Monday, June 8, 2009

Rally in commodity shipping index may not indicate revival in shipping sector

THE current rally in commodity shipping rates reflected in the Baltic Dry Index (BDI) may not indicate any real sustainable revival in the shipping industry as the rise in iron ore shipments and other cargoes to China, a major destination for commodity shipments, is probably due more to current cheaper spot prices than a turnaround in real demand.

The BDI had moved up by 547.2% to 4,291 points on June 3 since its lowest level last year at 663 points on Dec 5.

Iron ore and coal account for about half of commodities shipped on dry-bulk vessels.

Although the current BDI level is somewhat close to industry’s five-year average of 4,921 points, its sustainability for the second half of this year remains uncertain.

An Australian newspaper quoted experts saying that much of the surge in Chinese iron ore imports was driven by traders, rather than steel mills, during an uncertain period over new contract prices for iron ore while domestic demand for steel in China remained weak.

An analyst from a local brokerage told StarBiz that the current iron ore spot price was 63.9% lower year-on-year at US$67.5 per tonne.

“The current spot iron ore price has been moving the BDI and the movement has little to do with the current iron ore price negotiation.

“This is because the spot iron ore price has already reflected the expected outcome of the annual iron ore price negotiations that are still going on due to China seeking a lower price,” he said, adding that Rio Tinto, one of the world’s biggest mining companies, had reached an agreement with Japan as well the rest of Asian steel manufacturers except China.

China was reportedly calling for a fall in iron ore contractual prices to the level seen in 2007 or a drop of at least 40%. It has influential bargaining power because it is the largest customer of Rio Tinto.

According to Reuters fact box on iron ore price negotitions, the world’s top three iron ore suppliers and their major customers gather at the end of each calendar year to determine free-on-board contract prices for deliveries made in the following fiscal year (April 1- March 31), instead of relying on commodity exchanges.

Australia’s BHP Billiton and Rio Tinto together with Brazil’s Vale control around three quarters of the global iron ore export market.

But on a more positive note, AmResearch in its latest sector report said the new dry bulk vessel orders that had almost entirely dried up since the onslaught of the financial crisis would set the right foundation for a strong cyclical upswing.

“Most important, the dry bulk sector is positioned as a proxy to a rebound in commodity prices – which we believe is headed for a recovery.

“Commodities are early cycle plays to a recovery in global economy and the dry bulk sector is a major beneficiary of any pick-up in commodity transportation demand,” it said.

The report also indicated that real demand had been improving as reflected in China’s Manufacturing Purchasing Manager’s Index (PMI) that saw two consecutive months of rebound.

“The PMI rebounded to 52.4% in March, the first time it was back in expansionary zone (i.e. a reading above 50%), since October 2008. The month of April saw further expansion with the PMI registering at 53.5% .

“We think this provides an early indication that downstream steel inventories are being worked down – bearing in mind that steel production has barely recovered in the past couple of months,” AmResearch said.

China’s 4 trillion renminbi stimulus package was also expected to take effect from the second half of this year, it noted.

“The bulk of stimulus plan flows towards construction and transport sectors – big consumers of steel.

“China’s steel demand is driven mainly by the construction sector (51%). This is followed by machinery (14%), auto (5%) and highways (4%).

“We would expect a meaningful recovery in steel demand as a consequence, which in turn, is expected to increase demand for iron ore,” AmResearch said.

Source: Star Biz

No comments: