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

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.