dry shipping company had put in future delivery orders for everything from Panamax to Capesize vessels, at even the most shoddy of Chinese shipyards. Now, a few years later, as these orders are starting to be completed, the world's dry bulk shipping industry is suddenly experiencing an unprecedented supply glut of coal/ore carriers, which has resulted in the Baltic Dry index droppoing below 1,500 for the first time since 2009. And as Bloomberg reports, with at least 200 capesize ships, stretching at 35 miles end to end, expected to be completed by the world's shipyards, which represents an 18% expansion in the world's shipping fleet, the excess supply will once glut the modest demand rise which is expected to come at just 7%. The winners: raw material companies which have massive pricing power in an environment in which shipping costs are plunging, as well as the shipping companies which have managed to lock in charter contracts at historic rates. The biggest loser: dry bulk shippers operating at spot, and which have large, debt-funded balance sheets.There the pain will be substantial.

From Bloomberg:

Leasing costs for capesizes, 1,000-foot-long ships hauling iron ore and coal, will drop 34 percent to average $22,000 a day this year, according to the median in a Bloomberg survey of eight fund managers and analysts. The last time that happened, China’s economy, the biggest consumer of the minerals used in steel and power, was 75 percent smaller and the benchmark Standard & Poor’s GSCI commodity index 67 percent lower.

“The market was able to take a punch in the face in the form of 200 capesizes and loads of smaller vessels last year but I doubt it will manage another punch without having to hit the deck,” said Erik Nikolai Stavseth, an analyst at Arctic Securities ASA in Oslo who correctly forecast in July that rental costs would more than triple by the fourth quarter.

Rates averaged $34,913 a day in the final three months of 2010, 33 percent more than in the previous quarter. Tariffs are already plunging, dropping 36 percent last week to $12,897, as ships leave yards in China, Japan, the Philippines and South Korea, according to data from the London-based Baltic Exchange, which publishes assessments for more than 50 shipping routes.

Yet the market has been sanguine in punishing the companies that stand to lost the most:

The Bloomberg Dry Ships Index of 12 shipping lines has yet to react, declining 0.9 percent last week. Prices in the shipping market are more volatile that stocks and bonds, with rates moving 10 percent or more in 32 weeks last year.

The surplus was caused by orders placed in 2007 and 2008, when daily income averaged about $111,000. Rates reached a record $233,988 in June 2008 before plunging 99 percent over the next six months to $2,316 as economies entered the first global recession since World War II. In 2009, tariffs more than quadrupled as growth rebounded.

Which means that at some point the BDIY will drop to a point when many companies will no longer be viable, and as they liquidate, the supply and demand will once again reach some acceptable to all equibilrium.

While dry bulk rates could “drop a little” this year, “container shipping is doing well,” Koichi Muto, president of Mitsui O.S.K. Lines Ltd., told reporters in Tokyo on Jan. 5. The company, operator of the world’s largest merchant fleet, got about a third of its revenue from containerships in its last fiscal year, data compiled by Bloomberg show. Shares of Mitsui, based in Tokyo, advanced 13 percent last year.

The shipping lines are already lagging behind the suppliers of the iron ore and coal they carry in the stock market. The Bloomberg Dry Ships Index fell 21 percent in the last 12 months, compared with a 14 percent jump in the 100-member Bloomberg World Mining Index. Vale SA, Rio Tinto Group and BHP Billiton Ltd., the world’s three-largest iron-ore exporters, will report the most profit ever this year, according to the median of analyst estimates compiled by Bloomberg.

And for those seeking slightly more than just a spun interpretation of the current supply glut, here is N. Cotzias' latest monthly shipping analysis.

 

 

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Mon, 01/10/2011 - 12:46 | 863912 HarryWanger
HarryWanger's picture

From CR regarding BDI:

While about 90 percent of global trade moves by sea, according to the Round Table of International Shipping Associations, the slump in rates is being caused by a vessel surplus not a contracting world economy. ... The surplus was caused by orders placed in 2007 and 2008, when daily income averaged about $111,000.

Freight costs fell as Queensland’s worst flooding for 50 years prompted buyers of the Australian state’s coal to cancel ship charters, intensifying competition for cargoes as the extra vessels become available.

Yawn. No worries.

Couldn't have said it better myself.

