BDI touches years low on decline in iron ore & steel trade with China

Written by Nikita Upadhyay | Nikita Upadhyay | Mumbai | Updated: Jun 30 2010, 06:28am hrs
The Baltic Dry Index (BDI), a measure of shipping costs for commodities, has touched its lowest level for the calendar year 2010 to 2,482 points on Tuesday. The index has been slipping from this years all time high of 4,209 points on May 26, continuously declining for the past 21 days. Shipping companies and sector analysts attribute this to slowdown in iron ore and steel trade from China.

In the dry bulk segment, China contributes 30% of the total trade. Japan has also curbed its imports. To add to this is the European crisis, which has led to a decline in shipment of dry bulk, thus impacting BDI to slip to this unit, said an official with the largest shipping company in India.

Indian shipping companies like Shipping Corporation of India, Mercator Lines and GE Shipping might see a decline in their spot charter rates for dry bulk, which will be closer to their operating cost, thus impacting their margins. On the other hand, companies like Essar Shipping will hardly see any impact as most of their vessels are in long-term supply contracts.

Shares of SCI were down 1.65%, Mercator down 2.3% and GE Shipping 1.43%, to close at Rs 160.90, Rs 46.45 and Rs 293, respectively, on the BSE on Tuesday. Essar Shipping too was down 3.48% to close at Rs 87.25.

We do not see a recovery in the charter rates for at least six months from now. There is a lot of pressure from the supply side (availability of ships). Unless we see some order cancellations or an ease in supply pressure, charter rates wont improve, said Param Desai, an analyst with Angel Broking.

As per a Morgan Stanley report, freight rates in the segment ticked up sharply after some pullback in April this year. The BDI rallied by around 25% in May-10 relative to April-10 average via strong Chinese demand. Spot earnings improved by 10-20% across vessel classes. Term charter rates also improved by 1-10% across most of the asset class.

There is tremendous supply in the market and new additions are expected to be almost 65% of the existing fleet. Of this, 20% capacity will hit the market this year. However, appreciation in Chinese currency, Yuan, might bring in some relief to Chinese importers and their demand might go up.

Currently, dry bulk charter rates are hovering over $18,000-$20,000 per day which might not be profitable for the newer capacity coming to the market, said K Ravichandran, senior VP & co-head, corporate ratings, ICRA.

However, expected uptick in iron ore demand, appreciation of Yuan, recovery in the European nations and in global GDP might see some improvement in demand for ships. We assume the worst has already been factored in. The drop in BDI is not in line with the drop in freight rates. Also economic activity in the European nations is gaining traction, indicating towards a recovery in the shipping rates, said Ajay Parmar, head, institutional equities, Emkay Global Financial Services.