Commodity Shipping Lines Reel as Baltic Index Tumbles

By Alistair Holloway and Alaric Nightingale
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(Corrects index forecast to 2010 in second paragraph.)

Aug. 14 (Bloomberg) -- The world's coal, grain and ore shippers, after the longest losing streak since 2005, may face another two years of declines as the fleet expands and slower global economic growth curbs demand for raw materials.

The Baltic Dry Index, the benchmark for shipping costs, fell for 23 consecutive sessions through Aug. 12, the worst decline since the third quarter of 2005. The index will average 40 percent less next year and sink another 47 percent in 2010, according to Goldman Sachs Group Inc. STX Pan Ocean Co. Ltd. and the other 11 smaller members of the Bloomberg Dry Ships Index have retreated as much as 34 percent in three months.

``What we have is a classic cyclical downturn,'' said Andreas Vergottis, research director at Tufton Oceanic Ltd., the world's largest shipping hedge fund manager. ``People are not buying cars and people are not buying houses, and when that stops, it travels backwards all the way back to the mine.''

Commodities, as measured by the Standard & Poor's GSCI index of 24 raw materials, are in a bear market after plunging as much as 22 percent from a record set July 3. China, the world's biggest consumer of coal, iron ore and industrial metals, expanded at the slowest pace since 2005 in the second quarter. Supertankers that ship oil are trading below the break-even rental rate of Frontline Ltd., the biggest owner of the ships.

The Baltic Dry Index reached a record 11,793 on May 20 and has dropped 40 percent since then. The index will average 8,498 this year, 5,099 next year and 2,719 in 2010, according to Hong Kong-based Goldman Sachs analysts Tom Kim and Edman Wong.

The index gained 1.5 percent yesterday, spurring a 13 percent rise in shares of STX Pan Ocean as of 12:15 p.m. today in Singapore trading.

Largest Vessels

Manufacturing in China contracted in July from June, the first drop in at least three years. Steel mills and other factories were closed to cut pollution during the Beijing Olympics that end Aug. 24. The world economy is ``precariously close'' to a recession in 2009, UBS AG said Aug. 6.

Slowing growth comes as shipyards have almost as many capesize vessels on order as already exist in the fleet, according to Goldman Sachs. Capesizes are the largest dry bulk vessels. They travel between the Atlantic and Pacific oceans via the Cape of Good Hope because they are too large to use the Panama Canal.

To be sure, even after the 23-day decline in rates, shipping costs remain more than three times higher than their 20-year average of 2,015 on the Baltic Dry Index.

Seoul-based STX Pan Ocean, South Korea's largest bulk- shipping line, on Aug. 11 said second-quarter profit rose 46 percent. DryShips Inc., based in Athens and the second-largest member of the Bloomberg Dry Ships Index, in May said first- quarter profit more than doubled.

Norwegian Billionaire

``We will see more activity from September,'' said Herman Billung, Oslo-based managing director of Golden Ocean Management AS, which controls the commodity carrying fleet of Norwegian billionaire John Fredriksen.

The drop in rates is being caused by a lull in demand during the Olympics and summer vacations, he said. Orders normally accelerate in the fourth quarter, he said.

Unlike tanker markets, where unprofitable rental rates are spurring owners to slow down ships to save fuel, rental income from capesize carriers is still profitable, meaning there's less incentive for owners to cut speeds.

Some investors have anticipated the plunge. Nobu Su, a shipping investor based in Taipei, spent the last two years reducing his dry bulk fleet to 40 from 120, instead amassing the third-largest fleet of supertankers trading in the single voyage, or spot, market.

Shipyards will deliver 786 coal, iron ore and grain transporters next year, according to data from London-based Drewry Shipping Consultants Ltd. That's equal to 15 percent of the existing fleet.

Shipping Derivatives

So-called forward freight agreements, derivatives used to bet on future ship-hiring costs, for the fourth quarter have dropped 6.9 percent since July 18 for capesizes. Freight agreements for panamaxes, ships about half the size, are down 13 percent.

``There's been a genuine downturn in demand from key areas, in particular China,'' said Steve Rodley, a shipping hedge fund manager at M2M Management Ltd. in London.

``The next two months will go a long way in providing answers as to whether the current softness is seasonality- related, Olympics-related or the start of a general slowdown,'' Omar Nokta, the New York-based head of maritime research at Dahlman Rose & Co., wrote in a report Aug. 11.

Nokta is advising investors to take a ``cautious'' approach to commodity shipping stocks. He doesn't recommend selling any.

To contact the reporters on this story: Alistair Holloway in London at aholloway1@bloomberg.netAlaric Nightingale in London at Anightingal1@bloomberg.net