Shipping rates tipped to stay low

COMMODITY exporters will continue to enjoy lower freight rates this year as the dry-bulk shipping industry battles chronic oversupply of the global fleet and high fuel prices.

Volumes of exports of commodities such as iron ore, coal and agricultural products continue to increase but excess capacity in a shipping market which has struggled since 2008 is keeping firm downward pressure on freight rates.

Figures from Braemar Seascope, one of the biggest chartering and ship-broking companies in the world, show the industry ended 2012 with the dry-bulk capacity in the market growing 10 per cent, from 598 million dry-weight tonnes at the start of 2012 to 658m dry-weight tonnes at January 1.

Braemar director Peter Malpas told WA Business News that after nearly four years of weak conditions, the industry was eager to see the end of the supply glut.

“What we’re waiting for as a shipping industry is for the market to pick up, for the demand curve to catch up with supply and we don’t think that will happen until at least 18 months from now,” Mr Malpas said.

“There are some differences among the specific types of ships but we’re really not talking about any recovery until the middle of 2014 onwards.”

The state of the industry today is vastly different to conditions before the GFC.

iron ore export industry, charter rates dropped from a high in mid-2008 of around $US234,000 a day to the current level of between $US5,000 and $US6,000.

The cause of oversupply in the market can be traced to late 2006, when north Asian shipbuilders threw open their order books to eager shipowners who had been kept waiting for years for the chance to place new orders.

The supply of tonnage in the market quickly outstripped demand, with new vessels hitting the water every couple of days - a state of play that shows only minor signs of relief.

“It’s very difficult to cancel a ship once it has commenced construction,” Mr Malpas said. “Once it was evident how many ships had been ordered in 2007, it could really only go one way.”

Shipowners are increasingly looking to the scrapyards of India, Pakistan and Bangladesh as a way of dealing with the oversupply.

New records for the volume of tonnage scrapped were set in both 2011 and 2012, with shipowners keen to get rid of inefficient, uneconomic ships.

Mr Malpas said that aside from reduced costs lower freight rates bring to exporters, the depressed market also allowed them far more flexibility over the voyage.

“Another advantage of low freight rates for exporters is that they can more readily justify multiple port discharge, so instead of just going to one port they can probably go to one or two or even three ports if they wanted to because the hire-cost of the ship is so much lower than the time incurred to do deviations,” he said.

At the same time, bunker fuel prices continue to eat into margins for shipowners, accounting for roughly 50 per cent to 65 per cent of the total cost of a voyage.

High fuel costs have seen the industry run a microscope over the fleet in search of ways to cut down on fuel usage, placing the concept of ‘eco-ships’ at the forefront of the industry.

“Eco-ships can mean different things to different people, it’s not a brand per se, it’s a general concept that encompasses a series of technical developments and design features of a ship” Mr Malpas said.

“This can be anything from hull forms to new developments in engines, to the overall planned maintenance program of a ship.”

With bunker fuel prices sitting around $600 a tonne, even changes that can save four to five tonnes of fuel a day represent significant savings for owners.