Mon, 01/10/2011 - 14:10 | 864186 NotApplicable
NotApplicable's picture

No worries? Well, only if you're not the one having to pay for the ships.

Guess what though? In addition to the cost the capital that went into them that the owners will have to pay (plus interest on any debt), is the opportunity cost for alternative uses for that capital that could've been used to solve actual human needs. In that regard, it makes every one of us poorer, because for every malinvestment, the pool of social circulating capital is drained.

If this is kept up long enough, eventually the pool will drained completely, and we will be surrounded by the equivalent of modern day pyramids.

Yep, no worries, alright.

Mon, 01/10/2011 - 15:29 | 864583 TruthInSunshine
TruthInSunshine's picture

HarryWang is a small supplier (controlling 0.00000009% of the market) of urinal cakes used in capesized ships.

He has no orders this year or last, as the industry has adopted as standard the orange or purple urinal cakes from ACME Urinal Cake Supplies, Inc.

 

Mon, 01/10/2011 - 12:47 | 863915 monopoly
monopoly's picture

Tyler it is just amazing how staff comes up with these jewels in such a timely manner. ty.

Mon, 01/10/2011 - 12:54 | 863937 markmotive
markmotive's picture

Is that scarcasm?

Mon, 01/10/2011 - 12:53 | 863932 Mike2756
Mike2756's picture

And yet unp hits a new high while hauling less freight than in 2008. Go figure.

Mon, 01/10/2011 - 12:57 | 863945 gwar5
gwar5's picture

Good news for China?

Money for building the ships, lower prices for raw materials?

Mon, 01/10/2011 - 13:01 | 863957 Mike2756
Mike2756's picture

At least lower shipping costs.

Mon, 01/10/2011 - 13:12 | 863990 Azannoth
Azannoth's picture

It's funny how everything goes right for people who produce real goods(like China) and everything goes wrong for people who think they can print prosperity(like the USA) I guess there is some Natural Justice in the world afterall

Mon, 01/10/2011 - 13:04 | 863964 Thepnr
Thepnr's picture

I always pay attention to the shipping industry as it is without doubt an indicator to the overall health of the global economy. It's not just the BDIY that is looking bad, oil tankers (in this case VLCC's) are actually struggling to find work.

I know this as my sons ship has been idle since 31st December and is sitting off Rotterdam "awaiting orders". He tells me it is much the same elsewhere.

Mon, 01/10/2011 - 13:05 | 863968 jus_lite_reading
jus_lite_reading's picture

I believe the PTB are preparing for a WATER WORLD!

 

Who the hell are they going to ship to? Stephen Hawking's aliens?

Mon, 01/10/2011 - 13:09 | 863980 alter ego
alter ego's picture

Hey folks.

Oil is in the news today, starting from shipping to Alaska's oil pipeline shutdown.

You should take a look to Jeff Rubin's speech on oil prices and the future of economics. 

http://www.youtube.com/watch?v=wYuLjGQQ-jg

Mon, 01/10/2011 - 13:17 | 864008 The Axe
The Axe's picture

Info is great, but ..it only means that DRYS or the rest of the group will just go UP..stocks do not reflect their true values or future growth!  They just move up..

Mon, 01/10/2011 - 13:19 | 864016 the rookie cynic
the rookie cynic's picture

Sagging BDI would be indicative of deflation. Therefore, cash would be a great investment for 2011 if the central banks weren't printing us to oblivion. So we have no choice but to buy PMs.

Mon, 01/10/2011 - 13:21 | 864025 Oh regional Indian
Oh regional Indian's picture

That three digit BDI seems closer every day.

it's a double whammy of over-supply meeting calamitous demand contraction (possibly permanently) and both accelerating faster everyday (assuming the capesizes will come on-line over the year).

My colleagues from the Navy quit to join India's booming shipping industry. Huge demand for qualified people. 

I feel wartime will change all our perceptions of these times (in retrospect). America is an oceanic power after all.

 

ORI

http://aadivaahan.wordpress.com/2010/06/09/an-older-piece-pertinent/

Mon, 01/10/2011 - 13:24 | 864038 Joe Sixpack
Joe Sixpack's picture

Ah, but the ships are not used for shipping. They are used to speculate in raw materials. They are floating containers so JPMorgue and others can corner markets.

