How commodities woes are hammering shipowners

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The global plunge of prices for industrial commodities is hammering the world's shipowners.

The Baltic Dry Index, which tracks freight rates for ships that carry bulk commodities, recently hit its lowest point in its 30-year history as prices for iron ore and coal plummet due to a flood of supply and weak demand.

The rout in shipping rates has been worsened by a glut in the number of ocean-going vessels built to carry bulk commodities. In the past five years, the cargo capacity of the world's fleet of bulk vessels has risen by 44 per cent, and the number of ships on the seas has risen by 26 per cent, according to Bloomberg data.

The plunge in freight rates is hitting container carriers, as well, and analysts say much of the maritime shipping industry is facing mounting layoffs, bankruptcies and consolidation.

Erik Nikolai Stavseth, an analyst with Oslo Arctic Securities AS, said the oversupply of ships will persist until iron ore demand and prices return – which could take years – or shipowners reduce their fleet by sending ships to the scrapyard.

"There's going to be more blood on the street, put it that way," he said.

A stock-price index of 47 shipping companies has fallen by 37 per cent over the past five years, compared with a 75-per-cent rise in the benchmark S&P 500. In the container-shipping industry, which has seen a 20-per-cent drop in rates this year, deep losses, layoffs and merger talks have been making headlines.

The list of global bulk shipping companies that have sought protection from creditors includes Japan's Daiichi Chuo Kisen Kaisha and Global Maritime Investments Cyprus Ltd. Denmark's Western Bulk, meanwhile, has been forced to renegotiate lending terms with banks and creditors.

"Quite frankly, most of them are trying to survive right now," said Basil Karatzas, a marine consultant in New York. "The dry bulk market is a big mess."

A large bulk ship's daily operating costs – insurance, crew, and maintenance – are about $8,500 (U.S.), an amount shipowners are lucky to be paid to move commodities, Mr. Karatzas said. And that doesn't cover the loan payments or fuel costs.

"It means as a shipowner, you have to take money from your pocket to keep the ship running," Mr. Karatzas said.

China and its major ore supplier, Vale SA of Brazil, are relying on a fleet of massive ore ships to supply the steel mills that have shown few signs of slowing output in the face of falling prices. This has left many smaller bulk carriers at anchor.

"Right now there is a big imbalance between the availability of ships and demand. The world's economies are not growing as fast over the last several years," Mr. Karatzas said. "A lot of ships were ordered on speculation. So now you have many more ships than the world requires. It takes years to have a balance."

He said the fastest way to balance the fleet with demand – scrapping – is being discouraged by the very trend that is hurting demand for ships – low prices.

"A year ago you could sell a vessel for scrap and make $5- or $6-million. Now you sell the same vessel for scrap and you only make $2- or $3-million," he said.

The plunge in ore and coal prices is being felt along Great Lakes and St. Lawrence Seaway. The combination of low prices and slumping demand helped send both U.S. Steel Canada Inc. and Essar Steel Algoma Inc. into creditor protection. Shipments of ore are down by 15 per cent while coal is down by 40 per cent this year on the 3,700-kilometre trade route that connects North American mines, mills and farms with global buyers.

For shipowner Algoma Central Corp., this has meant a 38-per-cent drop in profit for the latest quarter as steel mills scale back production and low prices have make it unprofitable to ship North American ore to global buyers.

The shipping trade on the Great Lakes-St. Lawrence Seaway is heavily dependent on ore that moves within the system from mines to mills, and grain, which flows eastward to the elevators near Quebec City. From there the crops are loaded into ocean-going ships bound for foreign markets. Until recently, there has also been a robust trade of global steel imports and ore exports to China, but both have been hit hard by the plunge in commodity prices and the economic slowdown that has slowed North American steel mills.

"There is really no iron ore being exported from this market to China," said Peter Winkley, chief operating officer of Algoma Central, which operates 25 dry bulk vessels and has three more on order.

The glut of ocean-going ships (known as salties) and cheap rates also means Algoma Central and other domestic shipping companies are facing new competitors. The Port of Thunder Bay on Lake Superior saw a total of about 35 salties in October and November, a number reached only twice in the past 15 years, the port said.

"With the ocean rates being so low, many salties that before would have come in and dropped their steel and gone back out into the lucrative ocean trade, are actually now spending the extra time to go to Thunder Bay to pick up grain and then take it out [to world markets]," Mr. Winkley said. "So we are seeing some competition as a result of those low ocean rates."