Industrials

After a relatively quiet week for dry bulk shipping rates (for things like iron ore, coking & thermal coal, and grains), I thought it was useful to report Mr. Charles de Trenck's recent words on Baltic Dry Index (BDI) speculation. The BDI has held up lately, but has been helped by continuing port congestion and Chinese port inventory build. To me, it seems the BDI above 4000 likely requires these factors to continue and as they are likely unsustainable, as Transport Trackers reiterated, "chasing the BDI above 4000 makes no sense". In the short term, the BDI can go anywhere, but odds are stacked against you in the current environment. For example, see my recent piece in regards to declining steel and seaborne iron ore trade this year, which is a major headwind the BDI faces in 2H09 especially after the spectacular growth of the bulk shipping fleet in the recent shipping boom.

BDI speculation: We exited the BDI rebound above 4000 in early June, and all we have seen in recent weeks are speculative and volatile commodities’ moves. In other words…froth. And this even though there were too many Capes sucked into China congestion (ie, the ramp up in China congestion in recent months). We continue to think select cargo cover charters can offer opportunities, while chasing BDI above 4000 makes no sense

A lot of oil has been floating in idle tankers at sea recently, as traders sought to hoard oil and take advantage of contango (higher future prices than current).

The number of supertankers being used to store crude and oil products shrank by about a third since March [according to ICAP]... About 30 very large crude carriers (VLCCs) are in use now, compared with about 45 late in the first quarter, shipping analyst Simon Newman said on Wednesday... A supertanker can hold about two million barrels of crude, more than France consumes every day.

The amount of oil stored at sea climbed to the highest in at least two decades, Frontline Ltd, the biggest supertanker operator, said in January. Traders sought to profit from contango, where longer-dated contracts are more expensive than near-term supply. The spread is profitable so long as it exceeds storage and finance costs.

I always found the hoarding of oil at sea an interesting dynamic in the tanker shipping world. For perspective, 15 less ships at sea hoarding oil is 30m barrels of crude, which compares to about 85m barrels/day global consumption.

UNCTAD has forecast that as much as 40% of Chinese domestic iron ore product could close down in the coming years due to rising costs locally, and lower freight costs internationally having made seaborne iron ore more competitive.

The agency’s annual report on the 2008 iron ore industry forecasts what it called a “great Chinese shakeout” resulting in widespread mine closures and even greater reliance on imported iron ore — a key driver of demand for the bulk carrier freight market. “It is probable that between one third and one half of Chinese iron ore capacity will close over the next three years, with 40%, or 130-150m tonnes, being the most likely reduction figure,” the report said.

This could be a nice balancing mechanism for seaborne iron ore shipping rates, since if rates sky rocket, then less domestic producers are likely to close, but if rates fall, more domestic producers close down, removing domestic Chinese iron ore supply and thereby adding to seaborne demand. I have tried to find the original UNCTAD report which Lloyd's List quoted, but don't have the time to dig around their site. If someone has a link, would love to see it. Thanks. Anyhow, continuing...

Hong Kong's Costco Pacific reported overall container terminal volume down 8.6% YoY in May, which is slightly worse than the number for 1Q09, which was down 8%. Costco's terminals are mostly in China, though they have some terminals abroad (Antwerp & The Suez Canal for example). Simply put, hard to see any green shoots here yet. FYI, A prime US-listed container stock related to this data is Hong Kong's Seaspan (SSW).