What next for freight rates in 2018?

Published: Tuesday, 09 January 2018

Freight rates have risen steadily from lows in 2016, but ample vessel availability should cap further increases, analysts say.

Freight prices have risen steadily for almost two years, chipping away at margins for the industrial mineral trade. But with plenty of vessels available, the sector is unlikely to see the cost of shipping rise much further in the year to come, shipping consultants have told Industrial Minerals.

The Baltic Dry Index, which measures global prices for the shipping of bulk commodities, hit a low of 290 points in February of 2016 after coming under pressure from the seasonal lull during the Chinese New Year, which brings much shipping activity in China to a halt.

Prices have ticked up gradually since then, rising to 961 points by the end of 2016 and hitting 1,366 points by the end of 2017, but prices are still well below their historical peak of 11,793 points in May 2008.

"It’s been good times for the shippers of industrial minerals," Peter Malpas, at transport group Braemar Shipping Services told Industrial Minerals.

"March 2016 saw a real low period, really across all sizes, but particularly on large capesize vessels," he said, adding, "the handysizes were less impacted, but were still well below operation cost levels."

Handysizes are mid-sized bulk carriers, which transport most industrial minerals.

"We’ve had that period of recovery," Malpas said, adding that in 2018, "the recovery will still be evident...what we are not expecting is a significant increase in rates beyond what we currently see."

"2016 was an extremely bad year, and so [2017] looks good, comparatively speaking," Basil Karatzas, chief executive of New York-based Karatzas Marine Advisors & Co. said, adding, "however, the question is whether this trend is sustainable."

Increase in demand, especially for capesize

The demand picture for freight is mixed, with a modest global economic uptick looking positive for demand. But the mineral sector has been hit by the Chinese government's crackdown on pollution, which is reducing heavy industrial activity there.

Chinese pollution controls, however, are helping to support demand for capesizes, the largest bulk carriers, which are used to transport iron ore, Malpas said.

"The anti-pollution measures put in a greater focus on higher grade iron ores," Malpas said, because higher grade ore requires less energy to process.

The focus on ore quality is driving demand away from local supplies and from Australian imports, and toward Brazilian ore, increasing the distance ore consumed in China has to travel, and tying up capesize capacity. 

"This is having a great bearing on capesizes," Malpas said.

Ample vessel availability

The main downward pressure on shipping rates is that vessel availability has remained strong, due to recovering prices easing the pace at which ageing vessels were scrapped.

The low prices of freight in 2016 meant that shipowners were facing losses.

"Handysize average rates were as low as $2,900 per day," Malpas said, adding, "operating costs were $4,500… that doesn’t take into account any capital costs."

But returns have risen since then. "By the end of 2017 we were looking at the average rate being $9,000 per day," he said.  

"In 2017 you saw significantly less scrapping [of ships]. As the recovery was evident, the incentive to scrap was dissolved and they could start to make some profits. Enough to keep the ships away from the scrapyard."

This has helped maintain ship availability, which is also being bolstered by a delay in the enforcement of new environmental rules.

 "What we were initially anticipating was the ballast water regulation coming into effect in late 2017 and, playing out over a four year period, we would see significant numbers of middle-aged ships scrapped," Malpas said.

But in July 2017 the International Maritime Organisation pushed back the requirement for ships to comply with new ballast water management rules. The rules, which were designed to prevent ships from dumping untreated ballast water and potentially disrupting local ecosystems, will now come into force from 2019, two years later than previously allowed.

"That is going to delay the need to scrap the middle-aged ships," Malpas said, allowing for tonnage to continue to see "modest" growth.

Karatzes also saw vessel availability as ample. "In general, demand has been growing, overall, because world economies are growing," he said, adding, "but fortunately for the cargo shippers, it’s an oversupplied market."

"In 2017 the freight market may improve a little bit, but it’s a market in favour of the charterers and not the ship owners," he said.

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