Commodity Slump Puts Dry-Bulk Shipping on Hold

By Curious

Idled ships are crowding coastlines world-wide as increasingly desperate companies that ship iron ore, coal and other bulk commodities try to weather the industry’s worst downturn in decades.

The parked vessels are a stark sign of how crumbling Chinese demand for commodities is pummeling the global shipping industry. The freight rates shipping lines can charge to transport raw materials are at record lows, and several operators have filed for bankruptcy protection or folded outright, brokers say.

Commodity Slump Puts Dry-Bulk Shipping on Hold

Image: Captain Ted / shipspotting

The companies still in business face tough choices. Some shipowners are scraping the dry-bulk vessels that carry commodities years ahead of schedule in an effort to cut excess capacity. Other ships are anchored for weeks at a time awaiting the next paying job, while a growing number of vessels are being idled for even longer at a cost of $15,000 a month or more. The slump is taking a toll on ships’ crews, as well.

“We are stuck outside Singapore…waiting for a charter,“ the master of a ship operated by a New York-listed company said. “The boredom and tropical heat is driving us crazy and my job now is to break up fights among the crew. It’s total misery.”

Shipping brokers estimate 690 dry-bulk ships, or about 7% of the global fleet, currently are sitting idle. Twice that number will likely need to be parked to balance capacity with demand, said George Lazaridis, head of research and valuations at Athens-based Allied Shipbroking Inc.

Richard duMoulin, owner of Intrepid Shipping LLC in Connecticut, which owns three dry-bulk ships, said it may be two or three years before “there’s going to be a little daylight beginning to show,” adding, “It’s really nasty now, and it’s going to get worse before it gets better.”

China’s industrial slowdown is the principal reason for shipping lines’ woes. The downturn at the world’s biggest importer of commodities has eroded demand for construction materials such as iron ore, bauxite and cement. The financial effects have rolled across businesses from mining companies to transportation operators that move the goods.

‘It’s an excellent entry point. You buy when you see blood in the streets, even if this blood is your own.’ - Leon Patitsas, chief executive of Atlas Maritime

The Baltic Dry Bulk Index, a global measure of shipping prices for commodities, reached the lowest point in its 31-year history on Feb. 10, at 290 points. It recovered slightly last week but remains 74% below the past year’s peak hit in August.

The index “is hitting record lows every day,” said Emanuele Lauro, chief executive of New York-listed Scorpio Bulkers Inc., one of the world’s biggest dry-bulk shipping companies. “It’s scary.”

Publicly traded dry-bulk shipping companies have been hit hard, with Scorpio Bulkers and Nasdaq-listed Star Bulk Carriers Corp. shedding 90% of their market value over the past year.

Shipping companies are running low on cash, face tight credit, and are finding access to private investment scarce, said Basil Karatzas, a New York-based maritime adviser. “There are absolutely no signs for a quick recovery.”

Some operators with resources and an appetite for risk consider the ships sitting in the water an opportunity.

“Now that the market is the worst it’s ever been, it’s the time to start buying,” said Leon Patitsas, chief executive of Greece-based tanker operator Atlas Maritime.

Mr. Patitsas said he was on the lookout for dry-bulk ships seized by banks after their owners defaulted on loan payments. “It’s an excellent entry point. You buy when you see blood in the streets, even if this blood is your own,” he said.

Bulk carriers are trying to reduce their capacity, but simply shutting a ship down carries its own costs.

A so-called cold layup keeps a ship off the market for six months to a year with its systems deactivated and three crew members on board for basic maintenance. Returning a vessel to seaworthy service can cost owners up to $1 million.

The most popular spots for idled ships are near ports in Singapore, Indonesia and China.

Allied’s Mr. Lazaridis said most owners can operate ships at a loss for about two months before considering laying them up or scrapping them. Daily general-cargo freight rates for new Capsize ships are below $3,000 a day. Owners need rates to be at least $6,000—or as much as $12,000 a day for vessels with financing costs—to break even on new ships.

That has driven more than a dozen small operators to file for bankruptcy-court protection, brokers said. At least 20 closely held companies have gone out of business over the past year, brokers said, and others are unloading assets at big losses.

“We view the market to be in pure survival mode for the coming year,” Clarkson's Platou Securities said in a recent report.

India’s Mercator Ltd. this month sold its 67% stake—including six vessels—in dry-bulk shipping subsidiary Mercator Lines to three Singapore investment companies for a token one Singapore dollar from each buyer, or about $2.13 total.

The new owners will have to decide whether to put the ships in long-term storage or leave them sitting at anchor with other vessels looking for loads.

Source: WSJ