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New capacity to soften freight rates

Shipping costs for coal freight customers look set to ease in coming months, despite a recent rise in rates, as the number of new build vessels coming into service comfortably outpaces the amount of tonnage being scrapped, and concerns grow that global trade could be hit by a further economic slowdown.

Freight rates for Capesize vessels recovered to an extent in mid-to-late 2011, rebounding from a collapse in the early part of the year. The rise was helped by a recovery in cargo volumes following disruption to sea trade caused by the Japanese earthquake and Australian floods, as well as factors such as Indian iron ore export restrictions and a Russian grain export ban.

However, there is little belief in the shipping sector that prices will maintain that upward trajectory. “There is very little confidence within the freight market right now that this latest rally is anything other than a short-lived spike,” John Kearsey, head of research at shipbroking group SSY said at October’s Coaltrans conference in Madrid.

While concerns over the uncertain global macroeconomic outlook and potential weakness in steel, iron ore and coal prices are growing, the main factor weighing on sentiment among fleet owners is the knowledge that the market is likely to be swamped with new capacity over coming months.

All classes of cargo vessels are likely to see further net rises in tonnage next year. SSY estimates that Capesize capacity will rise by 10.2%, or 25.3m deadweight tons (mdwt), while the Panamax fleet will grow by 12.6%, or 19.6mdwt.

“Not so many Coaltrans conferences ago the question was: could the Chinese yards possibly build 40-50mdwt a year of carriers? We now know the answer and it’s a resounding ‘yes’,” Kearsey said

The rapid growth in fleet size has ensured that any dip in cargo volumes is immediately reflected in lower freight rates. He said the freight market still retains potential for surprises, but sustained medium-term increase in rates would depend on a reduced rate of vessel deliveries, record levels of scrappage and major expansion in mineral export capacity. A cut in shipbuilding activity is likely to be forthcoming. At present, capacity on order for 2013 is less than a quarter of that projected for 2012.

Maximising loads

For coal producers in some countries, comparatively low freight rates, combined with growing Asian demand, make exports look increasingly attractive compared to supplying the local market. That is the case for some firms in the US, faced with growing domestic competition from cheap shale gas, which is being substituted for coal by power firms.

Xcoal Energy and Resources is one such firm, shipping coal from the US east coast to Asia, despite having to use a route that takes over 45 days to reach those import markets. The company has maximised the potential of its cargoes by employing a so-called “top-off” process, which enables it to employ larger Capesize vessels in the relatively shallow water ports on the east coast, such as Baltimore.

The company loads vessels capable of holding up to 200,000 dwt to around 125,000 dwt in the US before sailing them to a deeper water location in Nova Scotia, Canada to top them off to full capacity with coal loaded from another vessel. They then sail fully laden to destination markets.

Ernie Thrasher, Xcoal’s chief executive, told the Coaltrans conference that the process is worth the effort, because its customers benefit from the lower cost of ocean freight, which reduces the delivered cost of the coal. Meanwhile, loading and unloading terminals benefit from the efficiency improvements and increased capacity resulting from the use of larger vessels.

The Arctic option

In the medium to long-term, a more radical solution of cutting costs for trans-global shipments could come in the shape of the opening up of northern sea routes, as Arctic ice floes continue to melt. That could cut distances for some journeys from Europe and North America to Asia dramatically. That from Rotterdam to far eastern markets could be reduced by 30-50 percent, for example.

That is an attractive option, according to Vsevolod Garulin, head of chartering at Swiss-based SUEK, the biggest supplier of Russian coal to international markets. But, he told the Coaltrans conference, a number of factors made the development of these new routes potentially difficult.

While ice coverage in the region may be less than half what it was three decades ago, no one is sure whether this is a long-term trend, he noted. Few will want to invest in expensive ships designed to cope with the challenges of Arctic waters, unless they are sure the ice is not going to expand and block the passage again. Another obstacle could be the lack of a clear legal framework for ships sailing through waters that are often disputed by several countries. 

Despite the potential pitfalls, Russia is keen to take a lead in attracting shipping to the 4,000 nautical mile route running along its Arctic coast from the Barents Sea to the Bering Strait. In September, Vladimir Putin, Russia’s prime minister, said the country was prepared to invest billions of dollars to establish a fleet of new icebreakers and a line of search and rescue bases in a bid to encourage shipping to the area.

This content is provided by Coaltrans Conferences for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.

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