As Demand Picks up, a very Slow and Steady RecoverySeen in Global Shipping Industry

A market recovery in the shipping sector was signaled as the Baltic Dry Index (BDI) reached its highest level since August 2015. The Baltic Dry Index (BDI) is an indicator of the shipping costs for bulk commodities.

With overcapacity bringing down shipping rates and sending many companies (most notably Hanjin) into bankruptcy, the shipping industry has had to sail through tough waters.

However the rates have been pushed back up helped by tightening supply as older ships are decommissioned and increasing demand for basic resources.

“Dry bulk shipping has bottomed out and a market recovery is underway, albeit a slow one. Rising demand for ships to cater for increasing raw material consumption, together with the effect of shifting trade routes will help increase ton miles,” Rahul Sharan, lead analyst for dry bulk shipping at research firm Drewry, said in a press release earlier this month.

“With investment remaining out of reach from dry bulk owners, even a modest growth in demand will help support market recovery. Meanwhile, the increasing cost of running an old ship will mean more vessels go to scrapyards, tightening supply over the next five years,” Sharan said.

According to a Drewry report released earlier this month, improved economic conditions in Asia and emerging markets has resulted in a rise in demand. While countries including Vietnam, Korea and Taiwan are opening new coal-powered energy plants, requiring more coal imports, Brazil is receiving an increasing share of iron ore imports from China.

The BDI had reached an all-time low of 290 in February and it has climbed back up from there. With the index having risen 93.64 percent over 1 year, currently it is around 1,084.

“The reason the index has recovered is a mix between good cargo demand growth, heavy scrapping in early 2016 and positive sentiment among owners and charterers,” explained William Bennett, senior analyst at shipping valuation and data provider Vessels Value, to CNBC in an email.

“(Ship) values in many cases (in dry bulk) have not recovered as much with large capesize dry bulk vessel values remaining stable since the BDI crash earlier in the year. Scrapping is very important for aiding a market recovery and in the beginning of 2016 the demolition market was very strong,” Bennett added.

For those companies which decided to expand their fleets and buy ships, the recovery of the Baltic Dry Index will come as good news.

“In the last 12 months, contrarian owners have taken advantage of the low values and have been buying cheap tonnage. With hindsight, this looks to have paid off with many values having increased above the purchase price,” Bennett said in a report released on Monday.

Al be it at a slow rate, ship values have begun to firm according to Bennett. For example, the value of bulk carrier vessels remains at historically low levels. Anangel Maritime Services, Winning Shipping and Oldendorff Carriers are among the companies that have added ships to their fleet.

Increasing its fleet’s carrying capacity by 1,095,500 tons, or 23 percent, Oldendorff Carriers has spent $181 million in the past 12 months.

(Adapted from Reuters)

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Categories: Economy & Finance

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