Baltic index on crash course, at 28-year low
Coal, fertiliser importers to benefit but shipping firms in troubled waters
Aditi Divekar | Mumbai
February 12, 2015 Last Updated at 00:57 IST
Commodity shipping costs are at a record low, with the Baltic Dry Index falling 30 per cent to 556 points, the lowest since 1986.
In the past two months, freight rates for major bulk commodities such as iron ore, coal and grain have dropped about 40 per cent, as slowing demand for coal from China, as well as weaker bookings, have compounded a fleet glut. This year, the Chinese economy, which buys about half the world’s coal and ore cargoes, is set to expand less than in 25 years, economists’ forecasts compiled by Bloomberg show.
While the fall in the index is proving beneficial to India’s coal and fertiliser importers such as NTPC, Adani Power, Tata Steel and Steel Authority of India, it is a drag for shipping companies, as lower freight rates hurt their revenue. For shipping companies to break even, the Baltic Dry Index has to be at 3,500, at the least.
“In the case of fertilisers such as di-ammonium phosphates, freight rates have declined 20-25 per cent in the past two months in the West Asia-India route,” said an executive of SIVA Bulk, the fourth-largest carrier of coal into India. “Coal freight has declined to $10 a tonne from $15 in the past two months, on the South Africa-India route,” said another company executive.
India primarily imports coal from Richards Bay in South Africa, Australia and Indonesia. Overall, coal freights have declined 25 per cent in the past two months, said the official. “There is a benefit for chartering companies, those that are on time charter, but the extent of the benefit depends on the nature of the contract they have signed for the import.”
Chartering companies are those that import or export cargo, either by hiring a vessel from shipping companies or appointing a shipbroker to deliver the cargo. With a fall in the Baltic Dry Index, those companies with spot contracts will benefit the most, compared to those running on long-term contracts (for about a year) or short-term deals (two-three months).
Exporters of rice and basmati will also benefit. For the year ended March 2014, India exported rice and wheat worth $9.6 billion.
Given trade troubles across the globe, especially the slowing coal imports from China and the approaching Lunar New Year, officials say freight rates will continue to remain low.
That will come as bad news for shipping companies. “2015 does not seem like a good year for the sector, in terms of freight rates. Even if China reopens after their New Year, the pick-up in trade will remain moderate, not rosy,” said Anoop Sharma, chief executive (sea transportation business), Essar Shipping.
“This is the lowest level we have seen ever. Apart from falling commodity and crude oil prices, the drop in the index is because of too many ships on water,” said an executive at JM Baxi & Sons, a leading shipping agent.
The low freight rates aren’t allowing companies to even recover operating costs, say executives. “The situation is getting worse for shipping companies. Forget debt servicing; companies are unable to recover even operating costs. As of now, we don’t see any light at the end of the tunnel. If the situation prevails, we might see companies shut down,” said an executive of Link Shipping & Management System.
“Though a 3,500 index level is broadly seen as break even point, a lot also depends on the fleet utilisation (both for spot and long-term contracts) by shipping companies,” said an analyst with a domestic brokerage firm. “The more the contract renewals at this juncture, the adverse will be the situation for a shipping company, as contracts will be locked at much lower rates,” he added.
For instance, Shipping Corporation of India is in a difficult position, as two of its 17 bulk vessels have signed mid-term (three-month) and 15 spot contracts. Essar Shipping has a 50:50 break-up between the two segments, with long-term contracts varying between two and five years.
SECTORS TO BENEFIT
COAL (IMPORT)
In the past two months, freight rates for major bulk commodities such as iron ore, coal and grain have dropped about 40 per cent, as slowing demand for coal from China, as well as weaker bookings, have compounded a fleet glut. This year, the Chinese economy, which buys about half the world’s coal and ore cargoes, is set to expand less than in 25 years, economists’ forecasts compiled by Bloomberg show.
While the fall in the index is proving beneficial to India’s coal and fertiliser importers such as NTPC, Adani Power, Tata Steel and Steel Authority of India, it is a drag for shipping companies, as lower freight rates hurt their revenue. For shipping companies to break even, the Baltic Dry Index has to be at 3,500, at the least.
“In the case of fertilisers such as di-ammonium phosphates, freight rates have declined 20-25 per cent in the past two months in the West Asia-India route,” said an executive of SIVA Bulk, the fourth-largest carrier of coal into India. “Coal freight has declined to $10 a tonne from $15 in the past two months, on the South Africa-India route,” said another company executive.
India primarily imports coal from Richards Bay in South Africa, Australia and Indonesia. Overall, coal freights have declined 25 per cent in the past two months, said the official. “There is a benefit for chartering companies, those that are on time charter, but the extent of the benefit depends on the nature of the contract they have signed for the import.”
Chartering companies are those that import or export cargo, either by hiring a vessel from shipping companies or appointing a shipbroker to deliver the cargo. With a fall in the Baltic Dry Index, those companies with spot contracts will benefit the most, compared to those running on long-term contracts (for about a year) or short-term deals (two-three months).
Exporters of rice and basmati will also benefit. For the year ended March 2014, India exported rice and wheat worth $9.6 billion.
That will come as bad news for shipping companies. “2015 does not seem like a good year for the sector, in terms of freight rates. Even if China reopens after their New Year, the pick-up in trade will remain moderate, not rosy,” said Anoop Sharma, chief executive (sea transportation business), Essar Shipping.
“This is the lowest level we have seen ever. Apart from falling commodity and crude oil prices, the drop in the index is because of too many ships on water,” said an executive at JM Baxi & Sons, a leading shipping agent.
The low freight rates aren’t allowing companies to even recover operating costs, say executives. “The situation is getting worse for shipping companies. Forget debt servicing; companies are unable to recover even operating costs. As of now, we don’t see any light at the end of the tunnel. If the situation prevails, we might see companies shut down,” said an executive of Link Shipping & Management System.
“Though a 3,500 index level is broadly seen as break even point, a lot also depends on the fleet utilisation (both for spot and long-term contracts) by shipping companies,” said an analyst with a domestic brokerage firm. “The more the contract renewals at this juncture, the adverse will be the situation for a shipping company, as contracts will be locked at much lower rates,” he added.
For instance, Shipping Corporation of India is in a difficult position, as two of its 17 bulk vessels have signed mid-term (three-month) and 15 spot contracts. Essar Shipping has a 50:50 break-up between the two segments, with long-term contracts varying between two and five years.
SECTORS TO BENEFIT
COAL (IMPORT)
- India-South Africa route
- Freight: To $15 per tonne from $10 per tonne
- India-West Asia route (di-ammonium phosphate)
- Freight: To $8 per tonne from $12 per tonne
- India-Iran route
- ..........................http://www.business-standard.com/article/companies/baltic-index-on-crash-course-at-28-year-low-115021101238_1.html...........===============
THE FALLING CRUDE PRICES HELPS OPERATIONAL EFFICIENCY AND SAVING BUT THE SENTIMENT GOT HURT. MOSTLY INVESTORS SHALL OFF LOAD 50-60% AND REENTER AGAIN AT LOWER LEVELS....THE BOTTOM FISHING IS ONE WAY OF INVESTMENT MODEL FOR LONGTERM GAINS FOR NEXT 1-2 YRS SPAN.
THE HEALTH OF SHIPPING COMPANIES DUE TO LOW FREIGHT INDEX WENT FOR A TOSS.
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