Air Freight and Logistics

Perfect storm to keep shipping under water

I'm a shipping bear in the medium term: Analyst

Dry bulk ship owners will need to idle or demolish their ships to tide over excess capacity that has sent freight rate plunging, a maritime research analyst said Tuesday.

The dry bulk sector's woes have been simmering for the last seven years although demand had held up relatively well until 2013-2014. The recent slowdown in China has exacerbated overcapacity currently estimated at 30 percent, said Rahul Kapoor, director of equity research at Drewry Financial Research Services.

"It's a toxic combination of negative demand growth and excess supply," Kapoor told CNBC.

Freight rates have collapsed as growth in China slows, reducing the country's appetite for commodities just as a backlog of large vessels come into service.

Key shipping indicator Baltic Dry Index has been breaching fresh record lows and is down almost 100 percent at 316 since reaching a peak of 11,793 in May 2008. The BDI is a measure of freight rates for shipping dry bulk cargoes such as iron ore, coal and grains.

To get supply and demand in order, dry bulk vessel owners will need to park over 20 percent of their capacity, Kapoor told CNBC's "The Rundown" on Tuesday.

Dry bulk freight rates are so low that they are not even covering operating costs, he said.

Other than dry bulk, Drewry is also bearish on the container shipping sector in the medium-term.

The sector has become so competitive that carriers are forced to pass on savings from the collapse in oil prices, which have tanked 70 percent since the summer of 2014.

"Fuel surcharges have vanished from container shipping carriers," he said.

The prolonged slump in the maritime industry has spurred consolidation.

Just last week, China shipping giants Cosco Group and China Shipping Group merged to form China Cosco Shipping Corporation.

French shipping company CMA CGM SA is buying Singapore's Temasek Holding's shares in Neptune Orient Lines for S$2.26 billion ($1.61 billion).

However, the M&A wave may be tapering off, said Kapoor.

Not all shippers are doing badly. Oil tankers are riding the wave from the oil slump with freight rates at "respectable levels".

China's crude oil import volume rose to its record high in December due to stockpiling on a prolonged slump in prices.

Tankers carrying liquefied natural gas however are facing the same fate as bulk shippers with many parked and idled in and around Singapore, one of the world's biggest trading hubs for the fuel, reported Reuters earlier this month.

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