Bloomberg News

Coal-Carrier Rates Seen at Decade-Low as Glut Expands: Freight

January 31, 2012

Jan. 31 (Bloomberg) -- The greatest number of coal cargoes in history still won’t be enough to eliminate a glut of Panamax vessels, driving charter rates to the lowest in a decade.

Shipments will rise 3.6 percent to 956 million metric tons this year, according to London-based Clarkson Plc, the world’s biggest shipbroker. Rates for Panamaxes, each about 750-feet long, will average $12,744 a day in 2012, the lowest since 2002, the median of 10 analyst estimates compiled by Bloomberg shows. While that implies losses for ship owners, investors may profit by buying forward freight agreements, traded by brokers and used to bet on future costs, which anticipate $10,107.

Panamax charter costs already tumbled 53 percent since Jan. 1, the worst start to a year since at least 1999, as the fleet expanded for a 35th consecutive month. The slump is masking growth in economic activity, with Clarkson predicting record cargoes of everything from iron ore to oil to manufactured goods. The International Monetary Fund expects a third consecutive annual gain in world trade as economies recover from the worst global recession since World War II.

“Demand looks good, but it’s just going to be massively outweighed by new vessels,” said Will Fray, a senior analyst at Maritime Strategies International Ltd., a London-based research company. “There’s unlikely to be enough mining output to soak up the enormous new capacity.”

Rates averaged $14,000 a day last year, down from $25,041 in 2010, according to the Baltic Exchange, the London-based publisher of freight costs along more than 50 maritime routes. Panamaxes, the largest ships able to navigate the Panama Canal, need about $13,000 to break even, Morgan Stanley estimates.

Five Predictions

Eight of the 14 companies in the Bloomberg Pure Play Dry Bulk Shipping Index will report lower profit or losses in 2012, analyst estimates compiled by Bloomberg show.

Excel Maritime Carriers Ltd., the Athens-based owner of 35 ships in the Panamax size range, will report a loss of $116.6 million this year, widening from an estimated $64.3 million in 2011, according to the median of five predictions. Its shares fell 69 percent in New York trading in the past 12 months. Excel Maritime has the highest proportion of Panamaxes in its fleet of the five largest publicly listed shipping companies to own the vessels, according to data from Clarkson.

Nikolas Arachovas, Excel’s vice president of finance, declined to comment by phone.

The index slumped 35 percent in the past year, compared with a 5.8 percent decline in the MSCI All-Country World Index of equities. Treasuries returned 9.8 percent, a Bank of America Corp. index shows.

Four Decades

Outstanding Panamax orders are greater than for any other commodity carrier, Redhill, England-based IHS Fairplay estimates. The contracts are equal to 41 percent of existing capacity, against 26 percent for capesizes, which hold about twice as much cargo. Some ships were ordered in 2008 when daily rates reached $91,710. The Panamax fleet will grow 14 percent this year, adding the most new capacity in at least four decades, Clarkson says. That may spur owners to scrap vessels or cancel orders.

Panamaxes also carry commodities such as wheat, soybeans and iron ore, with coal making up about 90 percent of single- voyage charters in the past year, Morgan Stanley estimates. Indonesia, the biggest exporter of the fuel, will ship about 3.6 percent more this year and second-ranking Australia will deliver 8.2 percent more, Clarkson estimates.

Rates may exceed predictions should China, the biggest coal user, import more. While the nation relies on domestic supply for about 90 percent of its needs, rising extraction costs and the distance between mines and consumers may spur buyers to favor seaborne supply, Credit Suisse Group AG said in a Jan. 17 report. Prices at the Australian port of Newcastle fell 8.8 percent to $118.80 a ton since March, McCloskey Group data show.

Fourth Quarter

China imported an average of 19.7 million tons of coal a month in the fourth quarter, the most since at least 2004, customs data show. Charter costs jumped as much as 22 percent in the period. The nation will probably buy 25 percent more this year, Credit Suisse estimates. Its economy will expand 8.5 percent this year, almost four times faster than the global pace, economist estimates compiled by Bloomberg show.

The plunge in charter rates has been mirrored by a drop in asset values, with the cost of a five-year-old Panamax tumbling to $26.25 million from $88.5 million in July 2008, according to Simpson, Spence & Young Ltd., the world’s second-largest shipbroker. The difference between the price of a 20-year-old Panamax and its scrap value was $3.6 million in December, the narrowest gap since September 2002, Clarkson data show. Eighteen percent of the fleet is at least 20 years old.

Monetary Fund

Owners may also seek to boost earnings by slowing down ships to save fuel, their largest expense. Vessel speeds averaged 8.9 knots in December, compared with 11.1 knots two years earlier, ship-tracking data compiled by Bloomberg show. The price of fuel rose 6.9 percent this year to $703 a ton, according to data compiled by Bloomberg from 25 ports.

Demand may also fall short of expectations. The Washington- based International Monetary Fund said Jan. 24 it expects global trade in goods and services to expand 3.8 percent this year, compared with a September forecast of 5.8 percent. About 90 percent of world trade moves by sea, according to the Round Table of Shipping Associations.

Exporters may restrain sales to ensure domestic supply. Indonesia’s government told coal producers in September they would need to set aside 82.1 million tons for the local market this year, up from 79 million tons in 2011. Others may struggle to expand exports quickly enough because of limited rail and port capacity. Ships are waiting 12 to 18 days to load at the Koorangang Coal Terminal in Newcastle, according to G-Ports Ltd., a Truro, England-based research company.

“We don’t have a problem with demand,” said Philippe van den Abeele, the managing director of Castalia Fund Management (U.K.) Ltd., a London-based adviser to a hedge fund trading shipping derivatives. “Supply is what is putting a huge lid on the potential for freight to rise in 2012.”

--With assistance from Fitri Wulandari in Jakarta. Editors: Alaric Nightingale, Stuart Wallace.

To contact the reporter on this story: Isaac Arnsdorf in London at iarnsdorf@bloomberg.net

To contact the editor responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net


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