The Baltic Dry Index (BDI) has shown nascent signs of revival, rising 8.9% over the last three trading days.
The Baltic Dry Index (BDI) has shown nascent signs of revival, rising 8.9% over the last three trading days to Friday on stronger booking demand for iron ore and coal transportation to China prior to the Chinese New Year. The BDI, a measure of shipping cost for commodities, rose to 945 points on Jan 22 from 868 points on Jan 19. According to Bloomberg, China, the world"s biggest steel maker, may want to secure raw material shipments before its national holiday starting today to Jan 30.
But this marginal increase may be considered short-term comfort as the long-term outlook for the dry bulk business, which largely depends on China"s economic growth, is still unclear.
China"s economic growth dropped to 6.8% last quarter, dragging down the pace of expansion to a seven-year low of 9%, said.
Nevertheless, the temporary relief was welcomed by most dry bulk players, as they were battered when the BDI slumped almost 92% last year from its peak of 11,793 points on May 20.
The record-high BDI in 2008 was mainly fuelled by China"s preparation for the Olympics and many other factors that are worthwhile to revisit.
According to Maritime Institute of Malaysia senior fellow Nazery Khalid, to fulfil demand for coal and iron ore last year, China began to import from non-traditional and faraway markets such as Brazil.
?The huge volumes involved and the longer voyages required to ship these commodities to China resulted in a huge demand for even larger dry bulkers.
?This prompted demand for larger iron ore carriers. A 300,000 dead-weight tonne (dwt) bulk vessel ? a groundbreaking feat from a technical standpoint ? was being ordered by the hundreds by bulk operators like Mitsui OSK Lines from South Korean and Chinese shipyards.
?An accommodating ship-financing market also helped fuel the order frenzy by providing cheap loan in abundance.
?Ports went into overdrive to beef up capacity and improve bulk-cargo handling capabilities to handle greater throughput and to lure more bulk vessels,? he told StarBiz.
Nazery said due to the inelastic demand in the market, the dry bulk trade was deemed to be performing spectacularly on its own merits.
He said perhaps due to dry bulk"s non-speculative nature, analysts and economists rarely spoke of mismatch between demand and supply in the trade, and hence were confident that the bull run would continue indefinitely.
?Such was the level of confidence and the exuberance behind the superlative rally of the dry bulk trade. At its peak in mid-2008, the dry bulk trade was the darling of investors in the shipping industry. Things were almost too good to be true,? he said.
The infrastructure to handle huge volumes began to strain under the tremendous weight of the booming trade.
Dry bulk ports struggled to efficiently handle the tremendous volumes and to quickly turn around rising dry bulk shipping calls.
Dry bulk vessels calling at Australia"s Newcastle Port, the world"s largest and busiest coal port, experienced acute berthing delays of up to three weeks.
Likewise, ports in Brazil creaked under the avalanche of dry bulk ship calls to transport commodities like iron ore, soybean, sugar and coffee to meet the insatiable demand from China.
Earnings of bulk vessel operators reaches historical highs
Nazery said freight rates also skyrocketed to their highest levels and earnings of bulk vessel operators reached historical highs. Daily rates for Capesize vessels touched an unprecedented US$230,000 per day in mid-2008.
Then it all turned sour very dramatically for the dry bulk trade; the market overheated and collapsed under its own tremendous weight, he said.
?The prick that burst the bubble was the US financial crisis that punctured a massive hole in the integrity and stability of the global financial system.
?The harsh decline of the dry bulk trade began as the financial markets worldwide began to melt down and fears over the health of the global economy surfaced. his severely affected business activities, industrial production, consumer confidence and global trade.
?As a result, demand for dry bulk goods and bulk vessels slumped, and freight futures headed south,? he said.
Capesize daily rate collapsed to a mere US$2,700 in early December 2008, only six months from its all-time high level.
The BDI, from its all-time high level in May, slumped to a paltry 663 points on Dec 5, close to its all-time low recorded back in 1986.
Going forward, according to Nazery, it is estimated by Clarkson, the world"s largest shipbroker, that over 700 Capesize vessels are due for delivery in the next three to four years.
Although the prospect of huge new tonnage coming into the trade contributed to the current pessimism of shipping analysts toward the dry bulk trade, some remain somewhat unperturbed by this.
?The optimists" camp contend that it would take a while before the market suffers from a glut of capacity as demand for dry bulk commodities from China is expected to remain strong and should be able to absorb the arrival of new tonnage,? he said.
Nazery added that it would be interesting to see the impact of the growing clout and financial means of Chinese steel mills on dry bulk shipping.
?It would be possible that more of them would start thinking of developing their own fleet to control their supply chain better and reduce their dependence on and exposure to foreign carriers.
?Some are already doing that, to the anxiety of major bulk carriers,? he said.