28-04-2018

Metals and sugar charterers face freight rate surge in next three years: analyst

Dry bulk freight rates for the smaller sizes of ship are likely to rise significantly over the next three years as demand is expected to outstrip supply, a shipping analyst said.

Speaking at the International Chromium Development Association’s annual meeting in Paris, Denny Sabah, a dry bulk freight analyst at Clarksons Platou, said that new orders for Handysize, Handymax and Supramax vessels were at extremely low levels, especially ships in the 40,000-45,000 dwt size ranges.

This would particularly affect shipping of alumina, bauxite, copper concentrate, manganese ore, chrome ore, zinc concentrate and ore, sugar, cement, bulk fertilizers and grain.

“The availability of these ships will shrink in the next three years,” Sabah said. “If you regularly charter 40,000 dwt ships you will have less to choose from [compared with now].”

Freight rates have risen by more than 200% from multi-year and all time-lows seen in 2016, but are still “not amazing” compared with the boom years up to the crash in 2008, he said.

Dry bulk cargo generation has grown in every year since 2000, with the exception of 2009 and 2015, the latter remaining flat compared with 2014. Last year, seaborne dry bulk cargo amounted to a record 5 billion mt, yet freight rate increases were not that spectacular, because in percentage terms they were coming off an extremely low base, he said.

Sabah noted said that since 2005, seaborne dry bulk cargo growth had risen by 66%, whereas the size of the fleet had risen by 86%. “There were simply too many ships.” But all that is likely to change.

Over the last year, dry bulk orders from shipyards, especially in the smaller sizes, have dried up and the yards have now also delivered most of their backlog of previous orders.

Speaking on the sidelines of the conference, Sabah said the amount of shipyard capacity for dry bulk carriers had also reduced, especially in China, but he did not put a figure on it.

“In some cases, they’ve switched over to building tankers, or other ship types, although if owners get interested in ordering Handymax bulkers again, they could switch back,” he said.

He said ordering had started to pick up slightly in the last six months and it was possible that any significant upturn in freight rates could be relatively short-lived if the orderbook ballooned.

Shipowners could soon be “sowing the seeds of the next downturn. They never seem to learn,” he said.

Those shipowners that were first to order ships would fare better in the upturn than those that left it until later, he said.

But Sabah also urged metals producers not to rely on traders who arrange freight on their behalf. He had found one instance recently where a trader was overstating a freight rate of $23/mt to a dry bulk commodity producer, when it should have been $18, and pocketing $5, instead of a more reasonable $1.

Given the likelihood of potentially large freight rate increases, he urged charterers to get professional help with freight and use brokers, acting only as intermediaries on a percentage commission basis.

“Do your own freight and get the expertise; don’t rely on what the traders you are selling to are telling you on freight,” he said.

ANNEX VI OF MARPOL

The other factor likely to have a significant impact on freight rates is the expected increase in bunkering costs faced by the shipping industry from 2020 onward when ships will be banned from burning high-sulfur bunker fuel under the provisions of Annex VI of the International Convention for the Protection of Pollution from Ships (MARPOL), without the use of scrubber technology, he said.

“The shipping industry isn’t ready for the [January 1] 2020 deadline when the requirements come in to force,” Sabah said.

Shipowners could either install scrubbers to take the high sulfur out of exhaust gases, or they would be forced to burn low-sulfur bunker fuel oil at significantly higher costs, he said. Some shipping experts have predicted burning low-sulfur fuel would be twice the cost of burning high-sulfur.

“Fuel is the biggest [operating] cost for a ship, and there is no way that shipowners are going to swallow those increased costs. They will absolutely pass those higher costs onto charterers through freight rates,” Sabah said.

Source: Platts

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