 

www.Gold-Silver.us/forum

Mon, 01/10/2011 - 13:26 | 864044 haskelslocal
haskelslocal's picture

Isn't it a testament to product delivery that you find ways to reduce cost for what you do and not for how you transport it? If I sell widgets and sales boom, I find ways to reduce shipping costs. That the fleet expanded in the face of reality is either poor judgement or excellent planning by way of the commodity corporations.

Mon, 01/10/2011 - 13:39 | 864088 HarryWanger
HarryWanger's picture

And the other index that no longer seems to matter here, remember the ECRI Leading Index?, well it's up to  +3.3% from a -11% (sure to be a recession ala Rosie). Seems like the indices read what you want them to say until they don't.

Mon, 01/10/2011 - 15:11 | 864481 Cursive
Cursive's picture

ECRI is skewed by stock market performance, so I wouldn't call it a leading indicator unless, of course you believe in EMH.

Mon, 01/10/2011 - 13:55 | 864130 NotApplicable
NotApplicable's picture

This over production of capital goods is fully predicted by Austrian theory, as the ship producers fell victim to the credit-induced crack-up boom signalling the need for increased production to keep up with the observed growth in demand at the time.

As always though, being that it was credit based, neither the growth in consumption, nor for the base commodities was sustainable, as the ever increasing cost of debt service places an upper limit on this "growth," which resulted in ZIRP in order to prevent the banksters from paying for their lending follies.

Classic text-book definition of Mises' concept of malinvestment.

Mon, 01/10/2011 - 16:53 | 864956 Pool Shark
Pool Shark's picture

Yep.

Next on the Von Mises list of 'crack-up booms gone bust': Australian Housing...

Mon, 01/10/2011 - 14:00 | 864156 Thepnr
Thepnr's picture

Mike2756 thanks for the link, shows without a doubt and it is not just hearsay that tankers are idle also.

Mon, 01/10/2011 - 14:19 | 864233 Mike2756
Mon, 01/10/2011 - 14:24 | 864260 Common_Cents22
Common_Cents22's picture

 

 

Here comes the "cash for sunkers" program.

 

Mon, 01/10/2011 - 15:08 | 864458 Cursive
Cursive's picture

Where is that guy from the Soveriegn Man post who was looking to create a floating community? Maybe could get a good discount on the older floating turds.

Mon, 01/10/2011 - 15:55 | 864699 Drag Racer
Drag Racer's picture

How many of these new vessels are owned by China to replace the private commercial fleet so their governement doen not have to 'pay' for shipping and this will destroy the shipping industry????

Mon, 01/10/2011 - 16:38 | 864899 NotApplicable
NotApplicable's picture

SSSSSHHHHH!!!!

You aren't supposed to give away the game-plan for the "inevitable" rise of Communism as Capitalism "naturally" dies.

(pay no attention to the Marxist behind the curtain)

Mon, 01/10/2011 - 16:51 | 864960 nopat
nopat's picture

No mention of the Panama Canal expansion?

Mon, 01/10/2011 - 17:06 | 865004 virgilcaine
virgilcaine's picture

Sink them, they will make good coral reefs for Fish and other Marine life.

Mon, 01/10/2011 - 20:10 | 865627 ciao
ciao's picture

Beside the omission of the Queensland factor which is splashed all over the traxde press globally there is always the scrapping rate to be accounted and in how the new builds entering service are meeting the trend (or not so) in the size of vessel in most demand.

If ZH were to demand more rigourous analysis in future contributions it will be of benefit to the publication as a whole.

Mon, 01/10/2011 - 23:30 | 866166 Mike2756
Mike2756's picture

scrap rate:

http://www.dailytimes.com.pk/default.asp?page=2010\10\10\story_10-10-2010_pg5_14

new build:

http://harbor.typepad.com/analysis/global-ship-lease/

"Even with no new orders placed, global shipping capacity is expected to increase by about 40% over the next few years."

average age:

http://seekingalpha.com/article/80693-an-overview-of-the-global-shipping-industry

"the current average age of global shipping fleet is 19 years"

the trend is towards larger ships:

http://www.maritimesun.com/news/msc-closes-the-gap-as-lines-add-to-their-fleets/



 

 

Tue, 01/11/2011 - 08:11 | 866706 Zoran
Zoran's picture

Not looking good for the so called 'global recovery'!

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