Bloomberg News

Ore-Shipping Rates Seen 13% Lower as China Cuts Target: Freight

March 12, 2012

A haul truck is loaded by a digger with material from the pit at Rio Tinto Group's West Angelas iron ore mine in Pilbara, Australia. Rio Tinto Group is one of the three biggest iron-ore exporter. Photographer: Ian Waldie/Bloomberg

A haul truck is loaded by a digger with material from the pit at Rio Tinto Group's West Angelas iron ore mine in Pilbara, Australia. Rio Tinto Group is one of the three biggest iron-ore exporter. Photographer: Ian Waldie/Bloomberg

Rates to ship iron ore, the second- biggest cargo after oil, are poised to drop to the lowest level in a decade after China cut its growth target, signaling weaker demand from the world’s biggest buyer of the commodity.

Capesizes, each hauling about 170,000 metric tons of ore, will earn an average of $13,000 a day this year, the least since 2002, according to the median of 10 analyst forecasts compiled by Bloomberg. That’s 13 percent less than the median in January. Shares of New York-based Genco Shipping & Trading Ltd. (GNK), which operates nine of the vessels, will drop 19 percent in the next 12 months, the average of 11 estimates showed.

China, which buys 64 percent of all seaborne iron ore, will target growth of 7.5 percent, the lowest since 2004, Premier Wen Jiabao said March 5. Steel output will advance 4 percent this year, from 8.9 percent in 2011, the China Iron and Steel Association predicted the following day. Iron-ore imports may decline 14 percent this year, equal to about 550 Capesize cargoes, the China Mining Association estimates.

“Any optimism in the market earlier on has disappeared,” said Andreas Loftesnes, a Singapore-based freight and iron-ore derivatives broker at Freight Investor Services Ltd., which claims to be the biggest broker of the swaps contracts. “We may see China clamping down and going a bit slower. We need much more cargo.”

Capesize rates fell for a first week in four after Wen’s comments at a state-of-the-nation speech in Beijing, declining 3.2 percent to $5,786 as of March 9, according to the London- based Baltic Exchange. The analysts’ estimated average implies a fifth consecutive annual decline, according to data from the bourse, which publishes freight costs for more than 50 routes.

Losing Money

While the annual prediction implies rates will rally from current levels, that won’t be enough to return most vessels to profit. A five-year-old Capesize needs about $19,000 a day to break even, Oslo-based Arctic Securities ASA estimates.

A measure of combined earnings across the 14-member Bloomberg Pure Play (BPG4DBS) Dry Bulk Shipping Index will drop 91 percent this year, analyst estimates compiled by Bloomberg show. The gauge, led by Seoul-based STX Pan Ocean Co. and Hellerup, Denmark-based D/S Norden A/S (DNORD), is down 5.5 percent from this year’s closing peak on Feb. 20. That compares with a 1.5 percent decline by the MSCI All-Country World Index of equities.

The slump in shipping contrasts with historically high earnings for mining companies. Vale SA (VALE5), Rio Tinto Group and BHP Billiton Ltd., the three biggest iron-ore exporters, will report their largest or second-highest profits ever this year, the mean of 43 analyst estimates compiled by Bloomberg showed.

Carrying Capacity

Fewer cargoes would come as the number of Capesizes keeps rising. The fleet expanded 77 percent in the past five years, after owners ordered new ships in response to rates that were as much as 40 times higher in 2008, according to data from Redhill, England-based IHS Fairplay. Combined carrying capacity will rise another 13 percent this year as the number of cargoes across so- called dry-bulk commodities increases 3.5 percent, London-based Clarkson Plc, the world’s biggest shipbroker, estimates.

Declining earnings and unprofitable Capesize returns may spur owners to scrap older ships, cutting the fleet’s capacity and potentially supporting rates. A record 12.3 million tons of capacity will be demolished this year, 17 percent more than in 2011, Clarkson (CKN) predicts. The resale value of a 15-year-old Capesize is within 3.1 percent of the lowest level since at least 2005, increasing the likelihood vessels will be sent to scrap yards, according to data from Simpson, Spence & Young Ltd., the second-largest global shipbroker.

Monthly Decline

Rates may also exceed the prediction in the Bloomberg survey as owners slow ships to save on fuel, effectively reducing the capacity of the fleet. Speeds averaged 9.1 knots in February, a fourth consecutive monthly decline, vessel-tracking data compiled by Bloomberg show. An average of 326 carriers were anchored, the most in at least three years.

Clarkson raised its estimates for Chinese iron-ore imports three times last year. A 36 percent plunge in prices for the commodity in the nine months through October spurred demand from steelmakers. Monthly imports into China rose from 48.8 million tons in February to as much as 64.2 million tons in November, customs data show. Capesize rates jumped as high as $32,889 in December from as low as $4,567 in February.

The surge in imports means stockpiles at ports in China of 97.9 million tons are now within 2.9 percent of a record, according to Beijing Antaike Information Development Co., a state-backed research company. The price of benchmark hot-rolled coil steel in China fell 12 percent to 4,255 yuan ($672) a ton since July, Steel Business Briefing data show. Steelmakers may also curb imports because of rising prices.

Mining Companies

Seaborne iron-ore supply will rise 3.8 percent to 1.09 billion tons this year, the smallest gain since 2001, Clarkson estimates. While that means a slower expansion in cargoes for ships, it will bolster prices for mining companies. Ore at China’s Tianjin port will gain 10 percent to an average of $157.50 a ton in the fourth quarter, according to the median of 11 analyst estimates compiled by Bloomberg in February.

Vale, based in Rio de Janeiro, will report net income of $21.4 billion this year, the second-highest ever, the mean of four analyst estimates compiled by Bloomberg shows. London-based Rio will make $14.5 billion, the most ever, according to the mean of 19 predictions. Melbourne-based BHP (BLT) will earn $19.6 billion in the 12 months through June, an amount exceeded only by the prior period’s record, based on 20 estimates.

Genco will have a record net loss of $100.5 million this year, against profit of $25.4 million in 2011, according to the mean of eight estimates compiled by Bloomberg. The shares, down 9.6 percent this year to $6.11, will drop to $4.95 in 12 months, the forecasts show. Just one of the 18 analysts covering the company and tracked by Bloomberg recommends buying the stock. Chief Financial Officer John Wobensmith declined to comment.

Shipping Costs

The glut of Capesizes extends to other types of carriers. The fleet of Panamaxes, which carry about 50 percent less cargo, will expand 14 percent this year, Clarkson estimates. Daily rates plunged 43 percent from the start of the year to $7,309. The Baltic Dry Index, a measure of raw-materials shipping costs, tumbled 48 percent and its February average was the lowest for any month since at least 1992, Baltic Exchange data show.

The fleet of very large crude carriers, each hauling about 2 million barrels of oil, will swell 6.3 percent this year as demand for cargoes grows 3.2 percent, according to Clarkson. Earnings on the benchmark Saudi-Arabia-to-Japan route fell 27 percent in the past year, the exchange’s figures show.

Capesizes represent 41 percent of Genco’s combined fleet capacity, according to the company’s website. Iron ore accounted for 68 percent of all Capesize spot, or single-voyage, cargoes in the 12 months through February, Morgan Stanley estimates.

“Capesizes are massively reliant on iron ore,” said Steve Rodley, U.K. managing director at Global Maritime Investments Ltd., a Cyprus-based company that operates as many as 80 dry- bulk ships and trades freight derivatives. “Analysts were factoring in a certain amount of steel production, and the number of ships coming won’t change. So if you’re talking about a decrease in steel demand, that’s definitely negative.”

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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