KUALA LUMPUR: The Baltic Dry Index (BDI), a barometer of global shipping prices for dry-bulk cargoes including coal, iron ore, and grain, fell 41% to close at 1,773 points on its last trading day for the year on Christmas Eve compared with a high of 2,995 in September.
Analysts said dwindling demand for dry-bulk cargo such as iron ore and an oversupply of vessels have resulted in lower charges for transporting these items. This has lent credence to expectations that dry-bulk shipping companies’ profitability in the near future could be under threat as vessel capacity supply grows faster than the growth in dry-bulk cargo consumption.
“Supply of ships will increase this year and iron ore imports will be less,” an analyst from TA Securities Holdings Bhd told The Edge Financial Daily yesterday.
Among the notable regional dry-bulk shipping services providers are Malaysian-listed Malaysian Bulk Carriers Bhd, and Hong Kong-listed China Cosco Holdings Co Ltd and Pacific Basin Shipping Ltd.
The analyst said lower demand for iron ore, the raw material for steel production, comes at a time when rapidly growing China is tightening its monetary policy to combat inflation. This has led to expectations of lower demand for steel to spur the construction and real estate development sectors in the world’s second largest economy.
According to the analyst, more shipping capacity is expected as new vessels ordered in 2007 are due for delivery this year.
Credit Suisse, in a note dated Nov 23, said it had revised downwards its average BDI forecast for 2011 and 2012 from 2,500 points to 2,300 points after taking into account the demand-supply dynamics.
According to the research house, dry-bulk demand growth is expected to slow to 5.5% and 4.3% in 2011 and 2012 respectively, compared to an almost 9% expansion anticipated in 2010.
Meanwhile, vessel-supply expansion is expected to rise to 13.3% for last year, compared with about 10% a year earlier. For this year and 2012, capacity is expected to grow around 12% and 13%, respectively.
“Freight rates could trend significantly lower on accelerating deliveries,” said Credit Suisse which recommends investors “underweight” the Asian dry-bulk shipping sector. This is in anticipation of weaker profitability for the sector as shipping rates fall.
According to the research house, ship owners can ease the vessel-oversupply environment by cancelling their orders or scrapping existing ships.
But cancellations are deemed economically unviable due to high penalties imposed for terminating purchases, and as such, shipping companies tend to scrap depreciated old vessels that contribute to the excess supply in the market.
“With the BDI remaining significantly above operating cash costs since early 2009, owners have little incentive to cancel their vessel orders. Instead, delivery delays have been the most preferred means for owners facing financing difficulties,” Credit Suisse said.
On a broader scale, the BDI is also seen as a global economic growth indicator. This is because dry-bulk cargoes comprise essential inputs for the production of building materials as well as electricity generation, both of which are also deemed important indicators of world economic fortunes.
As such, a decline in the barometer could offer a glimpse of the world economic landscape in the months ahead.
The BDI had touched a high of 11,793 points on May 20, 2008, at a time when China was importing more commodities to fuel its economic growth while shipping capacity faced supply constraints.
On Dec 5 that year, the BDI plunged to a low of 663 when news of the US financial crisis rocked global markets.
Two years down the road, the external landscape suggests that global uncertainty is far from over.
As advanced countries are grappling with high jobless rates, tight credit and high levels of debt, the spotlight inevitably falls on emerging economies as the primary drivers of global growth.
Traditional major importing nations such as the US and Europe are now looking abroad to boost exports in anticipation that domestic demand may not be enough to sustain growth at home.
Meanwhile, capital flows from advanced economies into emerging Asian markets have also been a widely debated topic. This in anticipation that demand for regional assets such as stocks, bonds and real estate will fuel inflation.
Asian currencies, including the ringgit, have traded stronger versus a weaker US dollar while regional equity markets and real estate prices have risen as investors seek better returns in countries with higher interest rates and growth prospects.
This comes as investors weigh the effects of further quantitative easing in the US which, essentially, increases the supply of the US dollar and, hence, devalues the greenback.
As such, Asian central banks have been closely watched as policymakers in the region weigh the risks of slowing economic growth versus escalating inflation.
China, Australia and India have embarked on pre-emptive monetary tightening in anticipation of rising consumer prices.
Against the current macro backdrop, it is worth watching how global shipping firms navigate rougher waters in the year ahead.
While an overcapacity of ships is the primary reason for the plunge in the BDI, investors will also see if it is an ominous sign of another economic slowdown ahead.
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