The darkest days may be over for the dry-bulk shipping companies that transport the raw materials of global trade.
After a deep slump in freight rates pushed many of the world’s biggest dry-bulk shipping companies deeply into the red and some smaller ones out of business, a recent surge in freight rates has owners rejoicing.
The Baltic Dry Index, which measures the cost of moving commodities like coal, grain and iron ore, is hovering at a two-year high of 1,232 points after hitting its lowest level ever at 292 in February. At its peak, before the 2008 financial crisis, the index had reached 11,000 points.
Although much of the recovery is tied to end-year seasonal factors like China’s replenishing of coal and iron ore supplies in addition to bumper U.S. grain exports, shipping executives expect a slow but steady recovery will continue through the second quarter of next year.
“The market has turned from really awful, to just awful,” said Robert Bugbee, president of Scorpio Bulkers Inc., the biggest New York-listed bulk carrier by market value. “It’s got a way to go for a full recovery, but it looks like we may have gone past the bottom.”
Scorpio, which now operates 41 ships, sold around 20 of its biggest vessels at a sharp discount late last year to maintain financial viability after charter rates tanked to less than half of break-even levels.
The firm’s shares were trading off 3 cents apiece at $5.47 at midday Wednesday.
Dry-bulk shippers were hurt after China, the world’s biggest commodities importer, began shifting away from heavy industry as the main growth driver. Like Scorpio, other big players shrank their fleets in the face of losses while some smaller operators went bankrupt. At the same time, banks turned off access to ship-financing in the face of rising nonperforming loans.
Harry Vafias, whose family runs eight ships, said the market recovery is due to a halt in new orders of ships, a jump in ship scrapping and declining shipbuilding capacity by Asian yards as they shrink to survive the industry down-cycle.
“The election of Donald Trump is also lifting spirits,” Mr. Vafias said. “The U.S. must import large quantities of iron ore and cement if the new administration is to carry out its mega-infrastructure campaign promises.”
Among President-elect Trump’s campaign promises was to invest $1 trillion in infrastructure to jump-start job growth and economic activity.
Brokers in Singapore said they see increased demand for commodities like grains, lumber, cement, coal, and copper. One broker, who arranges charters for big operators in Asia and Europe, said rates are improving across the board. “Commodities are back in play after two miserable years,” he said.
Scorpio’s Mr. Bugbee said charter rates have risen to between $9,000 and $11,000 a day, up from as low as $3,500 a day in the first quarter of this year. The break-even, point for its Kamsarmax vessels that each move an average of 85,000 metric tons of cargo is around $8,000 a day.
“Next year there are strong indications we will cover costs and also make some money,” Mr. Bugbee said. “The market is fundamentally improving and barring a severe disruption to the world economy, it should be plain sailing from the second quarter onwards.”
But some analysts warn that bursts of optimism in the past have enticed owners to order new vessels worsening an overcapacity of tonnage in the water that they see as the main culprit behind the industry’s woes.
“The owners are often their own worst enemies with mindless orders at the first signs of recovery,” said Basil Karatzas, founder of Karatzas Marine Advisors & Co. “Hopefully the present rally will not derail the market where operators will again forget the fundamentals, stop scraping and start buying.”
Did you subscribe for our daily newsletter?
It’s Free! Click here to Subscribe!
Source: WSJ
